emerging construction risks 2013

Emerging Construction Risks 2013Markets, Methods, Globalization and Insurance Implications

September 11, 2013

“Those who do not learn from history are doomed to repeat it”

George Santayana

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2003 2013• “Residential”: $ 500 B or 54% of

construction put in place• $335 B or 37% of total put in place

• St. Paul, Travelers, Safeco and Liberty Mutual existed separately

• Travelers and Liberty Mutual, new capacity, carrier consolidation

• P/C Insurance Industry Has Grown…..

• Premiums: $ 388 B• Surplus: $ 347 B

• 2012 Y/E • Premium: $ 449 B• Surplus: $ 587 B

• But…Hasn’t figure out how to make more money

• Profit: $ 30 B• Und Loss: -$ 5 B

• Profit: $ 34 B• Und Loss: -$ 17 B Source: III

A Quick History Lesson-What Was Happening In 2003 vs. Today?

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2003 2013

We were talking about: We are now talking about:

• Mold • Professional liability

• AI Status • CRT/AI

• Construction Defect and the emerging QA/QC focus

• Construction defect. Has QA/QC been effective?

• Residential (we meant homebuilding back then)

• Property bubbles(multi-family) now everything is a problem!

• Builders Risk/property capacity

• Historic levels of capacity

• California, Nevada, Colorado • New York, New York, New York


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2003 2013

We were talking about: We are now talking about:

• The growth of Wrap Ups • The evolution of project specific coverages including GL Only CIP’s

• Is Surety in trouble as an industry?

• Why are there so many new players in surety?

• The London market was the hot bed of innovation

• The US market has become much more adept at new product development

• An increased focus on alternative risk financing including captives due to rate and capacity concerns

• Captive growth has been significant but for other reasons• Group Captive options, CCIP,

SDI for ex.

2003 2013• We were talking about: • We are now talking about

• Terrorism and TRIA• TRIA passed in 2002, it

was reauthorized in 2007

• TRIA expires 12/31/14. Will it be extended? Will it be narrowed? Is it still needed?

• Stand alone options have emerged over the last ten years and many offer viable alternatives to traditional TRIA

• Subcontractor Default Insurance-Sole Source and would it survive significant losses?

• SDI: Three players now and other markets looking at the product. SD losses up but product appears strong and sustainable.


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2003 2013• We were talking about: • We are now talking about

• LEED designations• Project energy efficiency• BIM

• LEAN• Energy Saving Warrantee

Products• PPP/PFI

• US Firms going global• DBA and working in the Middle

East

• Global Firms coming to the US• M&A and related risks


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Other Trends Have Emerged Indemnity statutes continue to change

• California, Texas, Colorado, Minnesota, Louisiana as examples

• Sub contracts need to be revisited• In addition there is an increase in awareness of the lack

of coverage certainty from all tiers and at all points through the statute of repose

What exactly is an occurrence for the sake of insurance?• Business risk and uncertainty of coverage

Growth of Privatization (PPP, PFI) blurring risk lines• Its also increasing global interest in the US market

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Other Trends Have Emerged

• Alternative delivery approaches (for ex, IPD) creating need for new product approaches

• Mega jobs driving partnerships (JV’s, Concessions, Design Build relationships) which require job specific risk treatments

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And The Insurance Industry Is Adapting….GraduallyJob placements driven by specialty markets

• New risks are often embraced first by new capacity or more nimble carriers

• As more of this business is placed, traditional carriers expand appetites• Professional Protective Indemnity• Contractors Pollution• GL only CIP’s • IPD professional placements• SDI

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Beyond Project Insurance The Market Is Stable and Competitive With A Few Big ExceptionsCapacity is significant and continues to grow

• Umbrella/Excess limits can be built over $ 1 Billion on specific risks

• Domestic capacity for lines such as Professional and Pollution well over $150 Million with much more available in London

• Builder’s Risk limits including CAT coverage areas has ample capacity

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Coverage is a bit trickierSignificant differences carrier by carrier

• Coverage alignment with contracts in focus• As contracts become more precise this will be even

more important• Best practice in most cases is to use straight excess

policies to increase GL limits to avoid re negotiating T’s and C’s in the higher limits

