Lessons From The Trenches-Construction and Risk Trends 2012Paul Becker CPCU, ARM

Chairman Willis Construction Practice

September 19, 2012

A Few Opening Comments• Welcome!

• What we focused on this year

• What are the underlying trends in the construction industry?

• What about the insurance market?

• What’s on your mind?

• Let’s get started

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Let’s Approach This Differently• This is audience participation time!

• Tell us who you are• Tell us what’s on your mind• Tell us what’s important

• Turning Technologies

Tell Us Who You Are

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Your Company Your role

Project owner Financial

General Contractor Risk management

Sub Contractor Safety

Supplier Claims

Willis Other

Carrier/Vendor

A Few Thoughts• What are we seeing now?

• Underlying construction activity still muted but signs of improvement in some sectors and geographies

• Carrier movements both in Surety and P&C: New capacity and appetites coming on line

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Value of Construction Put in Place - Seasonally Adjusted Annual Rate

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Value of Construction Put in Place - Seasonally Adjusted Annual Rate

(Millions of dollars. Details may not add to totals due to rounding.)

  Percent change

  Jul 2012 from -

Type of Construction:Jul

2012Jun

2012May

2012Apr

2012Mar

2012Jul

2011Jun

2012Jul

2011

Total Construction 834,384 842,224 838,778 825,133 817,842 763,468 -0.9 9.3

Residential 271,214 275,520 268,937 260,635 256,156 230,599 -1.6 17.6

Nonresidential 563,170 566,704 569,841 564,499 561,686 532,869 -0.6 5.7

US Census Bureau August 2012

Where’s The Growth Going To Come From?

7 Source: FMI Construction Outlook Second Quarter 2012 Reports

Help Us Get Better-What Are The Most Important Things Willis Should Focus On?

• Broad coverage terms

• Claims Advocacy• Safety Consulting

and Loss Prevention• Product and Service

Innovation

• Lowest Price• Day to day service• Understanding your

business• Helping you to identify

“over the horizon” challenges

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Tell Us What You Want To Hear-A Top Ten Voting List

1. The changing insurance marketplace-Is it getting harder really?  How long will it last?  How bad will it be?

2. Claims-What are the evolving challenges?  What recent court cases keep you up at night?

3. Changing exposures in construction-What risks will create the next coverage issues?

4. Project specific insurance-Its grown significantly in the last decade.  Where is it heading?  Is this good or bad? 

5. New carriers-Why does it appear that there are so many new carriers entering the marketplace now?

6. Evolving delivery systems and types of contracts-Are they really here to stay?  Which ones are we likely to be still talking about in 5 to 10 years? (IPD, PPP, Alternative Energy, Equity investing by contractors)

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Tell Us What You Want To Hear-A Top Ten Voting List

7. The trend of mega jobs-Will this change the risk profiles of mid-sized firms?  Where will the work come from for firms which can’t compete in this range? How is the surety market reacting?

8. Acquisitions continue to make headlines -Will this continue?  Why? Challenges to owners? Subs? Risks to contemplate?

9. What’s the latest on state specific challenges?  What are the biggest challenges you see at the state risk level?

10. Getting the best deal in the insurance marketplace-What makes a carrier look more favorably on one firm versus another? Does marketing yourself really have an impact on price?

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The Top Ten1. Changing Insurance

Market2. Claims Evolving

Challenges3. Changing Exposures-

New Issues?4. Project Specific

Insurance Growth5. New Carriers-Why

Now?

6. New Project Delivery Methods-New Exposures?

7. Mega Jobs-What Should You Think About?

8. Acquisitions9. State Specific

Challenges10.Getting The Best Deal

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1. Is The Market Hardening? If So How Long Will It Last• Lots of talk

• Some movement is clearly out there

• Not everywhere on all accounts• Are seeing some increases on larger accounts (5% + or -) • Property more stressed as well as Workers Compensation

• Long term sustainability of increases not certain at all• Unfortunately for insurance carriers, results still pretty good• Business is viewed as stable by investors encouraging capital

infusions• New carriers believe good time to enter

• Reinsurance pricing predicted to flatten for 1.1.2013 renewals*

12 * Fitch’s 2013 Reinsurance Review

1. Is The Market Hardening? Is So How Long Will It Last

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Line Rate Movement

General Liability +3% to +10%

Excess Liability +5% to +12%

Workers’ Compensation +3% to +10% (state-by-state increases could be higher)  

