Improving insurance market still has problems, so remain vigilant

By Angelle Bergeron

Insurance premiums should level off in 2004, but the market remains tight and it's not time yet for contractors to celebrate.

The same problems that spawned rising insurance rates and stricter guidelines haven't gone away completely, so contractors still need to remain vigilant when they're shopping for the best premiums.

The insurance industry as a whole is expected to experience a solid year in 2004, with decelerated premium growth and double-digit return on equity, according to an annual early bird forecast prepared by a panel of Wall Street stock analysts for the Insurance Information Institute (III). The III is a nonprofit center sponsored by property and casualty insurers that strives to improve public understanding of insurance.

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According to the forecast, the industry saw record highs in insolvency rates and guarantee fund payouts in 2002 due to unrestrained jury awards, asbestos claims, medical inflation, catastrophic losses, the crisis in corporate governance, a weak investment environment, the sluggish economy and the risk of terrorist attacks.

The III 2004 forecast attributes the healthy recovery primarily to improved underwriting performance and investment economy. That means that contractors will have to concentrate on doing everything within their power to look like a good risk to insurers.

"Safety is the most important thing a contractor can concentrate on," said Jack Harlis, president of First Louisiana Insurance in Baton Rouge. "If they don't have a safe workplace, it's just a matter of time before they have a serious insurance problem."

An unsafe workplace will result in exorbitant premiums and the company won't be able to remain competitive.

Although the market is loosening up a bit due to the improved stock market, it still remains an insurer's market, Harlis said. "They are picking the good ones and they know they can sit back and write all the opportunities they want, so why take a company that's marginal?"

If a contractor has had some claims, he will have a tough time finding any insurance at any price in 2004, Harlis said.

"The number one thing a contractor can do is really have a very good safety plan and make sure that it isn't just written and up on a bookshelf in a book, but they practice it every day," he added.

Harlis admitted that any company might have a freak accident, a one-time event that may result in a huge claim. However, he said that repeated, small claims are the kiss of death.

"An insurance company can see there is a problem there," Harlis added. "When it sees frequency, it knows the company is not managing like it should be."

Grace Hymel, president of National Loss Control Management in Baton Rouge, said that in 2004 contractors should address problematic safety issues from 2003.

Uninsured subcontractors, working drug and alcohol policies, auto exposure, height exposure, use of personal protection equipment and late reporting of claims (usually because a company tries to handle the claim on its own) should be looked at by contractors who want to reduce their risk, Hymel said.

"Safety is only one component to the prevention of losses," she added. "As an employer, attention must be given to the hiring and employment practices of the contractor. The contractor must incorporate a multi-faceted approach to his overall safety program, beginning with a program that addresses all areas of exposure."

National Loss Control Management is the service company for Louisiana Commerce and Trade Association Workers Comp Program, FCCI Insurance Group and American International Group.

Hymel said contractors interested in reducing their workmen's compensation premium costs should address the above-mentioned topics and also focus on establishing strong hiring practices.

Those would include implementation of a drug and alcohol policy, post-hire medical questionnaire, accurate job descriptions and regular documented safety meetings.

The III early bird report cites tort costs, specifically asbestos claims, as a continuing risk to the industry's stability and laments the industry's ability to have any success in reform during 2003.

"Controlling these costs will enhance insurer performance and the stability of casualty coverages," according to the report.

For contractors, that means many carriers simply won't provide coverage for something perceived as too risky.

"We are seeing a lot of carriers who are putting in mold exclusions to keep rates down or even to write an account," said Jeff Pitts, with Pitts, Querbes & Nelson in Shreveport. "We are even starting to see residential work exclusions because they are more likely to have problems with mold, soil subsidence, activities that may not be encountered during standard commercial construction."

Carriers have experienced more claims in residential construction than on the commercial side due to litigation, and they are therefore reluctant to underwrite certain jobs, especially if that is not the contractor's area of expertise, Pitts added.

This means certain types of residential construction will either cost more to build or certain types of companies won't be able to obtain coverage for their construction, said Steve Cory, president of Cory, Tucker & Larrowe Inc. in Metairie.

Carriers are issuing exclusions or stringent guidelines for things such as mold and EIFS, Cory said.

