Blog

January 26, 2016

THE 6 C’S OF SURETY?

The US surety industry has recovered since the downturn with written premium now exceeding its peak 2008 level.  While it sounds like “back to normal” here are some key changes that have occurred:

INCREASED COMPETITION

The economic downturn also affected the insurance industry, of which surety is a part.  A low interest rate environment leads insurance executives to seek their profits through pure underwriting profit rather than investment income.  The surety industry has become a more attractive sector due to its strong profitability of the past decade.

This desire for growth and profits has led to new entrants that have made bigger splashes, growing faster and offering larger credit facilities than typical for new entrants in the surety world.

Competition for talent has also increased. Sureties work hard to retain and attract surety professionals as they face their demographic shifts and aggressive competitors.

MORE CONSOLIDATION

Seeking growth leads to more M&A activity.  In 2015, the two prominent acquisitions involving large surety operations were:

  • Switzerland-based ACE buying Chubb (1Q2016 expected close), bringing together the 5th and 9th largest US surety operations.
  • Japan-based Tokio Marine Holdings bought HCC. This combines the 8th and 20th largest surety operations as Tokio Marine previously acquired Philadelphia Insurance Companies.

These two acquisitions also continue a globalization trend.  In 2008, 86% of US surety premium volume was received by US-based insurance companies.   Next year, it will it be approximately 70%.

Three new C’s of surety – Competition, Consolidation and Change – can be added to the classic three C’s of surety underwriting.  More significant change will occur when the industry turns less profitable.  Stay tuned…

Bob Bowman, Surety Underwriting Manager

January 20, 2016

THE UNEXAMINED CONSTRUCTION FIRM

It has been said an unexamined life is not worth living.  That may be overkill, but examining the financial health of your firm could change your company’s life.  The creditors your firm depends upon for work, your surety and your bank, already check in on your firm’s health regularly and you should track the progression as well.

Monitoring the evolution of your company can help you identify tangible success.  There are fundamental metrics a creditor uses in assessing your company’s strength and you need to make sure you understand those metrics.  Reviewing the financial changes within your firm over time will allow you to spot trends and identify opportunities for improvement.  You then have the ability to compare your company’s performance to that of other construction firms in your industry, sector, and region.

There are a number of benchmarking resources available that assess your strength using the metrics creditors rely upon and give a side by side comparison to peers within your trade.  This is a good starting point for an internal review to choose which indicators are important to monitor to help your company succeed.  Reviewing the necessary information a creditor will focus on can help uncover the often unspoken underwriting process and allow your company to take hold of your future by gaining the knowledge necessary to optimize your credit.

The leading indicators for all firms are clearly profitability, liquidity, leverage and efficiency, but how closely and regularly are they monitored?  The more details gathered with regard to your firm’s objectives can give you the knowledge necessary to thrive.  We embrace these discussions to help your firm attain its goals so you can live the life you want.

Ted Jorgensen, Surety Account Executive

October 19, 2015

FUNDAMENTALLY SOUND

n recent conversations with almost every contractor I hear:  “We’re so busy” or “we can’t find enough good employees for all of our work” or “we’re trying to wrap up/prepare before the weather gets cold”.  Busy, maximum capacity, short staffed.  This is the reality in which most construction firms are operating in right now.  This is great news, yet these companies/your company walk a tightrope from a safety and financial standpoint.

Even while you are running at maximum capacity are you taking time to conduct your toolbox talks and address safety issues on the jobsite?  Are you still checking your numbers closely on bid day?  Are you reading contracts and bid specs carefully for onerous terms & conditions?

In the midst of running at top speed in every direction, remember the fundamentals.  Just like any sport where not executing solid fundamentals can lead to a botched play and cost a game, a construction company can also suffer a major loss (Work Comp, Equipment, Auto, Financial, etc.).  It’s just as easy for an estimator or equipment operator to lose focus amidst their hectic day and cause an injury or financial loss as it is for a wide receiver to drop a pass because he’s turned his head to look up field instead of watching the ball in to his hands.

Conducting business and building projects efficiently, safely and on budget is the goal.  How are you operating toward that end goal?  Is your company really that good or just really lucky?  Does your team know you value their time in thinking through their work as much as completing it?

Stick to the fundamentals.

Ben Canning, Account Executive

October 15, 2015

THE FUTURE AIN’T WHAT IT USED TO BE

With the recent passing of Yogi Berra, his many great quotes have been brought back to our attention.  As I was looking at a list of the quotes the other day, one stood out: “The future ain’t what it used to be”.  Somehow this made me think about the future of surety underwriting.

