Dramatic Changes in State Building Trends Could Prompt Rise in Losses

As the financial and housing markets continue to work their way through the fallout of the mortgage lending meltdown, the construction sector faces its share of woes. But as is typically the case, specific conditions — and the resulting insurance implications — vary from state to state.

For carriers, the rapid acceleration or deceleration in the growth of an industry should raise cautionary flags. Rapid increases or decreases in an industry’s growth rate can give rise to up-ticks in losses. In the case of construction, increased workers’ compensation and construction defect losses are two probable consequences. Similarly, there are implications for retention and premium audit.

The information contained in this report includes data on residential construction (residential building; new single-family housing, except operative builders; new multi-family housing, except operative builders; new housing operative builders; and residential remodelers) as well as nonresidential building construction (industrial building and commercial and institutional building).

The data is derived from the North American Industry Classification System 236 (U.S. 2002), “the construction of buildings” sub-sector defined as those “establishments primarily responsible for the construction of buildings. The work performed may include new work, additions, alterations, or maintenance and repairs. The on-site assembly of pre-cut, panelized, and prefabricated buildings and construction of temporary buildings are included in this sub-sector. Part of all of the production work for which the establishments in this sector have responsibility may be subcontracted to other construction establishments — usually specialty trade contractors.”

A look at the projected change in activity for the construction of buildings as defined by the North American Industry Classification System (NAICS 236 — construction of buildings) in the “Deceleration in the States’ Building Industries” chart below allows us to identify which states are expected to experience greater-than-normal declines in growth and, as such, represent potential danger for carriers.

The chart above plots the change in the growth rates of the construction of buildings class (NAICS 236) by state. While numerous states will experience a decline in growth, the rate of change is not sufficient to raise concerns. These “activity neutral” states are shown between the diagonal lines. The states with greater degrees of deceleration are areas in which underwriting caution should be exercised.

A comparison of the historical to forecast growth rates emphasizes the dramatic swings forecast in select states, and the minor shifts projected elsewhere. The “Dynamics in States’ Building Industries” chart below compares the change in “activity neutral” states (Oregon, Texas, California) and states projected to experience dramatic changes in fortunes (Florida, Louisiana, Mississippi).

Graphing the specific historical and forecast growth rates for builders by state demonstrates the dramatic change in conditions projected for select states.

In Oregon, California, Florida, Mississippi and to a lesser extent in Louisiana, builders also generate a noteworthy share of these states’ all lines commercial premiums (see map). For Florida, Mississippi and Louisiana, the role of the construction industry in the states and the greater-than-normal projected declines could have a further dampening effect on production prospects.

Construction of Buildings

(North American Industry Classification System 236)

• All commercial lines premium of nearly $7 billion.
• Nearly 60 percent is residential construction and 40 percent non-residential.
• By number of accounts: non-employers (those who do not make payroll tax filings) dominate. In terms of premium, small commercial accounts (between 1 and 49 employees) dominate.
• Workers’ compensation, liability and commercial auto produce the largest premium volume in the sector. There is substantially more commercial auto premium available in the residential segment of this sector.

Topics Florida Trends Profit Loss Louisiana Mississippi Construction