Departments — January/February 2007

2007 Insurance Outlook: Risk Capacity Still a Struggle

Barring any catastrophes, the '07 property and casualty insurance market is positive for contractors, except for builder's risk volatility

Karen A. Reutter CPCU, ARM Senior Vice President Reutter is part of Willis' national construction practice team responsible for assisting local office efforts throughout the nation in sales and marketing, large account management, including program structure and coverage design, national carrier relationships, planning and strategy. Website: www.willis.com

Insurance trends for the construction industry generally follow those of the overall property and casualty marketplace, with some notable exceptions.

The overall health of the U.S. property and casualty industry is remarkably strong, given last year's catastrophic events. All indications point to 2006 finishing as a profitable underwriting year for the industry as a whole, and investment returns are improving for carriers as well.
The main drivers impacting construction risks are general liability (primary and excess), workers' compensation and builder's risk.

General Liability

General liability rates are trending downward for commercial risks although buyers in all segments, especially residential contractors, are facing more restrictive terms. Policy language, as well as interpretation of stated language, is becoming problematic. This may be the single greatest issue for contractors in 2007 when renewing their liability programs.

Further, contractors need to closely scrutinize the wording in additional-insured endorsements because carriers have begun using specific manuscript wording to suit their appetite, often at the expense of protecting interested parties. The definition of "occurrence" is under scrutiny for construction risks under the business risk doctrine, resulting in a deteriorating ability to apply "damage to your work" provisions for coverage in general liability policies.

From an excess standpoint, we observe a lack of continuity of coverage. Rates also are trending slightly upward for certain risk categories although capacity is available. Non-follow form terms and conditions in excess liability policies can lead to a disconnect in the event of a high-severity claim. Contractors are finding it difficult to get excess coverage in the event of inadequate protection under a wrap-up policy.

Workers' compensation, automobile liability and environmental liability programs are priced competitively. For workers' compensation coverage, state reforms have provided especially significant rate reductions in certain regions of the country. The movement of larger accounts from residual markets to standard carriers is also a sign of health for this line. We remain cautious about workers' compensation, however, because of increasing medical costs as well as the aggregation issues associated with terrorism exposures.

Professional liability is a difficult placement, with strained capacity and frequent unwillingness on the part of carriers to offer adequate coverage for contractors. The long tail related to construction claims increases the apprehension of professional liability underwriters. Professional liability protective policies for owners and contractors are commonly being placed on a project basis although the markets for this product are limited.

Volatility in Builder's Risk

The big story for construction risks is the struggle for builder's risk capacity. This continues currently, even though there were no catastrophes in 2006 that impacted property capacity. The volatility of this line has had a major impact on contractors. The impact of the 2005 hurricane season was moderate in most of the United States, but for coastal placements, rate increases of 100 to 500% have been reported.

The lack of capacity, however, has outpaced increased cost as the prime concern for most buyers. Where coverage is available, it is not only expensive, but terms are also strict and retentions are high. This will continue in 2007, especially for coastal areas as new, more restrictive catastrophe models are developed for allocating capacity and reinsurers' appetites wane.

Beyond issues related to wind and floods, the terms for earthquake coverage are also tightening, with reports of 50 to 100% rate increases, plus higher retentions. Continued pressure from this coverage will perhaps inspire owners and contractors to become more cooperative and creative in order to reduce builder's risk exposures.

Strategies for Tomorrow

While rate trends appear favorable relative to casualty lines, key coverage for construction risks is not as broad as it has been in recent years. Contract requirements that had been supported by insurance products may now be borne by the contractors, and we expect this to continue.

Many contractors are looking at alternative risk-transfer mechanisms for portions or all of their risk, another trend we anticipate will maintain its momentum. Market volatility has impelled all construction-risk professionals to think of more creative methods of managing the total cost of risk.