A couple of colleagues and I were recently discussing trends in surety underwriting – particularly the impact of the aggregation of data has had on the underwriting process and approach.  Market consolidation naturally leads to a consolidation of information and data, and underwriting companies have appropriately established practices to aggregate and analyze this information.  This is important and valuable, and it enhances efficiency in an extremely time sensitive environment.  However, as a result, the underwriting process can become a “science” of comparison potentially limiting the “art” of discovery.  This is an important dynamic to understand as you manage your surety program.  As this trend continues, keep in mind the following:

  • Understand the “science” of comparison – what is the data, how is it processed and accumulated, what are the key points of comparison, what are the ramifications
  • Bring to light what may not be discovered – do not expect that the underwriting process will uncover key information without you (and an engaged advocate) highlighting that information

Fortunately there is an underlying consistency and predictability in the surety underwriting process.  This has led to a stable and profitable marketplace, and we all benefit from that certainty.  These trends will continue as we manage the economy of time and aggregation of data.  The most important thing is that we recognize, understand and manage the process to a positive outcome.  I’m not sure what the future used to be, but I’m guessing that it will be different than it was – so maybe Yogi was right.

Josh Loftis, Sr. Vice President, Surety Director

September 10, 2015

THE MISSING LINK TO A STRONG QA/QC PROCESS

One of the most important components and arguably the most under-used/under-valued component of any Quality Assurance & Quality Control (QA/QC) process is having a well-defined investigation procedure.  If QA/QC incidents are not investigated to determine a cause, how are they prevented from re-occurring in the future?

It is important for this discussion to understand the simple definition of Construction Rework: Correction of defective, failed or nonconforming work.  In other words:  Doing something more than once to complete a task – Paying twice for the same work.

It is important to view a QA/QC incident in the same manner that employee injuries are analyzed.  When an injury occurs on site – the first thing that gets done is a field investigation & written report to identify the immediate & root cause.  This information is then used to implement needed controls to prevent the same incident from re-occurring in the future.  So, why isn’t this standard practice applied when it comes to QA/QC?

As QA/QC programs evolve and truly begin to identify and understand the true cost of QA/QC incidents & rework, there are several key areas to consider when developing an investigation process:

  • Develop an investigation form
    • Date of incident
    • What was the description of the original task or work to was being done
    • Description of the QA/QC incident – what occurred
    • Identify primary cause of why the QA/QC incident occurred
    • What are the corrective measures or means & methods going forward to prevent from recurring in the future
    • What is the estimated time to correct the QA/QC deficiency
    • What is the potential impact to work schedule
  • Implementing corrective actions from the investigation
    • How are these new work methods going to be uniformly implemented throughout the entire company
  • Establish an internal cost-code for rework & other QA/QC deficiencies
    • The only way to truly track and identify the true cost of the QA/QC incident
  • Establish a designated individual (may be several individuals if the company has logistical challenges). This is important to gather consistent and accurate information from the investigation
  • Establishing a database to capture all related QA/QC information and any new work procedures or processes.

If you have questions or need assistance in developing or enhancing a QA/QC process within your company, please contact a CSDZ representative to discuss.

 Scott Staffon, Director of Risk Management

July 14, 2015

TALENT AND PRODUCTIVITY

Cobb Strecker recently hosted a two part seminar conducted by Gregg Schoppman from FMI Consulting regarding acquiring, retaining, and training your current workforce. The second segment of the seminar discussed a very practical tool to increasing productivity on the job-site, therefore maximizing the productivity of your current workforce.

Virtually every conversation we have with our clients focuses around the lack of quality talent in the industry right now. Many contractors have great backlogs and potential for even more work, but they worry they don’t have the workforce to execute the work. This obviously creates one of the largest challenges for most all contractors, and with many forced to hire a warm body, there can be a number of risk management concerns as well.

Gregg shared many practical approaches to help in this area, and I will share the few I feel stuck out the most.

Attracting New Talent

  • How do you market your company to potential candidates? You cannot just offer a paycheck anymore! To many younger candidates, it is more about the culture and freedom than simply the money.
  • What is your company’s value proposition for potential candidates? Do you have a compelling reason why they should come work for you, versus the company down the street?

Screening Talent

  •  Conducting multiple interviews with a number of different touch points will give great perspective for both parties.
  • Background checks, personality screening, online checks, reference checks, and post offer physicals are great objective ways of screening a potential candidate.
  • Case studies or other competency tests are excellent ways to see if a candidate can really do what they say they can do.

