The Current State of Wrap-Ups
October 2003
A review of the current market for wrap-ups
reveals that wrap-ups continue to be the product of choice by owners, developers,
and contractors on large construction projects.
by Richard
Resnick
Tanenbaum Harber
Co., Inc.
Whereas the President of the United States is required by the constitution
to provide the Congress with a State of the Union, report we will (although
not required) gladly provide IRMI.com readers with our own State of the Wrap-Up
Union report. Well, to coin an old phrase, the state of the wrap up “union”
is fine.
The Down Side
Although the state of the market is good, there are have several “blips”
on the screen that need attention. First and foremost is the impact that the
current economic climate is having on the construction industry. Remember, no
hole in the ground means reduced potential for wrap-ups. That is the short and
long of it.
Many plans to build were put on hold post-September 11. In New York City,
where there seemed to have been a wrap-up in place on every major street corner
a few years ago, the landscape has changed dramatically. Understand that not
every project is a candidate for a wrap-up. “And that is the rub.” For instance,
there is certainly more residential construction currently in New York City,
but not all such projects are large enough for a wrap-up. Many wrap-ups in the
past 5 to 6 years have been during the office-building boom in New York City.
The Up Side
It is not all doom and gloom though. Across the country there are many potential
projects that qualify for wrap-ups. Try reading a real estate magazine and not
be amazed by the number of planned projects for schools, universities, hospitals,
and sporting venues. These make wonderful prospects for wrap-up programs. Many
prospects have timelines that encompass numerous projects under one continuous
capital construction program.
Hard Market Realities
The insurance marketplace has been a mixed blessing to our world of controlled
insurance programs. On one hand, we have been subject to more stringent underwriting
conditions, a reduced marketplace, and escalating wrap-up premiums combined
with higher aggregate risk for the “sponsor” of the project. However (there
are two sides to every story), this has also presented an interesting “window
of opportunity” for us.
Wrap-up sponsors are seeing higher premiums to pay for their wrap-ups, but
the wrap-up still makes economic sense due to the “insurance credits” they are
obtaining from the subcontractors. These subcontractors have seen a major escalation
in their premiums over the last 2 years due to the hard marketplace. Subsequently,
they are charging more for insurance in their bid prices and are therefore providing
greater insurance deducts when enrolling in a wrap up program.
By the way, while we are on the subject, (but somewhat digressing), I do
not mean to give the impression above that the only reason wrap-ups make sense
is due to cost savings potential. Today, control of the insurance process makes
more sense in many cases then cost savings. How could I say that you ask? Well,
have you ever been involved in settling a claim when the contractor does not
have the proper limits, coverage, or heaven forbid, no insurance at all. In
today’s difficult marketplace, this is a reality for anyone considering a wrap-up.
At a minimum, by instituting a wrap-up program on a major project, you will
at least have a comfort level that all enrolled contractors have adhered to
the insurance requirements.
Wrap-up sponsors are also subject today to the simple realities of supply
and demand. There are fewer underwriters willing to subject their surplus to
the writing of wrap-ups. This has resulted in a major shake up of the key players.
Whereas in the last few years we could have counted upward of 10 insurance companies
willing to participate, today we are probably down to 5, of which some have
differing appetites for different types of projects.
How did we get to this point? Underwriters are rethinking their position
based on sub par results from wrap-ups written the last few 5 years. Keep in
mind we previously had gone through a soft marketplace where pricing fell, but
losses did not. In certain jurisdictions, such as New York, onerous labor laws
have given some underwriters second thoughts on entertaining business in that
state. Like any good business, prices need to escalate to make up for the losses.
Certainly the tragedy of September 11 had a dramatic impact, but the seeds for
the market turnaround were planted at least 6 to 9 months prior. We are now
seeing the impact today.
There is one other area to address at this point. We are seeing “owners”
more willing to allow their “construction managers” to procure wrap-ups in what
are called Contractor Controlled Insurance Programs. In short, the CM procures
and pays for the wrap-up insurance and in several instances agrees to provide
the owner with a portion of the savings. These types of programs are becoming
more and more popular as owners realize that the construction managers are in
the best position to control the contracting process and therefore obtain the
greatest dollar savings.
Conclusion
So, in conclusion, wrap-ups are here to stay. We may be going through some
trying times, but wrap-ups continue to be the product of choice by owners, developers,
and contractors on large construction projects.
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