July 7, 2011
Crystal Ball: Insurance For Architects And Engineers Are Climbing
Lower risk architectural and engineering firms (those that have lower claim frequency and severity, that have strong balance sheets, that are not engaged in more difficult projects such as bridge design or condo work, that have low employee turnover, and that have excellent internal controls that can be clearly shown to insurance carriers) are still reeling in stiff competition amongst A/E insurance carriers.
I predict, however, that despite the competition, insurance carriers will be forced to raise their rates in the next 12 months due to the following more generalized market conditions:
Any investment portfolio that is showing significant losses is required to be “market to market” to meet the Financial Accounting Standard Board (FASB) rules. Sub-par performance and the inability to reach 15% return on investment by the industry (the standard benchmark for performance) will obligate A/E insurance carriers to increase their rates.
Most reinsurance covers are negotiated on either July 1st or January 1st each year, and it is expected that reinsurance costs will increase. These higher reinsurance costs or even primary carriers assuming more net risk will cause a decline in desire for more uncertain ventures. All in all, if the risk cannot be passed on to another party or its cost has simply risen, the cost increases will be passed on to the end purchaser.
The A/E space is facing further deterioration due to an increase in the frequency of claims resulting from the decline in the construction industry. With financing squeezed, decreased tax rolls for government projects, and the attempts to regain losses by aggressive sureties, many owners, contractors, and developers that were once willing to negotiate with the design team when issues came up are now turning to litigation.
Go ahead and confirm this with your built environment counsel; I am sure they will see the same evidence that has led me to these predictions.
When it comes to liability insurance, engineers know that quality service is a must. To learn more about professional liability for engineers, be sure to visit these resources.
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