Brokers Assess Current Construction Insurance Market: Thumbs Up

By | July 29, 2016

Amid ups and downs, the construction market has nevertheless enjoyed steady growth over the past four years. Now construction insurance specialists believe the market is really heating up.

The competition has carriers maintaining a market favorable to buyers, especially those with good safety records.

For 2015 as a whole, total construction starts climbed 8 percent to $645.5 billion. This continued the pattern of moderate expansion for total construction starts established over the previous three years – 2012, up 12 percent; 2013, up 11 percent; and 2014, up 9 percent, according to Dodge Data & Analytics.

While growth is good overall, it’s not without some ups-and-downs. Construction starts were up 1 percent in January, then climbed 10 percent in February. They fell back down to 1 percent in March, before shooting up again by 8 percent in April.

The roller coaster ride has affected construction insurance specialists in every region of the country.

“We really haven’t seen much of a retraction in any segment, except a little slowdown on building in Texas because of oil and energy slowdown,” said John Campbell, USI’s construction practice managing partner and president of the wrap-up practice. “From a standpoint of overall construction, we are still seeing a lot growth across the board.”

Matt Chase, executive vice president and practice leader for Pasadena, Calif.-based Bolton & Co., said that his independent agency’s construction clients are doing well. The overwhelming majority of Bolton’s $40 million construction book has increased business this year while only a few have not grown. Renovation work, or commercial tenant improvement and betterment (TIB) work, are driving much of the growth, he said.

USI’s Campbell said that from a national perspective, the busiest sectors are office space renovation and retail construction, especially in downtown urban areas.

Apartment building is growing in certain areas of the country, according to Campbell, and the for-sale residential building market, or condos, has been ticking up as well. “Most of the growth in the last year-and-a-half has been apartment driven but now condos are up,” he said.

As for other sectors where construction activity is up, Campbell cites infrastructure and public works projects, housing for college campuses and healthcare/long term care facilities.

James Knoop, senior vice president and unit manager for Lockton’s Irvine, Calif., construction risk practice, said the uptick in residential construction in the West can be traced to both younger and older residential buyers moving to urban areas. But he worries that the activity could slow due to high costs.

Knoop said there’s been a shift from suburban to urban migration in cities with the millennial population to accommodate their lifestyles. “That’s why we are seeing such an increase in condos and mixed use projects,” he said. “But we are also seeing a little slow down with residential homebuilders due to low inventory and affordability.”

Knoop said that affordability is an issue due to an increase in building costs.

Seasonal Risks

Summer is always busy for construction business in northern areas of the country. Street and road projects in the Chicago area are particularly busy this season, according to Mary Anne Budworth, construction practice leader for HUB International’s Chicago office. “Everybody is out repairing roads, a construction segment that tends to be more seasonally driven.”

Budworth has also seen a surge of activity in water and sewer projects in recent months.

“There’s a lot of construction in replacing sewer lines right now and that’s work often driven by flood plain changes and media/news coverage related to water purity,” she said.

As in other regions of the country, the commercial segment in the Midwest and Chicago area has been steadily growing, Budworth added, while residential has not been as impressive in her region. “There are more (housing) projects but it’s just not growing by leaps and bounds, just slightly growing,” Budworth said.

But in Budworth’s view the overall construction market has certainly improved.

“Revenues are up, payrolls are increasing and while it’s not improving by leaps and bounds, it’s much better than 2010 when companies where just holding their own,” she said. “Now we are seeing growth. Are we seeing double digit growth? No, but we are seeing steady growth.”

Northeast Infrastructure

Road construction is enjoying a good season in the Northeast also, according to Peter Jacavone, assistant sales manager, vice president and construction practice director at Starkweather & Shepley Insurance Brokerage Inc., based in East Providence, R.I. Much of that growth and need has to do with the area’s old age, he said.

“To say our roads all need improvement is probably an understatement,” Jacavone said. “Some of the streets and roads haven’t been fixed in decades so there is definitely a need, but until now the funding hasn’t been there.”

Jacavone describes the construction sector as still in “recovery mode” but sees it gearing up for even better times ahead. “Today, you see more bidding and companies evolving and getting back to that prior 2008 level.”

