BC Surety and Insurance Outlook 2011

Where have we been?

There is no question that the last year has been a tough one for all of us who make our living in the construction sector. The impact of lower construction volumes and reduced margins showed itself clearly as local surety underwriters saw weaker balance sheets and income statements in most sectors. Fortunately, the federal stimulus money provided a timely boost to the construction sector. In fact, some surety companies ended up reasonably happy with their 2010 revenue levels. As usual, smart contractors found a way to make money despite the economy.

Bonding: Alberta bore the brunt of surety claims in the last year. Rumours of around $30 Million in bond related claims were paid to project owners to cover costs caused by insolvent contractors in 2010. While verifiable data on surety claims is hard to come by, it appears that these defaults have been caused by low work volumes in the oil and gas sector, jittery lenders and excess overhead. These losses have been shared by several bonding companies, suggesting that these defaults are more likely the result of the weaker economy, rather than lax underwriting at any one surety company.

Insurance: The Canadian Insurance market was very competitive in 2010. The soft insurance cycle, typified by low pricing and flexible underwriting terms, prevailed.

 

Where are we now?

There are many positive signs that the economy is now on the mend. The risk of a double dip recession is now looking very unlikely. Low interest rates continue to support the housing market. Anecdotal evidence suggests that larger housing projects are coming back onstream. The mining sector remains strong. BC population growth from international migration continues to spur on construction activity.

Bonding: The level of competition in the bonding market remains very healthy. While some surety companies have taken a more conservative underwriting stance, newer more aggressive players have moved in to continue to provide choices for contractors.

Surety underwriters in BC remain apprehensive generally about their prospects for 2011. Economic improvement may be offset by weaker government spending, a key generator of surety company revenue. Sub-contractor Default Insurance (Subguard), pitched by the jumbo General Contractors in North America as an equivalent alternative to bonding (it is not!) continues to erode surety company revenue.

Insurance: The Canadian Insurance market remains very competitive. Recognized as a relatively safe place for Insurance companies to do business, there is excess global capital available to Canadian Insurance companies. This has resulted in lots of choice for contractors for their liability and property coverage. As an example, we are seeing very low rates for heavy equipment contractors.

 

What changes can we expect?

Bonding: As in 2010, the major Surety companies are telling us that they do not plan to make any changes to their underwriting standards. They likely will spend much more time underwriting on an account-by-account basis. Contractors expanding their geographic footprint, changing their work type or undergoing some kind of ownership transition are likely to receive much more scrutiny than they would have over the previous few years. Despite this, it is expected that there will be lots of options for contractors with a solid business plan.

Insurance: No change is expected. The soft market will continue with even lower rates for some product lines in 2011. More choice will be available for previously limited segments such as professional liability for architects and engineers and commercial liability for building remediation contractors.

 

What are the unknowns that could impact the BC surety market?

More residential development projects may come back on-stream as the real estate market shows strength. Low interest rates are critical to this sector. An increase in interest rates could threaten this recovery. The level of personal debt, and more significantly in BC, the ratio of debt to annual income, remains a risk going forward.

Government policy on HST, municipal debt loads and spending restrictions remain a threat. A change in government at the Federal or Provincial level could have a significant impact on the construction industry in 2011.

 

What should a contractor do to protect and grow his business?

Meet your underwriter. No amount of paper will substitute for the personal commitment and confidence you show in your own business.

Be alert to changing staff and underwriting philosophies within the surety market. A surety company with claims can become much more conservative overnight. We also expect to see leadership changes at the major surety companies. As some in the industry retire, your traditional relationships may no longer get you the support that you once had.

Use a professional surety broker. There are many tools available to get support for a tough project, an aggressive business plan or an unusual corporate structure. A generalist broker with limited construction knowledge and market support cannot help you. The BC surety industry is very small and specialized, with about ten brokers (that's ten people!) who truly understand the business. Make sure you are working with the best. A project missed because of a bond error or worse, insurance coverage denied because your insurance broker was unaware of the unique issues in the construction insurance market, can be extremely expensive.

Networking Bonding and Insurance Services Inc. is a large BC based Surety and Insurance brokerage that specializes in the construction sector.