A year ago, we predicted price increases for 2001 as carriers sought to improve underwriting results. What we didn’t anticipate was the significant reduction of investment income for the industry. Through nine months of 2001, net investment income (including capital gains) decreased by $7.5 billion. Underwriting losses (including some initial losses from September 11) increased $18 billion. Speculation is that far higher losses will be posted in the fourth quarter as revised loss calculations are completed. Overall, the industry lost in excess of $3 billion through nine months and is expected to post a loss for the year as a whole – an unprecedented event.
The losses arising out of September 11, years of poor underwriting results, and dramatic reductions in interest rates and capital gains, have together made for challenging and sometimes unpredictable marketplace.
Significant price increases were already being felt before September 11. Industry data on more than 200 construction clients confirms that the pricing for many programs was already up 25 to 100 percent overall through the third quarter, with several lines of coverage up significantly more than that.
Market Consolidation, Dislocation and Pre-underwriting
From an underwriting perspective, Construction risk appears to be a particularly troublesome subset of the commercial insurance industry. In the 1990s, many carriers formed separate Construction underwriting units in recognition of the need for specific industry knowledge; meanwhile, competition drove pricing down significantly. By 2000 it became apparent that construction results for insurers were not acceptable, and a re-assessment of the class began at many carriers. By 2001, carriers were de-emphasizing contracting as a desirable class of business. New leadership for Construction was in place at several carriers. Significant coverage restrictions meant very little to no capacity for certain extensions of coverage and geographically problematic areas. In addition, carriers focused underwriting on the upper end of the marketplace (premiums from $250,000 to $500,000), creating a situation in which few carriers were willing to quote on smaller risks.
In the aftermath of September 11, reinsurers are looking closely at their books of business and segmenting which classes of business they will support and for what limits of liability.
Umbrella and Excess Liability
The first, most profound, and continuing impact of the market retrenchment is on excess liability limits for construction, specifically umbrella liability. We now see several trends emerging:
- Scope of coverage will be narrowed by exclusions or restricting endorsements.
- Limits of liability are being reduced. It will take more carriers to maintain limits of liability in many cases.
- Umbrella carriers are demanding higher underlying limits of insurance. This means that General Liability and Automobile insurance policies may need to carry higher limits to satisfy umbrella underwriters.
- Dramatically higher premiums are expected in 2002. Initial quotes for January 1, 2002 show increases from 50 percent to 400 percent in premiums, even with higher underlying limits.
- Companies with large, heavy vehicle fleets and or/ any previous umbrella losses should expect to face the high end of this range.
Many underwriters are imposing deductibles of $5,000 to $250,000, depending on the type of construction. Even with higher deductibles, premiums are increasing from 15 percent to 50 percent, again depending on loss experience and class of risk.
EIFS: This popular form of exterior finishing has generated losses in the hundreds of millions of dollars due to water intrusion issues. The industry has all but said it will no longer provide coverage for construction using this type of material for residential properties (homes, condos and apartments) or, in many cases, for commercial projects, especially if the materials are used in connection with frame supports.
Mold: The mold issue evolved rapidly in 2001 and many exclusion are being discussed. We predict this will be broadly excluded by a number of carriers in 2002, but perhaps addressed through environmental policies as the year goes on.
Residential/Condos: The market is evincing little appetite for these types of exposures.
Narrowing Additional Insured Endorsements: Many carriers are now saying they will only grant this coverage for losses during the course of construction. This means that the Additional Insured, who typically requires this status through contract (including completed operations claims), will not be defended once a job is complete. The resulting contract default makes this a very significant issue for 2002.
The Automobile line saw amazing rate reductions in the 1990s. At the low point, many contracting firms were paying lower premiums on heavy truck units than for their personal auto policies. Those rates were unsustainable, and now in many cases auto fleet pricing will show dramatic percentage increases. As underwriters return to more traditional “book” rating, heavy units such as dumps, mix-in-transit and truck-tractor units will see major increases. We have already seen this in the second half of 2001 and the impact will be greatest for accounts, which renew before July or August. In some cases, per unit costs have increased 50 percent to 100 percent when the fleet consists primarily of heavy vehicles.
Treatment of Workers Compensation varies significantly state by state, but in general most carriers are looking to convert their guaranteed cost programs to loss-responsive (deductible or retrospective) programs. This had started in 2001, and we expect the trend to continue in 2002. Loss-responsive programs are facing higher deductibles, higher maximum cost factors and some increases in fixed cost premiums (between 15 percent and 30 percent).
Property is obviously the line most impacted line by the events of September 11. Immediately, carriers reduced (or lost) their capacity on large single projects, put much lower sub-limits on flood, earthquake and windstorm and narrowed policy forms. While capacity has rebounded since September somewhat, expect tougher terms to remain a significant issue for 2002. Price increases seem to range from 25 percent in non-catastrophic areas to several hundred percent (with much lower limits) in higher potential loss areas.
All of the issues (cost, coverage, capacity) driving the standard marketplace for contractors will increase the value and use of wrap-ups. Wrap-up results seem to have been better than results for individual contractor programs, and as a consequence, several carriers are still actively competing for them. Coverage issues in particular will drive some usage of wrap-up programs, as a wrap-up with a single general liability carrier eliminates most coverage disputes.
Note: This article is excerpted from Marketplace Realities and Risk Management Solutions; Copyright © 2002 by Willis North America Inc. For more information, contact, by: Paul R. Becker, CPCU, Managing Director, Construction Practice, Willis North America, Inc.; 615 872 3464; e-mail: email@example.com
ConstructionRisk.com Report-Special Edition, Vol. 4, No. 3A (Mar 2002)
Copyright 2002, ConstructionRisk.com, LLC