By DAN REYNOLDS, senior editor of Risk & Insurance®
Want to find out what's going on with the economy? Talk to an insurance guy.
Insurance executives who attended last week's International Risk Management Institute (IRMI) Construction Risk Conference at the Gaylord National Resort and Convention Center on the Potomac River outside of Washington, D.C., paint a picture of a construction world that is in flux.
And despite what you might think, not all of the news is bad.
For one, there has been a sea change in the types of construction projects being funded. Billions of dollars in economic stimulus funds from the federal government are tilting the field toward healthcare, infrastructure, higher education, energy and, believe it or not, manufacturing, according to Gary Kaplan, president of construction for Zurich North America.
WHERE THE MONEY IS
As advertised, federal dollars are also going to renewable energy projects, whose technologies are much more proven and better engineered than they were 30 years ago.
Back then, when wind turbines were first installed at places like Altamont Pass in Alameda County, Calif. the engineering wasn't where it needed to be. Pads supporting the towers were too small and the turbines weren't anchored deep enough in the ground. Some times the turbines got to spinning so fast, they "helicoptered" right off of the ground.
"In the first go-around, wind power did not go very well for the insurers," said Kaplan. Nor did solar power.
But now, insurers have more faith in those technologies, and how the energy sector will apply them to produce more renewable energy. Like much else in our free market, insurers are going where the money is. Just this past week, the Obama administration announced a $3.4 billion investment in electric grid modernization.
That announcement adds to a trend in which the public sector is a much bigger funder in construction relative to the private sector historically, and alternate fuels and fuel efficiency are a priority.
Overall, though, because of the soft economy, construction is down. Greg Case, CEO of the Chicago-based brokerage Aon Corp., said in a conference call with analysts in late October that revenues from construction insurance business at his firm were down 20 percent year over year in the third quarter.
Like Zurich's Kaplan, Jack Probolus, a controlled insurance program marketing director with Boston-based Liberty Mutual, said his conversations with contractors tell him that higher education and energy are going to be two places where both private and public construction money is flowing in 2010.
Despite or perhaps because of decreases in endowments, higher education entities are competing fiercely for tuition dollars. These days, students want all the bells and whistles, and that means that universities are spending billions on capital projects.
"Colleges and universities have been affected, but they still have a pretty good base to work from," said Probolus.
"They are in a competitive environment, and they need to improve their facilities," Probolus said.
And the manufacturing angle? Zurich's Kaplan said he is seeing expanding opportunities as auto manufacturers reconfigure their shop floors to build hybrids and other alternate fuel vehicles.
He estimates that Zurich provided coverage for $42 billion worth of energy projects in 2008.
That said, there is still a lot of digging out to do. But Kaplan sounds optimistic and says he sees the light.
"We are thinking midyear when things start to come back for our contractors. It's not the same for all of them. Some guys are starting to see that they are going to have more business next year. It depends on how good they are. I think most of the depression comes in the middle-market guys. Their balance sheets are a lot more fragile than the big guys," Kaplan said.
November 9, 2009
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