Insurers building a floor for construction market

LAS VEGAS—While financial institutions bore the brunt of October's financial crisis, the ripple effect is making its way to the construction industry, where risk managers, contractors, brokers, insurers and underwriters are bracing for a hard insurance market in 2009.

More than 1,500 people associated with the construction industry were in Las Vegas in late October for the 28th annual International Risk Management Institute Inc. conference, which focused on the current state of the construction industry and trends affecting insurance and risk management.

While the construction insurance market has been soft for much of the year, recent events on Wall Street have begun to harden the insurance market, giving some risk managers and contractors pause when evaluating their projects and coverage.

American International Group Inc. was still very much at the forefront of attendees' minds as contractors and risk managers talked of controlling costs and maintaining stability.

"I think we are all holding our breath and hope that AIG succeeds," said Scott Trethewey, senior vp of Moss & Associates L.L.C., a Fort Lauderdale, Fla.-based contractor. "Their situation is leaving a lot of people with questions with where to go for contractual backstops for projects."

The key in the current financial market, said Paula Gentile, senior vp, general counsel and risk manager for Las Vegas-based gaming company MGM Mirage, is evaluating insurance options and consulting with all those involved in a construction project--owner, contractor, agent or broker--before making a change in coverage or carrier.

"People should not rush to change something in a panic when in a panic," Ms. Gentile said during the panel discussion. "You need to monitor your situation, but not panic. It's important to look at insurance as a partnership, and a good partnership gets all the information and looks at all the options before making a decision."

The financial problems surrounding AIG aside, the construction industry also is weathering more conservative pricing from insurers and tightening credit lines, especially those that require posting letters of credit as collateral. This combined with a sharp slowdown of residential and commercial projects have left construction companies with a dwindling project lineup.

"We're seeing some evolutionary changes in construction company risks and what organizations are considering," Mr. Trethewey said. "There are not many new projects coming within the next nine to eleven months and there is a shrinking backlog of projects, so risk managers will be dealing with the issue of maintaining stability" to keep construction companies operating.

From an insurance standpoint, there is still plenty of capacity, said Terry Gray, Minneapolis-based global head of construction for Zurich Financial Services Inc. Some firming of the insurance and reinsurance markets is already taking place, he said.

"As we look into 2009 and 2010, I think we will see a firming in pricing and terms and conditions, both in property/casualty and surety" insurance, Mr. Gray said. "But there is still adequate capacity and we still have the major players in the market."

According to the Insurance Information Institute, 2004 was the first time in 30 years that insurers made an underwriting profit, when the combined ratio was 98.3% . Following strong underwriting years in 2006 and 2007, the combined ratio for 2008, however, is forecast to be near 102%.

Karen Reutter, Minneapolis-based senior vp with Aon's Construction Services Group, said during a presentation that there will be more disciplined underwriting and pricing in the near future as insurers generally cannot offset underwriting losses with investment gains.

"There will likely be better data management by underwriters than in years past." Ms. Reutter said. "In today's environment, underwriters can better manage profitability and lines of coverage with more discipline, which impacts the negotiation of coverages."

Broadening and restricting coverage ebbs and flows with the soft vs. hard market cycle, Ms. Reutter said. Policy endorsements, such as an expanded definition of what constitutes an occurrence and gap coverage, that were offered during a soft market for commercial general liability cover for contractors likely will not be offered by insurers in a harder market, she said. Some restrictions on policy endorsements are based on the size of the business, the breadth of coverage requested and retention levels.

The 29th annual IRMI Construction Risk Conference will be held Nov. 2-5, 2009, in Washington. For more information, visit www.irmi.com/go/crc.

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