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Construction industry improving, but abundant capacity limits rate changes

Posted On: Nov. 9, 2014 12:00 AM CST

Construction projects have increased significantly in number since the financial crisis, but plentiful insurance capacity means companies working in the sector are seeing only modest changes in rates for most construction risks.

Insurers remain keen to underwrite construction business, offering traditional coverages and targeting growth areas such as general liability-only wrap-up policies and professional liability coverage for design consultants.

According to the U.S. Census Bureau, new construction on a seasonally adjusted basis totaled $961 million in August, a 21.2% increase from the low point of $793.1 million in total construction in August 2010.

While the construction sector is turning around, it is not doing so as quickly as the rest of the economy, said Mike Hastings, Atlanta-based managing director and project risk practice leader for Marsh L.L.C.

Still, insurers are seeing increased business, said Bill Sullivan, who heads Boston-based Berkshire Hathaway Specialty Insurance's casualty construction practice.

“There was a lot of capacity in 2008 that became underutilized” during the recession, but many policyholders have returned to the market, “which has been strong” from the insurance perspective, he said. Exposures have been increasing in terms of payroll and in construction values or receipts, Mr. Sullivan said.

“In general, there is significant capacity in the marketplace on most lines of insurance,” said Tim McGinnis, Addison, Texas-based senior vice president for the national construction practice with Willis North America Inc. During the latter part of last year, and all of this year, there has been continued growth in insurance market capacity, and “we don't think that's going to change,” he said.

The growth in construction activity has been diverse in both type and geography, including single and multifamily housing, office buildings, stadiums, manufacturing, water treatment plants and highway road projects.

That has resulted in a competitive insurance market. “The markets are very keen to write good risks” and it remains a buyer's market, Mr. McGinnis said.

Michael Perschetti, vice president, risk management, at Pittsburgh, Pennsylvania-based DCK Corp., a global construction company, said the insurance market responds differently to different risks.

“It depends on what market we're in” and on the project and the location of the risk, he said. “It can be difficult, it can be easy. It depends on the risk we're trying to cover.” He said, however, “As a whole, we're able to cover the risk, and the markets are receptive.”

Discussing specific lines of business, Mr. McGinnis said there have been decreases of about 5% in property catastrophe business over the past year, and Willis thinks these will continue for the remainder of this year and in 2015. “We think reductions for noncat will be even more pronounced” for the construction market, he said.

Renewals on construction general liability risks have been flat to up 5%, although some risks with low losses have seen reductions. Construction defect losses, though, may negatively affect rates, and an uncertain legal environment in certain states has led to higher rates for some risks, Mr. McGinnis said.

In excess umbrella, flat to 10% increases are expected on renewals next year, with increases reflecting the historical-low pricing in the sector.

“We're seeing some higher underlying limits being required” if an agreement cannot be reached on rate increases, he said.

In builder's risk, there are “huge amounts of capacity,” with very competitive rates, Mr. McGinnis said. And Mr. Hastings of Marsh said the only area where rates are up in this segment is in wood frame construction, where there have been losses.

Environmental insurance for construction risks is very competitive, Mr. Hastings said. “We have always had in the U.S. abundant capacity” in this segment, he said.

Rates for insurance issued on a per-project basis are “somewhat competitive, but the pricing there fluctuates a lot” depending on the project and its individual characteristics, Mr. Sullivan said.

Brian Cooper, managing director in the national construction practice of Arthur J. Gallagher & Co. in San Francisco, said, “Workers comp is probably the area where there's more stress because of health care costs,” so “if there is hardening or an increase in rates, it would come in the workers compensation line.”

In professional liability, “you probably have 25 carriers,” with rates falling a little and additional expansion of available coverages, including first-party coverages, said Jeff Slivka, executive vice president and chief operating officer of New Day Underwriting Managers L.L.C. in Bordentown, New Jersey.

Dan Knise, president and CEO of McLean, Virginia-based broker Ames & Gough, said the professional liability market for architects and engineers is “somewhat benign right now.”

“On most renewals, insurers are probably trying to get a 2%-3% rate increase, but for new business, they're willing to sharpen their pencil and come in at whatever the expiring price was,” Mr. Knise said.

Kevin Collins, Chevy Chase, Maryland-based senior vice president for Victor O. Schinnerer & Co. Inc., said one emerging area of coverage within the professional liability area is for consultants, such as interior designers and lighting consultants, who are part of the process of designing a facility.

“We see a really growing need for insurance coverage within that segment,” he said. This market segment “may be untapped,” he said.

Mr. Cooper of Gallagher said one trend has been a “pretty significant” uptick in general liability-only wrap-ups, which, because of statutory changes, are permitted in about 15 states, where previously workers comp had to be included in these programs. It is much simpler administratively, he said.

Growth in this area is coming from general contractors and owner-controlled programs, particularly in real estate, said Alex Wells, Philadelphia-based senior vice president and national manager of primary casualty for Ace Westchester Specialty Casualty, part of Ace USA.

These wrap-ups are especially attractive to smaller projects in the $40 million to $60 million range, said Geoffrey Hall, New York-based senior vice president of construction for Ace USA.