Understand how to prepare for future challenges and opportunities.

Since the beginning of 2008, contractors have enjoyed a relatively competitive insurance market cycle with many receiving rate reductions regardless of historical loss history. This cycle continues to baffle many of us. We have been down this path many times during the past thirty years, but as with the fluctuations in the economic cycle, each time is slightly different. Definite signs show that rates should have upward pressure, but there is no movement yet.

I am often asked by contractors, "When will the insurance industry harden?" and "When will rates go up?" I cannot predict the future, but I do believe, without hesitation, that the insurance market will harden, with rates increasing.

I am not sure which year this change will occur, but it will occur in a third quarter.

The Insurance Market

As we reach the second quarter of 2011, the insurance market is still relatively competitive and responsive to contractors' needs. Construction underwriters have continued to provide renewals with coverage expansions and rate reductions averaging 3 to 5 percent, depending upon the type of work performed, line of coverage and the contractor's loss history.

Underwriters looking for new construction clients have lowered their rates to grow their market share. For this reason, construction business owners should evaluate their insurance programs heavily this year. If you decide to do this, you must know what to evaluate to make your efforts pay off.

Reducing costs is the battle cry of most contractors. Accomplishing this involves much more than simply getting a cheaper rate from an underwriter. The long-term impact of seeking cheaper rates could actually come back to haunt contractors.

To reduce, manage and improve your insurance coverage, follow this game plan:

  • Be cautious about using underwriters who have been absent from the underwriting scene but now claim to be a construction underwriter. Rate improvements typically offer short-term gains but have long-term implications that could impact cost for several years. We call them bottle-rocket markets. Avoid them.
  • Redirect your focus to areas that represent the highest percentage of your costs- the losses. Meet with your insurance company and broker/agent and update claims management protocols using best practices to better adjust and manage your claims. But do not stop there. Monitor the results. Conduct annual compliance audits- this process will reveal any wasted dollars spent.
  • When times are tough, a contractor's focus seems to drift away from safety management and best practices. Avoid this urge. Now is the time when safety and loss control efforts will define your costs for years to come. Doubling your efforts in safety can pay dividends because underwriters will place greater emphasis on your losses in developing premiums in the future.
  • Prepare formal insurance and risk management specifications to present to the underwriting community. This process will aid in identifying risk profile challenges and solutions, creating a foundation when you evaluate your program in the future.
  • Interview the underwriters. Conduct a formal interview process to determine if the insurance company is a fit. Aligning your company's interests with an underwriter is more important today than in years past.

The Surety Industry

In 2010, the surety industry expected to see an increase in both frequency and severity of losses due to the severe economic downturn in the construction industry. But even though industry premiums were down for the first time in more than six years, the surety industry still remained profitable, and the losses were far shy of expectations.

The surety industry still remains very healthy from a financial and rate stability perspective. When the construction economy was strong, sureties stuck to their underwriting principles and did not push for market share. This resulted in a bit more market stability. In addition, when the construction climate changed, many contractors simply ran out of work, and chose to mothball their operations rather than replace their backlog with unprofitable work. In most instances, they completed their work with little to no impact on the sureties.

Today, however, indicators show the surety industry will experience an increase in loss ratios. Contractors' balance sheets continue to erode as the thin margin work obtained in the latter half of 2009 and 2010 materializes on balance sheets.

Many contractors expect to show a loss for 2010, and without a clear end to the turmoil in the construction industry, many expect a very slow recovery. As a result, the underwriting community is keeping a watchful eye on financials and work-in-progress schedules.

Requirements to bond subcontractors have increased, and proof of project financing has become a critical component of the underwriting process. In addition, most companies now request financial information quarterly to closely monitor any profit fade. Due to concerns over rising material and fuel pricing, you will see an increase in requests for contract documents to include escalation clauses.

Overall, the market still has quite a bit of capacity, results thus far have been profitable, and reserves are healthy. Although an increase in the loss activity within the contract surety arena is anticipated and many surety companies have reported an increase in loss frequency, the industry as a whole believes the activity remains somewhat predictable and believes sufficient reserves are available to cover the exposure.


All of the signs point to a more difficult market- losses, reductions in exposure units and an economic recovery on life support. Prepare yourself now for changes to come.

Construction Business Owner, July 2011