Source: http://www.businessinsurance.com, November 22, 2011
Insurance rates for construction contractors, architects and engineers could be on the rise, according to new market reports from Lockton Cos. L.L.C. released this week.
Unprecedented property losses stemming from natural catastrophes, anemic interest rates and worsening workers compensation results may conspire to drive up construction contractors’ premium rates on commercial general liability, builders risk and workers compensation in 2012, executives from Lockton wrote in its report.
“The market is clearly firming in chosen segments and geographies, and while most would hesitate to predict a ‘hard’ market, pricing is under pressure,” the company’s report on the construction market said. Insured losses from events such as the March 11 earthquake and tsunami in Japan, the flooding in Australia and Thailand, Hurricane Irene and the rash of tornadoes, windstorms and wildfires in the United States have been predicted to dampen capacity in vulnerable territories.
Depressed interest rates
At the same time, depressed interest rates also left many insurers unable to offset their cat losses with investment income, said Lockton Senior Vps Jody Wright, Jaime Knoop and Paul Primavera, the report’s authors.

“Several carriers have publicly stated their need for increased rates, and others are poised to do the same if broader industry support materializes,” the report said.
Workers compensation results also continue to be problematic for construction insurers, the report noted. Rising medical costs and loss development, coupled with reduced payrolls, are inflating insurers’ combined ratios past the point of tolerability, according to Lockton. As a result, workers comp insurers are currently paying out an additional 17 cents in losses on each dollar of premium written, according to the report.
Combined ratios are “projected to reach 122% for 2011, up from 118% in 2010,” the report said.
“The middle to large contractor is seeing most of the significant increases compounded by a trend in increasing experience modification rates, especially in California,” the report said. “Larger contractors with larger deductible programs are seeing on average 1% to 2% fixed cost increases.”
Positive signs
While conditions in the construction industry have been slow to improve as the economy recovers, Lockton executives noted some signs of positive growth. Construction employment has improved slightly since February 2011, they said, and contractors in certain submarkets including residential apartments and health care facilities have reported some moderate upticks in project volume. Those factors, plus near-record industry capacity—industry surpluses topped out at $565 billion this year before falling slightly by about 1%—should produce a mostly stable construction insurance market over the next 12 months, the report said.
“For 2012, we expect the construction insurance market to be in transition toward increased rates, the report said. “However, until the market experiences sustained underwriting losses, material decline in surplus and capacity, and a tightening in the reinsurance market, the market will continue to be stable and available for consumers.”
Separate report
A separate report, authored by Chicago-based Lockton Senior Vp Thomas Miller, predicted similar conditions are possible in the professional liability market for architects and construction engineers.
The falling premium rates commercial insurance consumers have enjoyed over the last several years have slowed considerably or all but come to a stop, Mr. Miller wrote in his report. The exception, he notes, has so far been within the professional liability market for small- to mid-market firms, “where there remain more than 50 underwriting companies competing for business.”
“However, this past May, both ACE (Ltd.) and Zurich (Financial Services Ltd.) advised that they would no longer be entertaining new business from firms with less than $5 million in architectural or engineering professional fee revenue,” Mr. Miller wrote in his report. “Overall rates in the professional liability sector have begun to strongly trend upward outside of the small and midsize sector, and accounts with significant claims are seeing sizeable increases in rate.”
Underwriters’ scrutiny
Mr. Miller’s report said underwriters in all segments are paying more scrutiny to quality control, client and project selection and geographic location when placing coverage for architectural and construction engineering firms. He also noted, citing “discussions with a number of underwriters,” that a recent spike in significant losses in the industry sector—claims for $10 million or more—could be an early sign of additional rate increases across the marketplace as those losses mature.
“One can only assume that there will be additional stress placed on rate increases, capacity restrictions, tightened terms and conditions, and perhaps, certain underwriters exiting the market altogether,” Mr. Miller said in his report.