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Business & Labor
Hurricanes Put Damper on Rebounding Bonding, Insurance Markets
(southeast.construction.com - 11/01/04)
By Martin
W. Schwartz
There's good and bad news in the outlook
for insurance and bonding for builders and contractors in
the coming year.
First, the good news: Premiums should
hold steady and might actually see a slight decrease after
the first of the year.
And, the bad: Contractors will be expected
to assume a larger share of the risk with higher deductibles.
And bonding is getting harder and harder to come by.
Initial forecasts had the insurance
industry on the rebound. The Insurance Information Institute
reported a statutory rate of return on average surplus of
11.3 percent for the 12 months ending March 31. That figure
was up from 9.4 percent for calendar year 2003, 1.1 percent
in 2002 and the worst-ever negative 2.3 percent in 2001. The
rate of return is determined by dividing net income by total
equity to show how efficiently invested capital is being used.
The annualized statutory rate of return
on average surplus for the first quarter of 2004 was 15 percent.
The last time the insurance industry generated a return anywhere
near 15 percent was in 1988. The Insurance Services Office
Inc. (ISO) and the Property Casualty Insurers Association
of America (PCI) released the results.
The III's conclusion was that 2004 would
be among the best for the insurance industry in the last half
century in terms of underwriting performance and the best
since 1987 in terms of profitability "barring unusual
catastrophe losses in the second half."
Then came the hurricanes.
Insurance claim payments to victims
of the four Florida hurricanes will exceed $22 billion, surpassing
the insurance payout from Hurricane Andrew, the costliest
natural disaster in history, according to the III. Only the
$32 billion in insured losses from the Sept. 11 terrorist
attack exceeds the estimated claim payments from this year's
Florida hurricanes, one of which (Ivan) narrowly missed New
Orleans.
But the high price tag in Florida will
mean little to insurance rates in Louisiana, said Jim Zimmermann,
vice president of insurance at Cory, Tucker & Larrowe
in Metarie.
"I don't think it will have a lot
of effect on anything except for property and builders' risk,"
he said. "There are very few quality builders' risk markets
in south Louisiana."
Zimmermann said the north part of the
state - from Alexandria to Shreveport and Monroe - remains
competitive with few restrictions in property and builder's
risk coverage. But construction in the southern part of the
state can bring wind deductibles of $200,000 to $500,000 on
a $10 million project.
"Contractors are going to have
to take a lot more risk," Zimmermann added. "And,
quite frankly, I think premiums are going to go up anyway,
even with higher deductibles."
Ronnie Bennett, sales manager for Querbes
& Nelson in Shreveport, disagrees. He said the industry
has stabilized and is beginning to show profits again.
"We think we're going to see some
decreases in premiums over the next two or three years,"
he added. "Contractors can look for some decreases in
their insurance premiums probably beginning the first of January."
That's good news for insurance, but
bonding is a different story.
"Nobody has made any money in the
surety industry in several years and they have tightened up,"
Bennett said. "It's getting more difficult to get bonds
placed."
William H. Ellsworth, president of the
Ellsworth Corp. in Metairie agreed, calling the surety market
"very tight" especially for smaller contractors.
Large contractors still have problems because there's not
enough surety credit to go around.
"They have to form joint ventures
and co-sureties and things like that," he said.
With a tight bonding market, good record-keeping
and strong financials can make a difference, said Debbie Heard,
insurance manager for Lincoln Builders in Ruston.
"We have a good relationship with
our bonding company, but we do see some of our subcontractors
who struggle from time to time when we require a bond from
them," Heard added.
Some subs simply don't know what it
takes to become bonded, she said.
"You can't just call up an agent
and say, 'I need a bond for a job,'" she added. "It's
a long process and you have to have good financial information
with a good financial background."
The insurance market is not quite as
tight as the surety bond market, but all the experts agreed
that the key factor in holding down rates is safety. Heard
said Lincoln Builders has its own on-staff safety director
who makes jobsite inspections and helps educate employees
and subs of all necessary safety guidelines.
"Some insurance companies will
provide some help through their risk control department, but
our particular program requires a safety director," Heard
said. The staff safety director receives training from the
insurance company throughout the year to ensure that any information
is always the most current available.
"It goes back to educating your
employees so they know how to work safely," Heard added.
"You even need to educate the subcontractors you use."
Bennett said contractors need to implement
a safety plan and "keep working at it every day. Stop
having losses. Educate your drivers. Educate your employees.
Do the things necessary to reduce risk and insurance companies
will lower their rates."
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