Posted on 06.08.15
Construction market update: Building projects are up, but where are the workers?
Source: http://www.propertycasualty360.com, June 8, 2015
By: Phil Gusman
Number of projects has increased, but a talent shortage impacts risk profiles at all levels.
When discussing current trends in the construction-insurance marketplace, experts agree on one thing: The greatest concern is a shortage in skilled labor to meet the growing demand in projects.
“This is probably the single largest issue in the construction industry—the lack of qualified and experienced talent, at all levels: not just field labor, but project engineering, project management, leadership, etc.” says Brian Cooper, managing director of Arthur J. Gallagher’s National Construction Practice. “There’s just a dearth of experienced and talented people.”
“That’s probably the thing I worry about the most,” adds Gary Kaplan, president, North America Construction at XL Catlin. “I’ve been asking this for the last six months to anyone who will meet with me, and I ask my team all the time: ‘What are we doing around that?’”
Like many lingering issues in sectors all across the U.S. economy, the deep recession that began in December 2007 is largely to blame for the talent shortage. Kaplan says unemployment in the construction sector climbed to more than 20% during the downturn. Years went by during the slow recovery, and now, as construction picks up, the remaining workforce is older and nearing retirement—“and they haven’t done a good job of training the next generation,” he adds.
Cooper notes it was tough for construction companies to look to the future and train that next generation between 2008 and 2010 because at that time, everyone was struggling just to stay in business. Rick Keegan, president of Travelers Construction, says a high number of workers either left the construction industry altogether or have been away from it for so long that it’s often difficult for them to adjust to such changes as new technology on worksites and new types of projects.
Kaplan expressed concern over energy projects along the Gulf Coast, where a lot of multibillion-dollar contracts are being awarded for specialized construction work, “and I don’t know where they’re going to get all the people for [that work].” As new workers are used on projects and even as experienced workers return or move to different companies, risks increase. Keegan says about 50% of all construction worksite injuries occur during the first year of employment. That statistic holds true, he says, regardless of a worker’s age or level of experience: “Even skilled workers are susceptible to this as they transition to new companies and projects.”
“This is probably the single largest issue in the construction industry—the lack of qualified and experienced talent, at all levels: not just field labor, but project engineering, project management, leadership, etc.” says Brian Cooper, managing director of Arthur J. Gallagher’s National Construction Practice. “There’s just a dearth of experienced and talented people.”
“That’s probably the thing I worry about the most,” adds Gary Kaplan, president, North America Construction at XL Catlin. “I’ve been asking this for the last six months to anyone who will meet with me, and I ask my team all the time: ‘What are we doing around that?’”
Like many lingering issues in sectors all across the U.S. economy, the deep recession that began in December 2007 is largely to blame for the talent shortage. Kaplan says unemployment in the construction sector climbed to more than 20% during the downturn. Years went by during the slow recovery, and now, as construction picks up, the remaining workforce is older and nearing retirement—“and they haven’t done a good job of training the next generation,” he adds.
Cooper notes it was tough for construction companies to look to the future and train that next generation between 2008 and 2010 because at that time, everyone was struggling just to stay in business. Rick Keegan, president of Travelers Construction, says a high number of workers either left the construction industry altogether or have been away from it for so long that it’s often difficult for them to adjust to such changes as new technology on worksites and new types of projects.
Kaplan expressed concern over energy projects along the Gulf Coast, where a lot of multibillion-dollar contracts are being awarded for specialized construction work, “and I don’t know where they’re going to get all the people for [that work].” As new workers are used on projects and even as experienced workers return or move to different companies, risks increase. Keegan says about 50% of all construction worksite injuries occur during the first year of employment. That statistic holds true, he says, regardless of a worker’s age or level of experience: “Even skilled workers are susceptible to this as they transition to new companies and projects.”
Cooper adds, “In the short run, a lot of the good contractors are simply turning down work that they would otherwise be able to do and want to do, because of the fact they don’t have the talent to do the work.”
Good contractors, says Kaplan, know their capabilities before they bid on projects. “My assessment is that the really good contractors figure this out before they even start bidding on the work,” he notes. Less-sophisticated contractors may not assess their capabilities as well, he notes, “and those are the ones that would scare me the most as not having the right kinds of people to do the work, once they win the bid.”
Good contractors, says Kaplan, know their capabilities before they bid on projects. “My assessment is that the really good contractors figure this out before they even start bidding on the work,” he notes. Less-sophisticated contractors may not assess their capabilities as well, he notes, “and those are the ones that would scare me the most as not having the right kinds of people to do the work, once they win the bid.”
