subcontractor default insurance
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Subcontractor default insurance
2013 Baker Tilly Virchow Krause, LLP
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History of the market
> 1996: Created by demand of contractors with the goal of taking back
control when subcontractors default.> 2012: 187 Accounts w/ $48.6B in enrollment
CRU 30 Accounts / $4B in enrollment
> Purchased by most large general contractors in US
> Barriers to entry for other insurers: No readily available loss datathe underlying source for insurance company
pricing methodologies
Surety review in house - we have this product
Program sizes require substantial reinsurance support to build capacitylimited
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What is SDI?
Using Surety on all Subcontractors Managing the Subs with SDI
Defaul t Resolut ion Contro l led
GC
e au eso u on on ro e y ure y
GCSDI
Premium
y enera on rac or
SuretyBonds o
ntract
Contract
InclSubBond o
ntract
Contract
Price
$Premium
Price
Sub-contractors
Sub-contractors
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Why do GCs buy SDI?
3rd
Party RequirementsLender / Owner / Surety
vThe unused loss funds are returned
Altruistic Approach
Better Control / Broader Cover /Recognizing & Pricing Sub Risk
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Component Typical Values Comment
Per Loss Retentions North of $500K Deductible Retained per Sub
Contract Default
Aggregate Retentions Expressed as Variable orhard wired to x Per Loss
Once Aggs are reached itsfully insured
Co-Pa ment Loss Retentions in Excess of 10% of the next 5MM its a
Deductible sharing layer Direct Loss Dependent on Limits Offered This pays to finish the
uncompleted sub work
of the direct loss 20%
beyond completing the subswork - OH Other Trades
Fixed Premiums The money that goes to the X per 1000 or % .5% of
Loss Funds Premiums Money that is paid in / setaside to pay for losses withinthe retention
X per 1000 or % of SubTrades - Bigger Ret Biggerthe Loss Fund %
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3 Markets Overview Comparison
Zurich Arch / Catlin XL
Est 1996 Est 2009 Est 201250MM 25MM 50MM
Jumbo GCs ENR 100 Mid Size GCs $50MM 500MM & Owners
Jumbo GCs ENR 100
10 Year Coverage Period 10 Year Coverage Period 10 Year Coverage Period
Indirects Require Proof Indirects Paid w/o Proof Indirects Require Proof
Minimum Premiums No Minimums Minimum Premiums
Deductibles & Co-Pays Deductibles / Co-pay Deductibles & Co-PaysWaived w/ Reporting
Owners Added as Addl Owners Added as Addl Owners Added as Addl
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The CRU underwriting process
Application
and InfoIn Person Evaluation SDI PROPOSAL
Senior Management Discussion:
1. Strategy2. Operational Issues3. Current and Future Plans
On-Site Evaluation:1. Sub-Contractor
Prequalification
2. QA/QC3. Project Controls
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6 major criteria
SDI underwriting evaluations of potential GCe e e e :> Market focus
> Financial health
> Strategy for SDI> Belief management team / business strategy
> -
> Subcontractor management
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The resulting overall risk score helps
offer a quote
Risk Score ResultIllustrative
5.0
Risk Score Translation
CriteriaMax Min Chos en Current Future
e resu ng overa r s score e ps eunderwri ter decide whether to o ffer a quote3.8 5.0 : Quote with
confidence
RiskScoringTool
Marketfocus 35% 15% 20% 3.5 3.5
Financialhealth 20% 5% 10% 2.0 3.5
2.3 3.8 : Consider quote,
StrategyforSDI
30% 5% 5% 3.0 3.0
Beliefi nmgmtteam
a nd bu s strategy40% 10% 15% 5.0 5.0
but also consider morerestrictive terms
Subcontractorpre
qualification40% 15% 25% 3.0 4.5
Subcontractor
management 40% 15% 25% 4.0 4.0
Total 100% 3.6 4.1
1.0 2.3: Decline to quote
CurrentScore 100% 85% 85%
FutureScore 15% 0% 15%
Total Score 3.63
1.0
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Sample quote of SDI
Section4 Rating
CoverageScenarios
and
Ratings
Option A B C D
er oss
Deductible
(Thousands)
$500 $750 $1,000 $1,500
Aggregate
Deductible 1 500 2 250 3 000 4 500
(Thousands)
FixedPremium
Rate $5.64 $4.50 $3.74 $2.79
LosFundRate $6.36 $7.50 $8.26 $9.21
SDITransfer$12.00 $12.00 $12.00 $12.00
ate
Premiumsinclude10%brokercommission
Premiumsdonotincludetaxesandsurcharges
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After general contractor buys SDI
Covera e is available Once a program isany project that the
GC enrolls in itsprogram
enroll one or more
projects
,in the program unlessthe general contractor
bonds them
Premiums are paidwhen the program in
After enrolled programis com lete final sub
enrolled
No minimumpremiums
values are reportedand premium is
adjusted
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Benefits to the owner of hiring a
project deliveryin the event of asubcontractor
default
Cost savingsover bonding
subs and moresubs covered
Availability of
Up to 10 yearwarranty
provisions
the assignmentof the benefits
of the SDIpolicy if the GC
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Examples of common claim types
Defective
Replacement of poor work by replacement sub
Construction defect after project complete (15%)or
Overbillings by subcontractor with other problems
ProjectControls
Unpaid amounts due by subcontractor to others(15%)
Subcontractor
Improper estimation of costs or quantities Solvency issues from other jobs (60%)
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How loss is calculated
$5,000,000 Original Contract Value
+, ,
$1,000,000 - Amount Paid on Original Contract
$8,000,000 - Amount to Finish Remaining
$2,000,000 = Loss Amount Before Indirect$500,000 25% Indirect
2 500 000 Claim Befo re Deduc tib le
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Other questions
> Surplus lines state tax varies by state
> Final audits As projects complete NOT PROGRAM
Voluntary
> No collateral re uired 1st art relationshi
> Loss funds are returned When there are loss payments
> If loss fund is empty, loss is paid minus deductible
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Questions?
Tim Cleary, CRIS, CLCSAccount Executive & Practice Group Leader
Tim AndersonSenior Vice President
608 288 2839
onstruct on s n erwr [email protected]
970 879 7870
Reminder: To qualify for the CPE credit, you must complete theevaluation form at the end of the webinar.
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Disclosure
Pursuant to the rules of professional conduct set forth in Circular 230, as
promulgated by the United States Department of the Treasury, nothingu w w u y ytaxpayer for the purpose of avoiding penalties that may be imposed on thetaxpayer by the Internal Revenue Service, and it cannot be used by anytaxpayer for such purpose. No one, without our express prior writtenperm ss on, may use or re er o any ax a v ce n s commun ca on n
promoting, marketing, or recommending a partnership or other entity,investment plan, or arrangement to any other party.
Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independentlyowned and managed member of Baker Tilly International. The information
provided here is of a general nature and is not intended to address specific. ,
services of a professional should be sought. 2012 Baker Tilly VirchowKrause, LLP
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