“People are always blaming their circumstances for what they are. I don’t believe in circumstances. The people who get on in this world are they who get up and look for the circumstances they want, and, if they can’t find them, make them.” – George Bernard Shaw
Contractors have begun to feel the circumstances of the current market and the “pinch in their pockets” by the underwriting community. Rate increases began in early 2012 and, to some degree, were nominal and isolated to accounts suffering adverse loss history. In 2013, however, the underwriter’s need for increased premium will affect more contractors—many more.
Despite that young-looking photo of me in the corner, I have weathered many a hard market thrust upon us by insurance companies—three, to be exact—dating back to 1984. Since then, the market cycles have seemed to spend more time being soft than hard, and, of course, there was that one time in 1996 through ’97 that the market pretended to get hard but quickly fell soft again. The lesson learned during those years of both soft and hard markets is surprisingly simple: Opportunities present themselves equally in peaks and troughs, and being prepared for either cycle is critical to weathering both.
Historically, insurance rates firm and loosen for a variety of reasons, such as excess capacity, catastrophic losses, rate inadequacy and investment yields. The question now is, “What is going to happen in 2013, and how bad will it be?” The truth is nobody really knows. However, we insurance guys enjoy any stage that allows us to ponder the future and prognosticate, so to get a glimpse, I climbed into the attic and found my old Ouija board. Commercially introduced in 1890, the Ouija, rumor says, has often been used as an underwriting tool by insurance companies to determine future rates. Logic, or actuarial science, is seldom embraced by underwriters during the soft insurance cycles, nor is it applied during the hard and frustrating times. Be prepared, though, as sophisticated pricing models based on formulas that none of us understand will guide many who determine your rates for next year.
The old board is dusty from storage and torn from excessive use, but I can peek into the next 12 months and share some thoughts on what to do if bad things happen.
Changes in 2013
Rates for property and casualty lines of business are expected to harden for construction risks, and while such change may not be drastic by historical measures, it will be significant. Insurance companies will continue to press their clients for more rate and premium, especially with contractors who have procured insurance programs with nominal retentions or guaranteed cost programs. These contractors may be required to assume more risk to mitigate the potential increases. There is also an expected decrease in exposures for many contractors, which will place even more pressure by the insurance companies on getting more rate.
Property insurance rates have been the most volatile during 2012 and are expected to be even more so in 2013, with potential increases of approximately 10 percent, depending on the claim history. During the past couple of years, catastrophe losses have especially triggered rate movement in areas of significant catastrophe exposures. Additionally, losses from events such as this tend to mushroom as more information is obtained, and Sandy could gut the global market for substantial sums. Budgeting a rate increase of 10 to 15 percent may be appropriate, depending upon the location of the risk; coastal risks may see significant rate increases along with higher deductibles or retentions.
General liability rates are expected to increase 5 to 10 percent on contractors with good loss histories while others will see increases of up to 20 percent. Umbrella, or excess, liability rates have crept up since the first quarter of 2012 and are expected to increase up to 10 percent or more. Many contractors will be subject to attachment point increases for auto liability and general liability, depending on the states of operation. These conditions, along with state challenges and labor law issues, will increase costs associated with any liability placement as “buffer markets” try to fill the gaps between primary and umbrella layers. Be careful: continuity of coverage between primary and umbrella will be challenged if “buffers” are inserted, and such buffers are not following form coverage.
Workers’ compensation is pretty much a disaster. Medical cost inflation, inadequate rates, low investment yields and increased losses are forcing insurance companies to seek rate increases of about 10 percent. Average loss ratio for workers’ compensation will approach 120 percent for 2012, which will lead some insurance companies to abandon certain states, such as California. Larger deductibles, increased rates and fewer interested insurance companies could all play a role in making 2013 look more like Friday the 13th. Finally, don’t forget the pending National Council on Compensation Insurance changes to the experience rating modifiers, which will place upward pressure on enterprise risk management. This will impact cost and the ability to secure work.
Builder’s risk coverage may see increases, depending on the project location, but for most projects, rates will remain fairly stable. Capacity continues to be strong, but be aware that catastrophe-prone areas will be challenged for rate and limits.
Your Action Plan
Both hard and soft markets create venues of opportunities. Based upon my experiences in hardening markets, I suggest the following five-point plan:
Future rates will be driven by historical losses and will be the foundation for any increase from the insurance company. It is important to present the market with updated historical losses, including detailed explanations on claims in excess of $100,000, and to spend time on preventative measures engaged or installed as a result of the claim. Focus on discontinued operations and how removing those losses affects the results.
Insurance submissions will need to be centered on operational risk and safety management protocols, with an emphasis placed on fleet risk, including motor vehicle records, driver selection, education and training. Review contracts and update them. Types of work or states of operation that created adverse losses need to be detailed from an exposure standpoint. Go to the Associated General Contractors of America website (www.agc.org) and download the AGC Risk Profiler. This form will assist in explaining operations to the underwriting community.
Relationships will continue to make a difference. The past few years have seen a redistribution of talent from insurance company to insurance company. Now is the time to rekindle and build stronger relationships at the broker and insurance company levels. Be wary of insurers seeking a short stay in the market. They might be less expensive on the surface, but they may also impact cost negatively over the long term.
Captives seem to draw interest as rates creep up, and this current market is no exception. Keep this option on the table, as more and more contractors find it a long-term solution to many short-term problems.
Education is vital to understanding the dynamics of any market change. There are numerous venues for contractors to become educated on the challenges. For more information, visit the International Risk Management Institute’s website at www.irmi.com.
Next year, CBO will cover risk management with an insurance panel that will write monthly editorials, focusing on claims, loss control and exposure management. As for this past year, I hope that you gleaned something of practical value from my Insurance Matters column, and if so, the hours laboring at my computer will have been worthwhile.