The trick is determining which contractors possess that level of foresight, Kaplan says. “I have my guys asking every prospect, ‘What are you doing? What are your best practices? How do you manage risk?’”
He says XL Catlin is attemping to create a service that contractors can call on to assess their practices and compare them to other contractors. The goal is not just to obtain information about risk management, Kaplan adds, but to “offer solutions to contractors so they can address their own fears and anxieties.”
Jack Probolus, manager, construction wraps, commercial insurance for Liberty Mutual, says contractors are also reaching out to trade schools to attract talent—with a particular focus on welders, given the increase in pipeline work. “There’s an awareness of the [talent] problem,” he says, “and there are a lot of outreach programs across the country to engage younger people to show them [construction is] a viable opportunity for a career.”
Keegan says contractors also are implementing assimilation programs and onsite mentoring and coaching to mitigate risks from new employees, and Cooper adds that contractors are paying more attention to employee benefits and long-term compensation programs to lure and retain skilled workers.
Construction strategies are also evolving. Kaplan and Cooper both point out the increase in offsite modular construction, where a lot of the work is done in a closed, controlled environment and then moved to the worksite. Kaplan says this has allowed contractors to retain older skilled workers, because they are no longer working outside in the elements as often.
He says XL Catlin is attemping to create a service that contractors can call on to assess their practices and compare them to other contractors. The goal is not just to obtain information about risk management, Kaplan adds, but to “offer solutions to contractors so they can address their own fears and anxieties.”
Jack Probolus, manager, construction wraps, commercial insurance for Liberty Mutual, says contractors are also reaching out to trade schools to attract talent—with a particular focus on welders, given the increase in pipeline work. “There’s an awareness of the [talent] problem,” he says, “and there are a lot of outreach programs across the country to engage younger people to show them [construction is] a viable opportunity for a career.”
Keegan says contractors also are implementing assimilation programs and onsite mentoring and coaching to mitigate risks from new employees, and Cooper adds that contractors are paying more attention to employee benefits and long-term compensation programs to lure and retain skilled workers.
Construction strategies are also evolving. Kaplan and Cooper both point out the increase in offsite modular construction, where a lot of the work is done in a closed, controlled environment and then moved to the worksite. Kaplan says this has allowed contractors to retain older skilled workers, because they are no longer working outside in the elements as often.
Pricing and capacity
Despite the challenges—and experts are quick to point out that there are always challenges when writing construction coverages—new capital is entering the construction market and pricing continues to be competitive.
Willis’ Spring 2015 Marketplace Realities report finds that pricing remains competitive in construction, with rates for most coverages expected to be flat over the next year. There are a few exceptions, such as Workers’ Compensation in states where pricing is firmer, Builders’ Risk (flat to -10%), and Excess Liability (flat to +5%).
Kaplan says pricing overall is flat to slightly positive—to cover claims inflation—compared to a year ago, but some lines, such as Builders’ Risk on the property side, are more competitive. “There seems to be way too much capacity” in Excess Liability from both primary carriers and surplus-lines insurers that are not typically in the construction marketplace, he adds.
Although there is no shortage of capacity or competition, Cooper says underwriters are beginning to get more selective on the accounts they write, even if those accounts do receive lower rates. Anemic investment returns due to low interest rates have led to pressure on underwriting to make a profit on long-tail lines like liability, he explains. “I think companies are going about [underwriting] in a more thoughtful way,” says Cooper. Carriers are beginning to target certain classes and types of work more, he adds, whereas previously their portfolio would include risks of all sizes and types.
Despite the challenges—and experts are quick to point out that there are always challenges when writing construction coverages—new capital is entering the construction market and pricing continues to be competitive.
Willis’ Spring 2015 Marketplace Realities report finds that pricing remains competitive in construction, with rates for most coverages expected to be flat over the next year. There are a few exceptions, such as Workers’ Compensation in states where pricing is firmer, Builders’ Risk (flat to -10%), and Excess Liability (flat to +5%).
Kaplan says pricing overall is flat to slightly positive—to cover claims inflation—compared to a year ago, but some lines, such as Builders’ Risk on the property side, are more competitive. “There seems to be way too much capacity” in Excess Liability from both primary carriers and surplus-lines insurers that are not typically in the construction marketplace, he adds.
Although there is no shortage of capacity or competition, Cooper says underwriters are beginning to get more selective on the accounts they write, even if those accounts do receive lower rates. Anemic investment returns due to low interest rates have led to pressure on underwriting to make a profit on long-tail lines like liability, he explains. “I think companies are going about [underwriting] in a more thoughtful way,” says Cooper. Carriers are beginning to target certain classes and types of work more, he adds, whereas previously their portfolio would include risks of all sizes and types.
