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:

Investment portfolios that are performing sub-par and incapable of reaching 15% ROI by the industry (standard performance) will force A/E insurance carriers to increase their rates. Investment portfolios that show significant losses need to be “market to market” according to Financial Accounting Standard Board (FASB) requirements.

Reinsurance covers are usually negotiated on July 1st or January 1st of the year, and it is more than probable that reinsurance costs will rise. Increased reinsurance costs or even the assumption of more net risk by primary carriers will inhibit and retract interests in less certain ventures. Generally, when increased risk cannot be passed to someone else or the cost increases, the end purchaser will have to cover the difference.

An increase in frequency of claims as a result of economic decline in the construction industry will cause continued deterioration in the A/E space. Less available financing, decreased tax rolls for projects funded by the government, and aggressive sureties desiring to regain losses are causing many once relatively small issues to turn into all-out litigation. Owners, developers, and contractors that were once flexible about working out problems with the design team are under increased pressure and less capable to do so.

It is my guess that any built environment counsel will see similar trends and hints leading to these conclusions.

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