There area also concerns over mold, mildew and completed operations claims in what insurance companies are calling "habitational construction, which includes apartments, condos, even high-end homes," he added. "In the event of an apartment or condo if mold develops and the whole complex gets concerned, it could result in class-action lawsuits, and you're talking about construction that is built relatively inexpensively."

Foregoing such risks is probably the easiest solution for contracting firms that do residential as an incidental piece of their annual income. However, for someone whose bread and butter is that type of construction, insurance costs or exclusions may be their downfall. "There are some specific policies you can look into to cover mold, for example, but they don't provide too much coverage and are expensive," Cory said.

He suggested that contractors follow certain protocol as a procedural issue of construction.

"It's almost common sense," he added. "Contractors have to follow certain procedures to try to mitigate the possibility of mold developing in the building. You can go on the Internet and get protocols."

Tightening of surety bond market perceived as healthy, normal

Contractors seeking bonding will definitely have to have all of their ducks in a row in 2004, even though experts view the new year optimistically.

The surety market has been hit hard by the post-Sept. 11 weak economy and incredible underwriting losses thanks primarily to companies like Enron. But for 2004, experts cite the recovering economy, tighter terms and conditions and slightly higher rates as the balm for the ailing industry.

"It is going to continue to be a very hard market (for contractors)," said Steve Cory, president of Cory, Tucker & Larrowe Inc. a Metairie agency that represents contractors in the surety and insurance market.

"The surety business in 2003 has had another terrible year. We've had a number of major players get out of the business - Kemper, Atlantic Mutual - and there is certainly going to be another round of consolidation in the surety market."

Additionally, several re-insurers went under in the past couple of years.

"The re-insurers have been taking a bath," Cory said. "Big companies had problems, and the re-insurers were burned." Consequently, the surviving companies will be commanding larger rates and requiring more stringent underwriting in 2004, including close scrutiny of files, accounts and types of profiles they may not want to write.

"The people getting squeezed the most are the big contractors, those doing over $250 million. If they need a lot of capacity, they are getting higher rates, because they are perceived to be a bigger risk."

Larger contractors typically bid on larger, more complicated projects, which translates into higher risk for insurers.

"Insurance companies are saying that if we are going to take them on, we want higher rates," Cory said. On the other hand, the little contractors (less than $10 million) are suffering because they lack experience, which, if the economy isn't too strong, also translates into a bad risk.

This pattern will probably continue through 2005, and contractors who handle an annual volume of $10 million to $15 million will probably fare best, Cory added. "I think you'll find with the bigger contractors, they are getting more questions from their surety companies so they will be selective with certain types of contracts and use surety credit wisely," he said.

Ron Schexnaydre, vice president of Gallagher of Louisiana, a New Orleans-based surety, agreed that the criteria for 2004 will be stricter but the industry has been overdue for some belt tightening.

"The term hard market suggests that even good, quality contractors have a hard time sustaining a good bonding capacity," Schexnaydre said. "I think the market is healthy, meaning qualified people are getting what they need."

The industry is experiencing what Schexnaydre said is a necessary return to the basics of underwriting, which have been relaxed in the past few years.

"Surety companies have to make money too, and to do so, have to use the ability to analyze, do homework and make intelligent decisions," he added. "We're back to where the criteria for qualifying is in the proper perspective and when we operate in that vein we will have a steady market."

Qualified contractors are being bonded for the capacity they need and that trend will continue through 2004, he said. "I think they are being supported properly by surety companies," Schexnaydre said.

Jeff Pitts, who manages commercial lines and bonding for Shreveport-based Querbes & Nelson, agreed that returning to the basics is the only way to maintain business health in the aftermath of incredible industry losses. Although the losses were focused on the commercial surety rather than construction in particular, the industry is slowly stabilizing and will continue to do so as long as carriers remain prudent and exercise discretion.

"The sureties have gone back to the three C's of suretyship - character, capacity and capital. Basically, they are underwriting like they should have been," said Pitts, who is also surety manager for Louisiana Companies, an insurance and bonding company in Baton Rouge.

Sureties are extending credit to contractors who merit credit, rather than trying to produce volume by extending surety, which was common practice in recent years, Pitts added.

In the current market, contractors seeking bonds will have to take much greater care with their financial statements, and compilations, which may have been acceptable in the past, will suffice only for limited bonding, Pitts said.

"It is more common to require a quality financial statement, where a CPA has tested the validity of certain assets and liabilities of the contractor's financial condition," he added.