Stormy weather
Hurricanes put damper on rebounding insurance, bonding markets

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.

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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."

Useful Source:

For the latest forecast info from the Insurance Information Institute, go to: http://www.iii.org/