Rollercoaster Ride

Insurance, bonding market may begin to soften in ‘08

By Angelle Bergeron

What goes up must come down is the truism for the insurance and bonding market, which has been enjoying all-time highs the past few years but shows signs of softening in 2008.

“In the casualty side, there should be little concern as far as price,” says Michael Tubbs, executive vice president for Willis of Louisiana in New Orleans. “Prices seem to be dropping like a stone.” Rates skyrocketed after Sept. 11, then again after Hurricane Katrina.

However, the insurance industry is cyclical and eventually softens when underwriters try to get new business or pick up business, Tubbs says. “Buyers ought to be excited about that from a buying standpoint,” he adds.

Even in the Hurricane Katrina-affected areas, where many insurers left the area or instituted dramatic price increases to cover their losses, the market began to stabilize in 2007. “When carriers decide to move to territories with less catastrophic exposure, contractors are forced into the surplus lines markets-paying a much higher rate in the markets that remain,” Tubbs says.

That began to level off after two hurricane-free years bolstered confidence. “The insurance industry has a short memory,” Tubbs says. “In 2008, we will see further loosening of constrictions in property markets.”

That’s good news for construction in the South Central region, which was significantly slowed because of property insurance being unavailable or cost-prohibitive, says Wayne Tisdale of the Gulfport, Miss., office of Stewart, Sneed, Hewes, a division of Bancorp South Insurance. “I know of one developer who had laid the groundwork for a project that was about $10 million, pre-storm,” Tisdale says. “After the storm, he asked me for a price on the insurance. It was no longer viable, so that project didn’t happen.”

Even government or public accounts that pay for projects with tax dollars were delivering fewer projects because the money didn’t go as far, Tisdale says.;Again, the more time that passed with no hurricane events, the looser things got.

“For the most part, in 2007 I could fill out any schedule, with any limits, as long as the account wanted to pay for it,” Tisdale says. “If we go through another season without a storm, we will have much-improved pricing and terms and conditions because when surplus builds up, the insurance industry has more capacity.”

In spite of the lower rates for property coverage, contractors should educate themselves about the kind of coverage they are paying for because underwriters will be getting more restrictive.

“Contractors need to work closely with their agents and, before they buy, fully understand all the terms and conditions of their policy,” Tubbs says. The same is true nationwide, he adds.

Builders risk, however, continues to be a huge problem for contractors in the hurricane-affected area.

“If a project doesn’t extend into the hurricane season, it isn’t a big problem,” Tisdale says. “But capacity goes down during hurricane season.” Tisdale says that if a project will be active during the heart of the season, underwriters aren’t willing to write builders risk. In the past, larger contractors could get better builders risk rates than owners, but those days are gone.

“Now, in negotiation of a contract, builders risk is a big item,” Tisdale says. “If you can start a project at the end of November and finish it before May, you’ve got a much better chance of getting better pricing and getting it done.”

Builders risk may even affect a contractor’s ability to get bonding. If a contractor is forced to take a policy that has a high deductible, from a surety standpoint, that becomes a concern for the bonding company, says Steve Wulff, bond manager at Eustis Insurance and Benefits in New Orleans.

“If there is a larger deductible for a smaller contractor, that could deplete their working capital and net worth, two things bonding companies look at,” Wulff says.

Still, Wulff agrees that the market is much more flexible than it has been since Katrina. “It could be that sureties are getting more comfortable with the construction climate in the area,” he says. “I think, initially, everyone was worried about contractors getting overloaded with so much backlog of work, so they were keeping a close eye on that.”

One of the good things about the market now is that the abundance of work means profit margins for contractors are where they should be. “In most cases, you don’t have as many bidders on a job,” Wulff says.

Because contractors have maintained good profit margins, they are able to increase their bonding capacity. Considering the number of architects with plenty of work on the drawing boards, it is likely the abundance of construction projects will remain healthy over the next several years, Wulff says.

“If contractors want to increase their volume, they need to make sure to take care of their financial picture to support their bond needs,” he says. That means contractors must make sure their balance sheet will support an increase in capacity by keeping profits, particularly liquid assets, in the company.

The surety market will indeed be scrutinizing the books closer in 2008, says Larry Bryant, vice president in the construction division of Marsh USA Inc.’s Memphis office.

“Three or four years ago the bonding markets were losing money, so they went back to the basics of underwriting,” Bryant says. “They look at interim financial statements, work in progress on a quarterly basis and they are asking questions about jobs losing money or variances in the profit margins.”

For example, after Katrina, many Memphis contractors went to the Gulf Coast to perform work. “Any time we have someone go down there, we ask them where they will get their labor and if they have enough labor to deliver the project in the predicted time frame,” Bryant says. “Typically, they are taking a good number of people from here because they know what their productivity is with their own people.”

As far as builders risk, liability and workers’ comp, Tennessee’s market is a world apart from that on the Gulf Coast. The market is stable enough that contractors who have had no catastrophic losses in 2007 can expect a 3 to 5% reduction in rates for 2008.

Risk transfers is the buzzword for underwriters in Arkansas, and much of the rest of the country, says Randy Irvin, vice president of Ramsey, Krug, Farrell and Lensing of Little Rock, Ark.
“Carriers don’t want to pay generals to take on the subs’ risk,” Irvin says. “If you are a sub to a general and the sub has to provide insurance to handle work for the general, carriers want to make sure the general has a hold-harmless clause and he is indemnified.”

Carriers simply want to make sure they don’t assume unnecessary exposures, and contracts are much more complicated than in the past.

“A sub or general has to really read the contracts closely, especially in the building trades,” Bryant says. “Owners are trying to transfer all of their risk to the general, and the general is trying to transfer risk to the sub.”

That being said, contractors may want to take advantage of reduced coverage rates to do a little internal housekeeping.

“While the markets are still softening and they are paying less in insurance, it might be a time to cover the gaps,” Irvin says. “It’s not a bad time to buy extra coverage for umbrellas for different things like environmental, professional coverages, employment practices liability and other insurances.” 

Irvin offers the following advice to those contractors who don’t meet with their agents several times a year: If nothing changes in your policy from year to year - pricing, rates, coverage - it’s time to revisit those policies with your insurer.