Insurance & Bonding

Hard or soft? It depends on where you are

By Angelle Bergeron

"Webster's definition of insurance is spreading the losses of a few over many," says Wayne Tisdale, with the Gulfport, Miss., office of Stewart, Sneed, Hewes, a division of Bancorp South Insurance.

But in reality the insurance and bonding landscape for 2007 looks more like a portrait of survival of the fittest.

Contractors along the hurricane-affected Gulf Coast continue to struggle with simply obtaining coverage, as well as paying dramatic premium increases for builders' risk and construction defects insurance.

The market softens farther away from the zone of devastation wrought by Katrina and Rita in 2005.

Consequently, in 2007, and possibly the next few years, contractors in coastal Alabama, Louisiana and Mississippi will experience an insurance and bonding climate that is drastically different from what their counterparts throughout the rest of the South Central region and Texas will enjoy.

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The Texas insurance and bonding market is indeed a world apart from what contractors south and east of the Lone Star State will continue to experience. A consistently healthy construction market and strong management practices that include tight balance sheets and well-managed loss prevention programs have resulted in a softness in the market, highlighted by premium price reductions and/or flat renewal pricing for most contractors, says Sam Mullis, president and chairman of Mullis, Newby, Hurst, LP of Dallas, one of the largest writers of construction and surety bonds in Texas.

"We believe 2007 should result in improved insurance terms and conditions for the well-managed construction firms," says Mullis, pointing specifically to internal accounting controls as well as overall loss control and safety efforts.

"We are seeing 10 to 12% reductions in workers' comp pricing for the beginning of 2007," he adds.

Mullis attributes much of the rate decrease to Texas' new health-care network that went into effect January 2006.

"Clearly, 2006 has been the best year ever to be a surety underwriter," he says, indicating that consolidations greatly reduced competition in the surety market. Those substantial, record earnings, as well as new restrictions for underwriting, should result in more competitive rates for contractors, but probably not until 2008, Mullis says.

The situation appears equally rosy in Arkansas, where a healthy construction market, stable workforce, effectively-managed loss prevention and safety programs have also resulted in a flat market, says Randy Irvin, vice president of Ramsey, Krug, Farrell and Lensing of Little Rock, Ark. The insurance market will continue to be flat, with premium rates declining a bit in the coming months, Irvin says.

"In Arkansas, we're far enough away not to have been affected by Katrina like Mississippi and Louisiana, and construction loss claims have been smaller than average in 2006," he adds.

Since most sureties have seen a profit this past year, Irvin doesn't foresee any additional bonding requirements forthcoming in 2007.

"Our insurance and bonding rates are probably better than most states," he says, adding that Arkansas will probably see an increase in school construction and private work in 2007.

Nationally, 2006 was a year of "rebuilding" for the property/casualty insurance industry, which realized "increased profitability due substantially to an ebb in catastrophe losses," says a report by Dr. Robert P Hartwig, CPCU, executive vice president and chief economist for the Insurance Information Institute.

But the industry won't be sharing its good fortune with the hard-hit Gulf Coast, which is still reeling from the 2005 hurricane season. Insurance and reinsurance rates are not likely to decrease in "catastrophe-prone" areas because all of those profits "are still inadequate relative to the risk insurers and reinsurers are being asked to assume," Hartwig says.

In Louisiana, the property market "is going through the roof," says Steve Wulff, bond manager with Eustis Insurance and Benefits in Metairie, La.

Insurance rates have gone up and fewer insurance companies are willing to write construction business, and builders risk insurance is particularly dear, he adds.

"The property market being what it is, it is more difficult to get, more expensive when you can get it and companies writing builders risk are putting more stipulations in place before they even write the coverage," Wulff says. Contractors may be asked to provide an engineer's report, and contractors or owners are subject to huge deductibles and financial exposure, he says.

"Contractors still recovering from Katrina don't want to eat the cost of higher premiums or high deductibles," Wulff adds.

The property insurance problem is so bad in Mississippi that unless >> things change soon it is likely to hinder future development, Tisdale says.

"Contractors building commercial and residential in the state, but particularly in coastal counties, will have a very difficult time obtaining coverage, both from a capacity and cost standpoint," he adds.

Reinsurers were the biggest losers from Katrina, and their losses are driving the skyrocketing insurance premiums.

The current stipulations under the Mississippi Windstorm Underwriting Association, commonly referred to as the wind pool, dictate that all insurers in the state are obligated to make up the pool losses.

"Each insurance company is assessed a percentage of the loss," Tisdale says. "Every insurance company in the state is facing an unknown assessment based on the percentage of property insurance they write, which will restrict the property market statewide."

Tisdale contends that the most logical solution is to create a national catastrophe insurance policy, much like the flood program, that will distribute loss throughout a broader base.

"You've got to spread the risk over the entire country," he says. "If you don't, it will inhibit construction. Developers won't build because they can't borrow the money from lenders. Contractors won't build because they can't purchase the insurance."

Although builder's risk (acquisition and cost) is definitely a "major issue" in Mississippi anywhere south of Hattiesburg, it won't likely hinder contractors from moving forward with new construction, says Billy Painter of Barksdale Bonding and Insurance Inc. of Jackson.

Even though builders risk has gone up as much as 300% in some cases, contractors can get it if they can pass the cost on to owners, Painter says. He agrees that the cost will make owners less likely to award contracts, citing an already slowing condominium market.

But "everybody has short term memory, even the insurance industry," Painter adds. "The longer we go without any serious storm activity on the coast, things will start easing up a bit. Once insurers make some money, they can afford to loosen up their underwriter policies."

In the meantime, Go-Zone and other economic development legislation is stimulating construction in Mississippi, Louisiana and Alabama, in spite of the cost. The same situation exists in Alabama, says Painter. His firm has offices in Alabama and Tennessee.

More than the amount of construction, insurance companies on the coast are concerned about quality of construction, he adds.

"There is so much work to be done and only so many contractors, many from out of state," Painter says. "When you are trying to do it quick, sometimes you sacrifice quality."

Wulff agrees that the influx of out-of-state and inexperienced, or at least unfamiliar, contractors makes insurance underwriters very cautious.

"With the proliferation of work we have now, we're starting to see a lot of guys setting up construction companies, and that's a concern to me," he says.

It is still too early to gauge the effects of skill and experience levels on future workers' compensation rates, but contractors are already being more closely scrutinized for bonding, Painter says.

"A contractor coming down here has no earthly idea of the environment down here, where both labor and housing are still a problem," he adds.

Even before the 2005 hurricane season, construction defect insurance exposure had risen in recent years, which jacked up the cost of general liability coverage, Tisdale says.

"Some insurers are making decisions not to write contractors defect insurance for contractors working on the coast or they are increasing their rate to compensate for additional risk they perceive being present on the coast," Painter adds.

The increase in premiums has caused many contractors to be more selective when choosing projects for bid.

"The smart thing I am seeing from a lot of contractors is they are not trying to rake in as much as they can," Painter says. "They are looking more closely at the work they pursue, being more selective about the architects and people they work for. Contractors really deserve this opportunity."