Risk is inherent in what developers/builders and contractors do every day as they seek to grow their business. How they effectively manage that risk, however, can mean the difference between staying nimble and successful as the economy continues to improve. Insurance is just one component of a risk management strategy, but if arranged effectively, it can be a useful ally in a company’s quest to grow its business.
The State of the Insurance Market
According to Marsh’s 2013 U.S. Insurance market report, U.S. commercial insurance rates are expected to continue rising in many lines of business and industry sectors as above average losses, subdued investment returns, and receding reserve releases impact insurers. The report notes that despite these trends, traditional signs of a conventional hard market are not evident as the price increases are not uniform, capacity is plentiful, and competition among insurers remains intense.
So what does this mean? As insurers’ combined ratios continue to stay above 100% (a measurement of insurance company’s profitability) and investment income returns remain lackluster, insurers’ operating performances will continue to suffer. Since capacity and competition remain available, insurers are likely to become even more selective on the risks they underwrite in order to maximize their return on investment. Developers/builders and contractors that can effectively differentiate to insurers their risk profiles against their peers will be in a much better position to minimize their capital expenditures while maximizing the available insurance coverages to protect their company’s balance sheet.
Key Strategies for Optimizing Your Capital Expenditure
Whether embarking on ground-up commercial projects or habitational multi-use developments, having a risk management plan from a construction and operational perspective will demonstrate to potential insurers that you’ve thought about risk from the top down. Insurers will underwrite to the unknown adding additional cost to protect themselves from uncertainty, so it is important to have a plan in place that addresses these risks and how to manage, mitigate, avoid, or transfer them. In addition to usual and customary project information, some additional key items to consider include:
- Implementing a quality assurance/quality control program that documents milestones throughout the construction project. This is especially critical for habitational projects as it can help identify root causation should a claim arise.
- Developing a strong safety/loss prevention program . A strong safety culture has to be developed from the president to the secretary in organizations in order to be effective.
- Developing a customer service program that effectively manages customer complaints. This could potentially save unnecessary litigation and claims costs. Insurers will look to see how effective your program is and how you evaluate its effectiveness.
- Developing a good relationship with your insurer(s). Insurers are trusted advisors in your efforts to be a successful business. Having a strong working relationship with them throughout the year can be critical in helping your risk management program work for you.
- Having in-house or corporate counsel who can help manage contract risk and the changing legislative landscape. Laws are changing constantly across geographies, so it is critical to stay current to ensure your contracts stay in compliance with all applicable laws.
- Keeping operational and claims data, including customer service satisfaction surveys, actuarial data showing the average size of claims, how long claims stay open, and what percentage of claims are handled outside of litigation. This data can help a company make more informed decisions on the type of risks they want to retain and those they want to transfer to an insurer.
Tell Your Story
All this data will go a long way in differentiating your approach to risk to insurers. Active participation from senior management in the process as well as the organization’s overall support will be key as insurers become more selective in the risk they choose to underwrite.