Is a Hardening Insurance Market on Your Radar?
Will the prolonged economic downturn spark a reversal of the construction insurance marketplace?
By David R. Bradbury, Sr. Vice President, Murray Risk Management & Insurance and CFMA’s National Secretary
The tumultuous economic climate faced by the construction industry the past three years will likely continue throughout 2011. While the effects from the government stimulus in QE1 and QE2 provided modest relief to specific industry segments, construction industry unemployment is expected to remain at nearly 20%, bank credit continues to be restrictive, and state and local governments will curtail discretionary construction spending wherever possible.
Coinciding with this trend, the insurance industry has been in a consistent “rate softening” mode for more than a decade. Cumulative commercial industry pricing has now been lowered to year 2000 levels. However, this trend is beginning to change, starting with construction workers’ comp lines.
Over the past several years, industry underwriting results have shown signs of significant deterioration, particularly in workers’ comp lines. Insurance industry experts polled at the most recent IRMI Construction Risk Conference (November 2010) are projecting workers’ comp combined ratios in the 110-120% range for the 2010 year. This means for every premium dollar taken in, the insurance carrier sustains $1.10-1.20 in losses and expenses. What’s worse: The trend over the past three years has been deteriorating at an accelerated pace!
Among the factors driving these results is the significant reduction in payroll exposures and return audits. Further, the relatively low rate of return on predominately fixed income investments by insurance carriers has not had the leveling effect as in a traditionally stable economy. Finally, many of the reserve redundancies allowed by statutory accounting practices have been “rung out” due to the sustained economic downturn, and therefore will not be available to offset future combined ratio deficiencies.
Although no one can predict with certainty exactly when the marketplace will harden, the winds of change are blowing, with medical cost inflation on our doorstep, and workers’ comp is the most likely line to lead the charge. My recommendation: If you are in a position to negotiate a multiyear rate commitment at flat or slightly reduced rates in 2011, lock it up now!