On-boarding

  • Take time welcoming the new individual to the team. Make it more than a 1 day or 1 hour process!
  • Consider including multiple touch points, departments, and experiences for the individual.
  • Reiterate the history, mission, and vision of the firm with the new employee, and get them involved early!

Training and Development

  • Consider a few training modules relating to your core values and processes.
  • Leverage external partners (counsel, accountant, risk manager) to help train certain individuals.
  • Consider a mentorship/job shadowing for a new employee. Think beyond just the managers.

Retaining Talent

  • This is more than just pay increases!
  • Conduct regular performance reviews and appraisals. Utilizing goal setting is a great tool in this process.
  • Consider deferred compensation programs, and other leadership development opportunities for key talent.

Secondly, Gregg discussed a tool that many of his clients utilize to increase the productivity and communication on a job site with the workforce they do have. He stated firms with a typical net margin of 2-3%, who increase their labor expenditures by up to 10% can have a potential savings of 100%, doubling their net margin! For firms whose employees work a typical 8 hour day, a 10% savings is only 48 minutes of time in the field to potentially double their margins!

The Daily Huddle is a simple yet extremely effective tool to allow contractors to increase communication and efficiency on the site. The daily huddle is not to be confused with the regular tool box talks, or job site analysis. The daily huddle which is either conducted utilizing a white board in the job site trailer, or a dry erase marker on the hood of the foreman’s truck, is focused on the following principals;

  • Setting AM and PM goals for Productivity, Safety, Material/Equipment Needs.Analyzing why a goal was or wasn’t achieved the period before.  What is needed to achieve our new goal? Do we have all of the proper material, equipment, manpower to achieve our goals?
  • Incorporating safety also reduces the risk of an accident because the task is properly planned for.
  • Many contractors also incorporate quality control/quality assurance as part of this process and discussion.
  • These daily huddles need to be documented and sent into the office for proper accountability measures.

Talent and productivity go hand in hand in any industry, and can make or break any company. Due to the increased competition in both talent acquisition and project acquisition, your company needs to be on the cutting edge and constantly evaluating the effectiveness of both areas. The construction industry in particular is going to be in an extreme talent draught over the next twenty years if we don’t adapt, innovate, and create a culture that competes with other industry segments. Please feel free to contact CSDZ for more information on Gregg’s presentation, or help in implementing either strategy.

Dan Etzel, Account Executive

June 18, 2015

CURBING THE SUBSTANCE ABUSE TREND

Approximately 1 in 6 employees has a substance abuse problem according to numerous studies. Unfortunately, substance abuse by employees can have a dramatic impact on the profitability of a business:

  • Accidents. Substance abuse is the most prevalent cause of all injuries and fatalities; substance abusers are 5 times more likely to injure themselves or another at work than are non-abusers.
  • Absenteeism. Substance abuse is responsible for 35% of all absenteeism; substance abusers are 16 times more likely to be absent than non-abusers.
  • Workers Compensation. 38-50% of all claims involve alcohol or drugs; substance abusers are 5 time more likely to submit a workers compensation claim than are non-abusers.
  • Employee Theft. Substance abuse accounts for approximately 40% of all employee thefts.
  • Loss of Productivity. Substance abusers perform at 67% of their potential.

So what can you do to protect your employees and business?

  • Employee Assistance Program: Often times an employee with a substance abuse issue isn’t sure where to turn to for help. Offering an Employee Assistance Program as a part of your employee benefits package can create an outlet for the employee.
  • Pre-employment or Probationary Period Drug Testing: Depending on applicable state laws or labor agreements, a good practice is to complete a pre-employment drug test. If your state allows it, the hair test may be a better indicator as it provides a 90 day use history.
  • Post-Accident Drug-Testing: Go beyond testing the injured employee to test anyone who caused or could have contributed to the accident. Often times, the actions or inactions of one person lead to the injury of another. As a best practice, two supervisors should immediately review the accident and come to consensus on all whom should be tested.
  • Proper Drug Screening Panels: Work with the drug testing clinic of your choice to ensure the screens used included both “traditional” drugs (such as cocaine or marijuana) and “prescription” drugs (such as opioids). A significant portion of drug abusers today abuse prescription drugs, several of which can impair judgment or reaction time.
  • Safety Sensitive Positions: While your employee has a right to personal privacy, there also could be positions within your organization that even a momentary lapse in judgment can cause physical harm to the employee or someone else OR significant financial harm to the company. For these specific positions that can easily be identified in your employee handbook, you should have a policy that any employees in these positions must inform a specific individual within your organization if they are taking any prescription medicines that may impair their ability to drive. As an employer, you’ll ask the employee for permission to speak with the prescribing physician to confirm it’s OK for the employee to operate the equipment or vehicle in their safety sensitive position. Failing to do this could create negligent entrustment issues should an incident occur in the future.