Builders Risk Flat to +10%, higher in high catastrophe areas

Project Insurance (Wrap-Ups) Primary and excess rates remain flat with significant variation depending on job size, type of work and location

2. Claims-What Are The Evolving Challenges?  What Recent Court Cases Keep You Up At Nght?

• Current challenges• Uncertainty on indemnity statutes• NY Labor Laws• Business Risk and what courts define as an occurrence• Lack of consistent underwriting alignment with claims• Aggressive coverage positions and use of outside counsels by

carriers

• Court cases that keep us up• Kvaerner• Gilbert

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3. Changing Exposures In Construction-What Risks Will Create The Next Coverage Issues?

• Cyber: The intersection of technologies via the Web

• Design teaming• IPD• Beyond BIM• Employee environment

• Supply chain: Globalization driving risk• Do you know where your materials are coming from? • Who procures these?• Coverage challenges

• Indirect losses/soft costs• Time• Contractual relief?

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3. Changing Exposures In Construction-What Risks Will Create The Next Coverage Issues? • Design Integration

• Impact on legal liability-When is a professional problem a coverage challenge?

• Contract Damages• Confusion on insurance coverage for consequential

damages versus contractually mandated damages (liquidated damages vs consequential waivers for ex.)

• Warrantees• Guaranteeing performance over time-ESCO contracts

for example• Not a big market for risk transfer at present

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4. Project Specific Insurance-Its Grown Significantly In The Last Decade.  Where Is It Heading?  Is This Good or Bad? 

• Underlying driver has shifted from perceived cost savings to more coverage certainty-that’s not a bad thing

• Market is adapting to new buying habits• GL only-At much lower project sizes (as low as $5 to 10 MM)• Project OPPI or CPPI programs• Statutory term coverage• Non traditional markets driving activity

• Challenges• Impact on contractor programs• Lack of consistent coverage project to project• Limits purchased• Poor project administration• More demand for accountability-How did the program work? Was it a

success? How do you measure it?

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5. New Carriers-Key National Construction Insurance Carriers-Primary Casualty

2005 2012

AIGACEArchCNAHartfordLibertyOld RepublicTravelersZurich

ACE *ArchAWAC *Chartis *CNA *Hartford *LibertyOld RepublicStarr *Travelers *XL *Zurich *

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= new leadership since 2005

5. New Carriers-Professional Liability

2000 2006 2012

CNAECSKemperLexingtonZurich

AceCNAECSLexingtonLIUQuantaSt. Paul/TravelersZurich

ACE AlterraArchAspenAxisCatlinCNA CV Starr LexingtonLIUSwiss ReTravelers XL Zurich

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5. Key National Construction Insurance Carriers-Excess Liability

2005 2012

AIG/LexingtonACE/WestchesterLloyd’sTravelersZurich

ACE/WestchesterAXISAWACChartisInterstateIronshoreLiberty InternationalStarrTravelersXLZurich

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5. Builder’s Risk

2008 2012

ACE/WestchesterAllianzAxisChubbCNALexingtonLloyd’sTravelersZurich

ACE/WestchesterAWACBeazleyChartisCV StarrIronshoreTorusTower GroupTravelersXLZurich

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5. New Names In Surety

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Recent activity and new players• Lots of movement on the carrier side

• New carriers getting in• Existing carriers trying to hold on to market share• Rate competition notable• Innovation for differentiation• Massive capacity

Delivery methods testing sureties• Gap• PPP• IPD?• Need for increased liquidity in the products

5. New Names In Surety

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Notable movements:• AWAC-New carrier. Leader named August 2012• One Beacon-New carrier. Leadership from ACE

September 2012• XL-Formed November 2010• Berkeley-New President 2012• Torus is investigating entering the business

Why do markets want to get into this business now?

6. IPD, PPP, Alternative Energy, Equity Investing By Contractors-Are These Really Going To Impact The Business?  Which Ones Are We Likely To Be Still Talking About In 5 to 10 Years?

• IPD: Health care driven• Will this migrate to general commercial construction? • Carriers still catching up-if you’ve seen a deal for IPD you’ve

seen one deal• Significant growth in next 10 years?

• Public Private Partnerships• In the US is there opportunity beyond infrastructure?