This extends to broker selection as well, Cooper adds, noting that carriers are becoming more particular when choosing distribution partners. Likewise, brokers and risk-aware buyers are sharpening their focus on carriers, choosing ones that provide services beyond collecting premiums and paying claims.
Probolus says buyers are interested in carriers that can help them address their total costs of risk. “The intent is to not have claims,” he says, “and [carriers and contractors] need skill and expertise about the changing workplace.”
With all of the coverages involved in Construction, Cooper and Keegan say Auto Liability has actually been a significant driver of exposure and severity. Keegan cites basic driver distraction, pedestrian distraction and an increased number of miles driven as reasons.
Probolus says buyers are interested in carriers that can help them address their total costs of risk. “The intent is to not have claims,” he says, “and [carriers and contractors] need skill and expertise about the changing workplace.”
With all of the coverages involved in Construction, Cooper and Keegan say Auto Liability has actually been a significant driver of exposure and severity. Keegan cites basic driver distraction, pedestrian distraction and an increased number of miles driven as reasons.
“It’s a dramatic increase in large claims,” says Cooper, noting that he’s seen a significant increase in combined ratios just over the last five years. He adds that claims are blowing past the first million in Auto Liability coverage and hitting excess layers as well: “It’s a big area of concern for the industry, and results have moved there more than [in] any other line.”
The growing role for producers
If construction is a challenging market for insurers, it is just as, if not more, challenging today for agents and brokers. “We’re being asked, and really are required, to do a lot more from the service standpoint,” says Cooper. “We’re not attorneys, but we review contracts all day long.”
Producers must gain knowledge and expertise on specialized, changing and increasingly complex insurance products, and must exercise quality control for clients. When a policy comes in for an insured, Cooper notes, brokers must have a “detailed process of reviewing it against what was promised and looking at what the exposures are to make sure it all matches up.”
The interest in wrap-ups and the changes in that area over the last 15 years is an example of how construction coverages can quickly evolve. Cooper says anti-indemnity statutes in some states preventing general contractors from passing along exposures to subcontractors led to general contractors implementing more rolling CCIPs (Contractor Controlled Insurance Programs) to manage risks.
Brian Billhartz, senior vice president of Wrap Up Insurance Solutions, which provides agents and brokers with expertise on wrap-up coverages, notes that traditional wrap-ups go back at least 40 or 50 years, but the last decade has seen not only the emergence of CCIPS, but GL-only wraps that have attracted surplus-lines carriers not traditionally involved in construction.
Kaplan adds that “COCIPS” are emerging, where contractors and owners will work together with insurers to figure out how to wrap-up coverage.
The growing role for producers
If construction is a challenging market for insurers, it is just as, if not more, challenging today for agents and brokers. “We’re being asked, and really are required, to do a lot more from the service standpoint,” says Cooper. “We’re not attorneys, but we review contracts all day long.”
Producers must gain knowledge and expertise on specialized, changing and increasingly complex insurance products, and must exercise quality control for clients. When a policy comes in for an insured, Cooper notes, brokers must have a “detailed process of reviewing it against what was promised and looking at what the exposures are to make sure it all matches up.”
The interest in wrap-ups and the changes in that area over the last 15 years is an example of how construction coverages can quickly evolve. Cooper says anti-indemnity statutes in some states preventing general contractors from passing along exposures to subcontractors led to general contractors implementing more rolling CCIPs (Contractor Controlled Insurance Programs) to manage risks.
Brian Billhartz, senior vice president of Wrap Up Insurance Solutions, which provides agents and brokers with expertise on wrap-up coverages, notes that traditional wrap-ups go back at least 40 or 50 years, but the last decade has seen not only the emergence of CCIPS, but GL-only wraps that have attracted surplus-lines carriers not traditionally involved in construction.
Kaplan adds that “COCIPS” are emerging, where contractors and owners will work together with insurers to figure out how to wrap-up coverage.
Agents have to stay on top of this evolving marketplace and educate clients on the complexity of wrapping up coverages for the general contractor and subcontractors. They also have to do their homework on the increasing number of market players.
Billhartz says agents looking for carriers to partner with must keep in mind that “this is a long-term deal. This isn’t like your typical renewal where you do it for one year. When you buy a wrap-up, you’re buying it for seven, eight, nine, 10 years, and who do you want to be with you, if something were to happen?”
With the increasing services and expertise agents and brokers must provide across the construction marketplace, Cooper says exposure has increased for them as well. “Mistakes are much more costly now that they have been in the past,” he says.
