Construction & Real Estate Risk
General Contractors, Subcontractors, REITs, Developers, Owner-Managed
Large general, subcontractors and design build organizations use captive insurance companies and other alternative insurance programs to house and launch a broad array of risk finance strategies.
Captives can be especially relevant for organizations with difficult and specialty classes of risk. Real estate investment trusts, developers and management company operators have many of the same risk considerations during project specific phases of operations.
Variables that drive captive formations for construction contracting and development operators may include:
- Increased loss\claim costs, elevated self-insured and deductible levels
- Access to terrorism coverage in key markets and locations
- Newly emerging liabilities (historical examples - mold, Chinese wall board, EIFS)
- Positive loss experience (from proactive loss and safety programs) may not necessarily translate into commensurate commercial coverage discounts, reflecting generally volatile nature of the class.
- Certain risk classes have experienced long term sustained price increases
- Contractor/subcontractor coverage inadequacy or affordability resulting in misaligned broader organization risk management goals.
- Wrap-up and Owner Controlled Insurance Program (OCIP) carrier, contractor, subcontractor deductible and default risk funding and cover coordination
- Growth in geographically diverse and somewhat decentralized operations
- New risk management, resources or techniques to centralize and gain greater control over costs
For many large contractors and nationally risk diverse clients, a properly structured captive or other alternative insurance program can be a powerful tool to:
- Control total cost of risk
- Provide consistent coverage terms and conditions across the group while managing local operating requirements and restrictions
- Formalize the overall corporate insurance program across the operating entities through formalized captive risk/reward programs including deductible buy-down and retro strategies
- Report regular financial and benchmarking results in separate subsidiary
- Enhance group consolidated cash flow through tax and ownership planning
- Supplement or wrap inadequate subcontractor covers, address credit default risk.
- Formalize coverage philosophy through the various phases of development, build, and occupancy in property developer & manager organizations.
- Fund Wrap-up and OCIP subcontractor deductible bids without insurance cover
Terror risk becomes more relevant to large firms with heavy concentrations of human and infrastructure capital. Traditional market coverage for this catastrophic scenario contains important exclusions or may be unavailable. A captive can access Federal backing (via TRIAE) for very high limits of terrorism coverage that a direct insured cannot otherwise access.