Stimulating the Construction and Environmental Insurance Markets
By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
More than $150 billion for new infrastructure; enough funding to double U.S. renewable energy capacity; the largest weatherization program in national history.
These are all elements of the American Recovery and Reinvestment Act, otherwise known as President Barack Obama's $787 billion stimulus package. Local and state governments and the contractors they'll be hiring are licking their chops, awaiting its purported effects on their purses. Insurers are also eying the potential for business but must also consider the risks that might come with stimulus-related construction projects.
The wait on both ends could soon be over. According to Carol B. Laufer, senior vice president, excess casualty, with ACE USA, a bunch of stimulus-related projects were required to be shovel ready by June 30, while the rest of construction-related money is mandated to be spent or at least dedicated to particular projects by March 2010.
You would think insurers are jumping for joy at the opportunity for new business. After all, the construction industry hasn't been the most bullish sector out there for a while, with more talk about what to do with abandoned and incomplete projects than about new ones. But it's unclear as of yet what all this stimulation will mean for the construction space.
The effect on rates on insurance, for instance, is hard to foretell, said Timothy R. Kania, senior vice president, construction, at Liberty International Underwriters. Currently, according to Kania, the construction business is hard to gauge anyway, considering that rates and terms differ by segment, building type, project and insured. In the energy subsector of construction, for instance, rates have started to stabilize, but in four-wall buildings (like office buildings and basic real estate) the market is fairly competitive.
For stimulus-related infrastructure, pricing will depend on how many new markets go fishing for the business. Kania said we can't know for sure how many projects will go out to the large insurance players, because some tinier stimulus-inspired projects could go either to small local carriers or folded into an existing policy.
Karen Keniff Schwartzkopf, senior vice president for Zurich North America Commercial's Construction unit, agreed that the industry will probably see more carriers get into the market.
"I do suspect we'll see more," Schwartzkopf said.
As you might expect them to say, representatives for larger carriers warned contractors and project owners to be wary of these newer markets coming in to take advantage of stimulus money.
Some of the fresh faces might not have the claims infrastructure that established players in the market have, said ACE's Laufer. They might not be in it for the long term either, which is important considering many of the exposures are of the long-tail variety.
'Who you choose as your carrier, you better think about when these claims come in 20 years," she warned. "It's not really an annual decision."
Combine that with the fact that government deals tend to go to lowest bidders and one is left to wonder if these contractors will come into these projects with the right coverage in place, she continued.
A well-constructed OCIP or CCIP from a big name commercial carrier, such as ACE of course, can mitigate the risk by getting all involved contractors on one contract with consistent terms and exclusions, a stable financial backer behind the contractor and uniformly limited gray areas, according to Laufer.
THE OTHER SIDE
Which brings us to our next point. Be wary of new contractors coming in to do the work if you are selling them insurance.
Some of this money is going to places which might not be ready for it, said Geoffrey M. Hall, senior vice president, construction, ACE USA. There are areas, he said, where enough qualified contractors to do the job might not even exist.
"You have concerns about who's doing the work," said Hall, talking safety protocols, risk controls.
Another risk that these green (as in, raw) contractors might face is working with the federal government.
"For contractors that don't do a lot of federal work, it could create exposures for them, financially," said Schwartzkopf. Cross the government and contractors could face stiff penalties.
In speaking with insurers that specialize in environmental coverage, one realizes that they share many of these same concerns when it comes to stimulus-related projects.
Take the market dynamics, for instance. The environmental insurance market is currently hit hard and hopes are the stimulus-inspired projects could revive it. But no one can be sure.
"It's fair to say that the macroeconomic situation is affecting the whole environmental market significantly," said Richard T. Corbett, president, XL Insurance-Environmental.
Because construction is normally a "big piece" of environmental, the slow-down there has been huge, plus it doesn't help that there is additional competition coming into the market, driving rates down on smaller deals.
With the stimulus, the question for Corbett is: Will the money coming in equal what's been lost?
With much of the Obama cash going into infrastructure, schools, alternative energy and weatherization, environmental underwriters should make out to a degree. But how eager will established environmental underwriters be to touch some of these new risks coming into the market?
Most of the schools built under the stimulus money will be green (as in, environmentally friendly), explained William Hazelton, senior vice president, environmental risk, ACE USA.
"These are not easy transactions," he said about insurance packages that will need to include environmental coverage (such as project specific contractor's pollution), construction coverage and excess liability.
What's more, new contractors brought in on these projects might not be schooled in LEED certification, or any of the other processes by which a building can earn a green designation.
Corbett agreed that you could have contractors engaging in projects that they've never done before, which could lead them to meeting new liabilities. But he added that there doesn't have to be any new liability simply because the money is stimulus related.
"The fact that the money's coming from someplace else, I don't think that makes a difference," Corbett said.
July 1, 2009
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