These are important Human Resource issues that should be reviewed and discussed with your legal counsel.

Ross Squires, Account Executive

June 3, 2015

THE RISK & RETURN PENDULUM

During the downturn, the pendulum swung in favor of project owners. They obtained competitive pricing and were able to shift more risk to contractors within contracts.

When more work becomes available, there is typically a lag in margin improvement as contractors increase their backlogs. Hopefully, you have now reached the point where securing better margins has moved from theory to reality.

Don’t stop there. Are you also looking for opportunities to lower the risk profile of contracts? Consider how payment terms, damages for delay, indemnity, attorney’s fees clauses, cure periods and other aspects of contractual risk shifted in favor of owners during the downturn. This pendulum may also be swinging where you can now make progress in improving contract terms.

As you consider the risk & return trade-offs, think about the risk within the contracts you sign in addition to margins. Contact CSDZ if you want help in identifying opportunities to lower contractual risk.

Bob Bowman, Surety Underwriting Manager

May 20, 2015

BE MINDFUL OF YOUR FIDUCIARY RESPONSIBILITIES

In a ruling that has broad impact on employers and their responsibilities to properly manage their 401(k) plans, the U.S. Supreme Court declared Monday that firms may be sued if they fail in their ‘continuing duty to monitor’ the fees associated with their 401(k) offerings.  The Court’s unanimous ruling in Tibble v. Edison International was surprising in both its declaration that plan fiduciaries must conduct regular and ongoing reviews of their plan investments, as well as ignoring ERISA’s six-year statute of limitations as not being an absolute bar to plan participants filing suit regarding plan investment options offered.  Many firms may have false comfort that they have outsourced their exposure to a third-party provider along with their plan administration.  While certainly helpful (as long as you have confirmed their expertise and experience in the responsibilities you have outsourced to them), employers cannot completely eliminate their exposure and liability to improper and/or imprudent investment options and other plan details.  What to do?

  •  Be certain that your firm is actively reviewing and documenting your ongoing evaluation of your 401(k) plan administration.
  • The same general responsibilities apply to all benefit plans offered, so be diligent in your review of any other benefits offered to your employees, including health benefit plans and how the Affordable Care Act may impact your responsibilities.
  • Ensure the fiduciary liability insurance your firm carries is adequate in its amount of coverage and broad enough to contemplate the exposures your firm faces.

As fiduciary responsibilities change over time, be sure to visit with your CSDZ representative to confirm your company has the coverage it needs.

Roger Cornett, Senior Vice President

April 21, 2015

THEFT: BACKHOES, PICKUP TRUCKS AND PERSONAL INFORMATION

As a Contractor, when you think of a crime being committed against your organization the first typical thought is: somebody stole a truck or piece of equipment. While turning in the claim and getting a replacement may be a short term inconvenience, the process usually goes smoothly and relatively quickly to make your organization whole again. Unfortunately, the construction industry now has to deal with high tech criminals who place a greater value on something else, something less tangible. This item is your and your employees’ personally identifiable information.

Criminals based on the other side of the world can have a bigger, longer lasting and more devastating effect on your company than a common criminal hot-wiring your pickup truck. These thieves can break in to your computer network through official and hard-to-distinguish-as-fake emails or websites that you or your employees allow them into, most of the time willingly-but unknowingly. The Target Corp. scandal started when one of their HVAC contractor vendors opened an email from an online criminal that mirrored a legitimate incoming email and gave them access to Target’s billing system. A new report from IBM Security stated that criminals are now using live phone operators in conjunction with these emails to pose as bank employees who go right into your account to liquidate your assets or take personal information while you are on the phone with them. If an Identity Theft Loss occurs, you are responsible under various State and Federal Laws to notify employees of the data theft and provide credit monitoring services.

So now what? How do you manage this risk? Most contractors now purchase a Management Liability Policy. Insurance companies offering these policies in almost all cases will offer Fiduciary Liability, Crime and Cyber Liability Coverage. There are components to these three policy forms that will protect the assets of your company in the event Personally Identifiable Information has been stolen. Depending on the method of the crime, a properly written policy will cover expenses related to Identity Theft.

Ben Canning, Account Executive