July 25, 2007

Problems still persist

Insurance premiums show signs of improvement

By Cheryl Mah

correspondent

VANCOUVER

The escalating insurance premiums and significant restrictions that have adversely affected the affordability, availability and scope of insurance coverage for the construction industry in the past five years are showing signs of improvement.

“The property and equipment side are stabilizing compared to the last couple of years. But problems in the liability market haven’t totally subsided. They’re getting a little better but we still have a long way to go,” says David Beck, vice-president, construction services, Wilson M. Beck Insurance Services.

As a consequence of global economic circumstances, insurance rates have increased astronomically over the past five years. A combination of factors — low interest rates, low investment returns, increased claims and 9/11 — have been responsible for the premium hikes.

“The rates have increased because of the terrible losses that the insurance marketplace as a whole have suffered,” says Beck, who has been in the business eight years.

David Beck

“In the past two years we’ve seen rates double, triple and quadruple in some cases. Last year was the worse we’ve ever seen the market.”

In B.C., the situation has been compounded by the widespread building envelope failures and subsequent litigation.

The “leaky condo” crisis has pushed premiums to record high levels, creating a particular problem in the construction industry.

“Definitely B.C. is tough,” says Beck, noting that the recent rash of large fire claims has also hit the industry hard.

“In construction, roofing has been hit very hard because of all the fires and also general contractors and developers doing wood frame projects have also seen their rates increase dramatically.”

A string of natural disasters worldwide has also impacted insurance rates over the years. The four hurricanes down in the U.S. this season did not help, says Beck.

Not only have premiums and restrictions increased, many insurers have also left the construction market because of the high risk.

“So, one you have diminished capacity because some insurers, their loss ratio is so bad they’ve just said we’re not going to write construction as a class of business. And then there are a lot of insurance companies that are merging or one insurance company is buying another insurance company,” says Beck.

Working for one of the largest brokers of contract bonding and construction insurance in B.C., Beck has seen first-hand how much the marketplace has decreased.

“Now we take the insurance risk out to about five or six companies whereas four or five years ago, we could take that out to 15 to 20 companies,” he says.

“Because we’re only dealing with a select few insurers now, prices are going up. Deductibles are going up. We’re not getting that full spectrum of competition out there.”

While skyrocketing premiums and exclusions have been cause for great concern, even worse is the unavailability of insurance.

“In the last couple of years, some roofers and some guys doing leaky condo remediation couldn’t get insurance but now there are markets available for them,” says Beck.

“The market has settled. In a few select areas, it is difficult to obtain insurance. A lot of it depends on the person’s claims history. If the company has tons of claims, they could very well not be able to find insurance.”

One of the alternatives that some in the industry looked at was setting up a captive to obtain liability insurance. Captives are insurance companies controlled by their owners.

“Maybe last year or the year before people were talking about running some scenarios to possibly see if a captive would be viable and it wasn’t viable in the peak of the hard market. Now as the market is softening, it makes captives even more irrelevant for construction,” says Beck.

Beck is optimistic that the bonding and insurance market is beginning to turn. The large amount of expected construction and an improving economy in B.C. will help lower insurance rates.

“This year we’ve already seen some signs that actually the rates are starting to go down, which is good,” he says, adding “but still not what they were prior to September 11.”

In the meantime, contractors and owners must look for ways to limit risk and maintain profitability. “They might want to look at higher deductibles to lower the premium. They might want to look at self insuring some of their small tools,” advises Beck. “They may want to look at — if they own property — putting in sprinkler systems and alarm systems if they’re not already in there because that will lower the rate.”

If a contractor is using a broker, it’s important to supply the broker with quality information to take and sell the risk to the marketplace. “It’s the broker’s job to negotiate the best terms for the client so the better that information looks, the chances are the better the rates will be.”

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