• Residential is having a major impact on appetites• Most carriers putting limits on type and amount of

residential work they will allow

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New markets entering in all major lines now

The growth of alternative capital (Cat bonds, banking arrangements, higher retentions) will reduce demand in some cases for traditional insurance

Lack of catastrophic activity

…all feeding conditions for competition

We Expect Rate Flattening Over The Next Year

Market Beyond 2013Rates should be stable next 24 months

Claims aggressiveness by carriers will continue as they try to manage key risks

While US based capacity is substantial use of global market strategies will increase

• Global construction firms who come to the US often bring existing relationships with insurers who typically are not as active in the US

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Design/BuildTraditional Design/Bid

BuildIPD PPP/PFI

Traditional and still predominant method

35% of GC work put in place has elements of D/B

Next generation collaborative building model

Integrated financing/design/build and operational model

Professional Risks Flow

toward team and contractor

Traditional risk allocations/indemnities

Risks change as parties blur

traditional risk lines

Financing, construction and operational risk

co joined

And Risk Profiles change…

As Delivery Methods evolve…

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The Risk Industry Must Adapt….

Design/BuildTraditional

Design/Bid BuildIPD PPP/PFI

• Industry comfortable with hazard risks and traditional flow down

• Many markets doing both contractors as well as project based covers

• Fits into traditional risk financing silos

• Industry able to respond i.e. CPPI/OPPI created

• Insurers (and sureties) comfortable with this approach

• Coordination of General Liability and Professional Insurance Key

• Mutual indemnity waivers create need for new approach to professional risk.

• No standard approach stretches ability to provide single approach

• Silo insurance approach does not respond well to this model

• Industry need to support operational as well as construction risks

• Limited marketplace with most carriers not fully understanding risk allocations

• International markets more comfortable with risks. Marketplace is global for insurance.

What’s Next For Construction Risk?Owners, contractors, designers will have to be better aligned than they have been historically

• The economics of the business will demand collaboration, innovation, and reduction of uncertainty

• As a result the “risk industry” will need to reexamine what we do

We will need to do more on the broad based risks of construction

• Conversation is moving beyond hazard risks• We must create broader risk tools-the questions will move from

“what’s insurable and what’s not” to “what will negatively impact the outcome of this job and what are our options”

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What’s Next For Construction Risk?

Insurance products will need to continue to evolve

• Construction risks aren’t defined by silos and the insurance industry must find a way to embrace the risks and find solutions

• This will demand different thinking, better tools to evaluate risk and harnessing technology

• In short…..

…We will need to make the data we have important, relational and actionable

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10 Years From Now….Insurance products and approaches will need to be re thought to meet the

needs of the construction business

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Traditional risk allocation and risk shifting will continue to evolve to more collaborative approaches to reduce costs

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Silo product approaches, while predictable from a data standpoint, will need to be brought together to truly address the risks of construction and contracts

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Traditional Insurance Approach

General Liability Auto Liability

Excess Liability

Excess Liability

Excess Liability

Pollution/ Prof

Builder’s Risk

Next Generation Insurance Structure

Workers Comp

Statutory Benefits

General Liability

Excess Liability

Excess Liability

Excess Liability

Pollution/ Prof

Builder’s Risk

Workers Comp

Statutory Benefits

Auto Liability





Global construction and insurance markets will be much closer aligned as firms seek to have their trusted relationships support their business strategies

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Global construction and insurance markets will be much closer aligned as firms seek to have their trusted relationships support their business strategies

The industry will need to do deeper analysis of why losses occur and provide construction clients, owners, financiers, designers with tools to allow better decisions and reduce risk and related costs

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10 Years From Now….Ultimately, as the construction industry explores new methods, contracts

and partners to increase efficiencies, the “risk industry” needs to adapt to be relevant. We need to rethink risk and bring more value to our clients on the more complex projects and relationships they will be engaging in.

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10 Years From Now….

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One must change one's tactics every ten years if one wishes to maintain one's superiority

Napoleon

10 Years From Now….

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To change is difficult. Not to change is fatal.

Thank You!

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Paul Becker CPCU, ARMWillis24 Century Blvd.Nashville, TN 37214Tel: 615-872-3464Email: [email protected]

emerging construction risks 2013

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