Expert Commentary

The Current State of Wrap-Ups

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.


Wrap-Up Programs
October 2003

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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