Starkweather & Shepley is growing its business. The firm has its eye on another hot region – Florida, where the independent agency opened a branch office in Fort Meyers in February.

Jacavone said the Florida market is a great fit for his construction practice.

“It’s a growing market and there’s a lot of building going on right now in Florida,” he said.

“We write everything from the landscaper to steel erectors for 100-story buildings,” he added.

Buyer’s Market

Carriers are competing for construction accounts and even less profitable accounts are getting good deals, according to USI’s Campbell.

“We are seeing carriers on renewals that are giving flat to 10 percent depending on the risk, and carriers on new business (accounts) giving (up to) 30 percent rate reduction off of expiring, on poor risks,” Campbell said. “It’s been pretty aggressive.”

Campbell said that carriers have had good underwriting experience in recent years and with very little investment income coming in, the only way for them to grow is to get new business. The fight for that new business means that some contractors switching carriers might enjoy significant price reductions.

“That 30 percent (rate reduction) number is not an unusual number,” he said. “We’ve seen that 30 percent reduction even on risks that might not warrant it from a strict underwriting perspective,” he said, although 20 percent reductions are probably “a good rule of thumb” on new business.

Campbell cautions contractors willing to move for the price. “You don’t want to make a short-term decision for long-term stability,” Campbell said. “But the reality is we still need to go to the marketplace and fully vet all the carriers. … Carriers are getting really aggressive to gain market share or just to have some sort of growth.”

Regional Pressure

According to Campbell, that environment is a challenge for the mainstays in construction.

“The Travelers, Zurichs and Libertys are under a lot of pressure from some of the newer players; these regional carriers like the Cincinnatis, Amerisures and Westfields are putting a lot of pressure on them because they are looking for growth,” he said.

Hub’s Budworth agrees that it’s a buyer’s market right now.

“Carriers are definitely being aggressive to keep and win their business. Pricing is soft in most of the country and capacity is high so rates have softened,” she said.

Budworth doesn’t see the soft market as dramatic as Campbell, however. “Most are holding flat, but more than anything claims history is what we are seeing impacting rates right now,” she said. “From a construction company standpoint, how you control your costs is very important. Understand what is creating your losses so you can control that overall cost.”

She agrees there are few increases in the rates unless those rates are being driven by loss history. And “that’s the controllable piece that the client has over their total cost of risk.”

According to Bolton’s Chase, some new carriers are entering the construction sector. But “what we are really seeing is capacity,” he said. “I haven’t seen general liability this soft in quite some time. Workers’ comp remains soft but I think it’s fair.”

Safety Difference

Lockton’s Knoop believes that while capacity and price are talked about a lot, it’s the construction industry’s focus on safety that is making the real difference.

“We can talk about how competitive and soft the market is but at a baseline the underwriters are responding more aggressively to good loss experience,” he said. “When there are authentic safety controls in place, they (rate reductions) are measurable.”

Knoop said workers’ compensation carriers are seeing good experience and medical costs are down, except for prescription drugs where costs are increasing.

Knoop cautions that down the road it’s going to level off as demographics and newer risks emerge.

“The aging work force is a concern and, interestingly, as more states legalize marijuana that’s going to be more of an issue, not only for workers’ compensation but it’s also an issue for automobile lines,” he said.

That is one class of business where rates are up for construction firms.

“Auto is the only line that is seeing rate increases because of the escalation in distracted driving,” Knoop said. “We just had a client of ours with a driver who had an accident and they were texting.”

Chase agrees that auto is where the market is having a tough time.

“Increases in auto are not necessarily indicative of whether or not an account has claims,” he said. “We are seeing consistent increases in that market space even for those that don’t have a lot of claims.”

“The market in general is softening but it all depends on claims,” said Jacavone of Starkweather & Shepley.

“If you are a high-end, small claims type of organization you will probably get very good pricing this year,” he said.

While underwriters now are more incentivized to write new business, he said contractors that do not keep a close eye on safety will still have few options when going to the insurance market.

Carriers are just more proactive now when it comes to evaluating the safety practices of a construction organization, he said.

“It has a lot to do with how they want to underwrite and I think that’s a good thing,” he added.

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