Construction Insurance in the Year 2001: An Economic Viewpoint

David L. Grenier, MBA


The construction industry has been experiencing it's best economic growth cycle in over twenty years. However, an analysis of economic indicators and other factors suggests that this period of sustained growth will only last through the end of the first quarter of 2001 before the trend moves south. As a result, the historically soft market for construction insurance will continue to harden, as we have already started to see, and loss-sensitive programs are back in vogue again.

The financial health of the construction industry has always been highly correlated with the U.S. economy, with construction being a major contributor to GNP. The construction industry has also always been the first to feel any economic pressures, and the last to recover. The key drivers, volatility in the stock market, combined with increasing interest rates and a declining Dow, are main indicators of a firming of the market. As a result of these factors, the expectation of higher insurance premiums, lower limits and reduced coverages, where guaranteed-cost insurance will no longer be less expensive than loss-sensitive programs is eminent.

However, with rates rising, contractors may have more options available to them then ever for obtaining risk transfer and risk financing alternatives. Every contractor has a different risk profile and has to strike a balance between risk-transfer and risk retention that is in alignment with the company’s business strategy and risk tolerance. The reemergence of loss-sensitive programs will be one way of addressing these concerns, but other means are becoming available and offered by a variety of financial sources due to the current state of excess capitalization.

The recently enacted legislation of the Gramm-Leach-Bliley Act of 1999 (A.K.A. the dismantling of the Glass-Steagall Act), allowing increased competition between banks and insurance companies for the development of alternative risk-transfer instruments, coupled with the proliferation of the Internet and e-commerce portals for evaluating and purchasing insurance, direct or indirect, using Web-based underwriting risk assessments and online pricing, is another option coming to fruition.

A few pioneering insurance companies are beginning to sell insurance directly to their customers over the Internet, either through their own Websites or through online insurance portals. Banks, securities firms, and other financial services firms have a substantial lead in Internet technologies, and are making insurance companies feel extremely nervous and easy targets for exploitation. The next few years will be a period of major change in the insurance and financial services industry. Some insurance companies will be able to sustain their competitive advantage in the market, while others will be just casualties of a transformed business environment.

About the Author

David L. Grenier is President of C-Risk, Inc., a national risk management consulting firm that provides risk management strategies and solutions to the construction industry. He specializes in construction risk management, contracts, insurance, and wrap-up programs. (phone: 503-228-0884, or e-mail: david.grenier@c-risk.com or at www.c-risk.com).


The information in this article, and all other articles provided by C-Risk, is intended for general information purposes only and does not constitute, nor is it intended to constitute, legal advice. For legal advice, you should always consult with the appropriate legal counsel in order to determine the laws that are applicable to your specific circumstances.