Keegan adds that agents can help themselves by understanding contractors’ goals and objectives. If agents can get a handle on a client’s risk management, safety philosophy and tolerance for risk, then they can better select a carrier that’s an ideal fit.
Where Is the Growth?
Experts in the construction-insurance marketplace agree that project starts are up overall. But which types of projects are growing the most, and which are lagging? Rick Keegan, president of Travelers Construction, says he sees strong growth in multi-family housing, particularly in the apartment sector in major metropolitan areas.
Brian Cooper, managing director of Arthur J. Gallagher’s National Construction Practice, agrees, saying high-rise multi-family condos and apartments in urban areas have seen a “dramatic upswing in the last year or two.” He adds residential homebuilders showed strong growth until the last several months.
Billhartz says agents looking for carriers to partner with must keep in mind that “this is a long-term deal. This isn’t like your typical renewal where you do it for one year. When you buy a wrap-up, you’re buying it for seven, eight, nine, 10 years, and who do you want to be with you, if something were to happen?”
With the increasing services and expertise agents and brokers must provide across the construction marketplace, Cooper says exposure has increased for them as well. “Mistakes are much more costly now that they have been in the past,” he says.
Keegan adds that agents can help themselves by understanding contractors’ goals and objectives. If agents can get a handle on a client’s risk management, safety philosophy and tolerance for risk, then they can better select a carrier that’s an ideal fit.
Where Is the Growth?
Experts in the construction-insurance marketplace agree that project starts are up overall. But which types of projects are growing the most, and which are lagging? Rick Keegan, president of Travelers Construction, says he sees strong growth in multi-family housing, particularly in the apartment sector in major metropolitan areas.
Brian Cooper, managing director of Arthur J. Gallagher’s National Construction Practice, agrees, saying high-rise multi-family condos and apartments in urban areas have seen a “dramatic upswing in the last year or two.” He adds residential homebuilders showed strong growth until the last several months.
Across commercial industries, Gary Kaplan, president, North America Construction for XL Catlin, says there is significant demand for energy projects along the Gulf Coast. Construction in the healthcare sector is also seeing continued investment, he adds: “We’ve written three to five new hospital projects as wrap-ups in the last eight months.”
Kaplan adds there’s still a lot of work in data centers, though not as much as previous years, and occasional investments in corporate campuses. He notes that when corporate-campus projects come through, they’re sizable, with investments from Fortune 500 companies.
Both Kaplan and Keegan say spending on infrastructure projects is down, particularly in the Southeast. Construction demand continues to be fueled by private investment while public works lag behind.
But others see opportunities in infrastructure. Jack Probolus, manager, construction wraps, commercial insurance for Liberty Mutual, says there are many street and road projects in Texas, and a good number of projects throughout New York. There are plans in Florida for highway improvements, he says, and there is also light-rail activity on the West Coast.
Kaplan adds there’s still a lot of work in data centers, though not as much as previous years, and occasional investments in corporate campuses. He notes that when corporate-campus projects come through, they’re sizable, with investments from Fortune 500 companies.
Both Kaplan and Keegan say spending on infrastructure projects is down, particularly in the Southeast. Construction demand continues to be fueled by private investment while public works lag behind.
But others see opportunities in infrastructure. Jack Probolus, manager, construction wraps, commercial insurance for Liberty Mutual, says there are many street and road projects in Texas, and a good number of projects throughout New York. There are plans in Florida for highway improvements, he says, and there is also light-rail activity on the West Coast.
Cooper says there is a trend toward much larger infrastructure projects. “Historically, public entities split contracts into smaller pieces,” he says. “Now there are a lot more large projects in infrastructure, and that includes the public/private partnership (P3) trend that has picked up dramatically.”
Kaplan says that when he does see the occasional infrastructure project, they tend to be P3s. “You can’t just write a P3 if you don’t have the capabilities to understand the contracts that get put out on those projects,” he stresses. “They’re all so special, each one’s like a one-off.”
He says P3s were a hot trend last year and XL developed a product to offer all six lines of coverage as well as the first two years of operation and maintenance. But he says the number of P3s has slowed down since the last half of last year. Still, he adds, “we’re convinced this will probably be the wave of the future for infrastructure investment in the U.S.”
Kaplan says that when he does see the occasional infrastructure project, they tend to be P3s. “You can’t just write a P3 if you don’t have the capabilities to understand the contracts that get put out on those projects,” he stresses. “They’re all so special, each one’s like a one-off.”
He says P3s were a hot trend last year and XL developed a product to offer all six lines of coverage as well as the first two years of operation and maintenance. But he says the number of P3s has slowed down since the last half of last year. Still, he adds, “we’re convinced this will probably be the wave of the future for infrastructure investment in the U.S.”