Healthcare? GSA? • Big bets that this will grow-Impact of foreign investment,

challenges from traditional financing• Growth likely but not a panecea

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6. IPD, PPP, Alternative Energy, Equity Investing By Contractors-Are These Really Going To Impact The Business?  Which Ones Are We Likely To Be Still Talking About In 5 to 10 Years?

• Alternative Energy• What are we talking about here?

• Alternatives Solar, Wind, Bio Fuels• Getting energy from point A to point B: Pipelines, refineries, HVT• Underlying economic drivers suspect• Impact of gas, shale, coal sources• Long term growth-uncertain

• Development • Contractor involvement-lots of discussion about sharing in equity risk

• Lender requirements forcing teams to look at different risk structures on financial returns

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7. The Trend Of Mega Jobs (over $500 MM)

• Dedicated sources of funds• Ballot initiatives• Political will-both helps (TMZ) and hurts (Hudson River Tunnels)

• PPP Model-using “off balance sheet funds”• Shift risk to consortiums/concessionaires• Limited pool of firms that can compete

• Helping larger firms- top 30 ENR contractors, not helping middle market firms

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7. The Trend Of Mega Jobs (over $500 MM)

• Pent up demand helping in some cases• Brickell Place, Miami

• Surety is keeping pace• Capacity on a single jobs well over $1 Billion • Developing products to help protect liquidity in some cases

• Insurance marketplace • Truly global especially on builder’s risk (European carriers

especially have an appetite for large infrastructure jobs)• Job limits of $300,000,000 + for GL/Excess, $100MM plus for

CPPI, same for Environmental• Vast majority of the mega projects are “wrapped”

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8. Acquisitions• Key Drivers

Geography Financial conditions Succession planning Size of deals Uncertainty about the future

• Recent Deals‒ Wietz (Orascom)

‒ Summit (dck)

‒ Shaw (CBI)

‒ All in last two months- All ENR 400 contractors.

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9. What’s The Latest On State Specific Challenges?  • Types of concerns

• Statutes• Court interpretations

• Concerns also based on who is asking• Owner, GC, Sub Contractors

• Statutes focused on several key areas that impact construction• Anti Indemnity Laws• Structural work acts/Labor Laws (Such as NY 240, 241, 242)• Subrogation limitations (such as on Worker’s Compensation)

• Court Cases• Business risk cases (South Carolina, Pennsylvania, Florida for ex.)• Horizontal vs. Vertical Limits exhaustion (for ex. Kajima decision in

Illinois)

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10. Getting The Best Deal In The Insurance Marketplace

• What makes a carrier look more favorably on one firm versus another?

• Make it personal-Meet the underwriters face to face• Spend time selling yourselves

• Why should the underwriter give you a better deal? How do your losses relate to your safety and quality programs? Is your senior management involved?

• Lay out your long term plans• If you do surety meetings think in terms of the same approach

• Talk about contractual controls• Are you keeping the right amount of risk via the contract or

assuming the right amount?

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10. Getting The Best Deal In The Insurance Marketplace• Marketing every year typically does not work

• Its expensive to quote a new deal-underwriters anticipate they will have a few years (3 or so) to recover these initial costs of establishing a new relationship

• Collateral is cumulative and needs to be considered in all deals

• Bank credit lines getting really expensive• As work picks up bank lines may become more important to

ramp up work• Focus on cleaning up your data

• Close as many claims as you can• Sort the claims based on work you no longer do or in states

you aren’t going to be in

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10. Getting The Best Deal In The Insurance Marketplace• Be creative

• Spend time making your company/job interesting• Set up job tours, share the things you are proud of like newsletters,

awards (particularly safety awards), and employee retention, recruiting and culture

• Be easy to underwrite• Share all information, be detailed and be complete

• Certainly question why data is being requested but supply everything you can

• Give them enough time-90 days is ideal. Also helps get them to quote early.

• Meet with them before the full information is submitted and then once it is• It’s a couple of meetings but the first one sells the firm, the second

shows commitment to giving underwriters what they need

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10. Getting The Best Deal In The Insurance Marketplace• Finally give the underwriter the opportunity to sell its services

• This gives you a good idea on their value added • Also allows you to make a qualitative decision based on how the

carrier aligns with your firm

• Ultimately the best outcomes take time and focus will assure the best long term deal!

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Have A Great Conference• Spend time getting to know who else is attending

• Pick everyone’s brains

• Tell us what you worry about

• Tell us what matters-not just in this session but overall

• Have some fun!

Thank you for coming to San Antonio!

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