A new year brings with it fresh challenges and opportunities for the Canadian bonding and construction insurance marketplace, according to one expert in this line of business. There has been a shift in the marketplace as a number of issues that have dominated the industry over the past 12 months come to a head, starting with the countrywide legalization of recreational cannabis.
“Cannabis legalization drove contractors to update their fit for duty policies, but also generated hundreds of millions in construction spend as producers ramped up production and processing facility builds,” said David J. Rae (pictured), an account executive at Petrela, Winter & Associates (PWA), which is a brokerage that specializes exclusively in the construction industry, and is the largest privately-owned brokerage in the country with this degree of specialization.
Meanwhile, Ontario brought sweeping reform to the construction sector when it passed the Ontario Construction Lien Amendment Act in 2017, which included changes to prompt payment legislation to ensure that construction businesses get paid on time for their work. Some of these reforms came into force in mid-2018, while others (prompt payment and mandatory interim adjudication) will come into effect this October.
“The new Ontario Construction Act stands to be an important template for other provinces, many of whom are looking at similar updates,” said Rae, though that’s far from the only change impacting the sector. The federal government’s Canada Infrastructure Bank, which was designed to attract private and institutional investment in infrastructure projects, celebrated its first full year of operation, but has only announced one major project so far, with more activity expected in the future.
Trade issues, interest rates, and oil prices are likewise expected to have an impact on the construction sector in the near-term.
“Macroeconomic issues were significant influences on our nation generally, and the construction sector specifically. The effect of ‘new-NAFTA’ – USMCA – is hard to predict, though we do know that tariffs on steel and aluminum stand to remain in place for the foreseeable future and are impacting businesses in these industries,” said Rae, adding, “Interest rates will likely continue their inexorable rise, driving up construction costs. Oil prices tanked in the latter part of 2018, but are back on the rise this year, and the outlook remains volatile in this sector with continued uneasiness in oil dependent regions of the country.”
As a result of these developments, forecasts for the construction sector in 2019 tend to include words like “steady,” “tepid,” but also “positive,” according to the PWA account executive.
“Investment in large scale non-residential projects is a boon. The $40 billion LNG facility in Kitimat, BC may even serve to take up some of the slack from the slowdown in construction in Alberta’s oil sands,” explained Rae. “Ontario’s building sector is expected to continue apace, with the new transit lines not yet near completion, residential construction seemingly never ending, and the provincial government pledging continued heavy investment in new transportation infrastructure initiatives.”
Nonetheless, the broader insurance marketplace is hardening as Canadian commercial insurers focus on improving their bottom line, which has implications for the construction business.
“Company profitability is under increased pressure from escalating losses across all coverage lines against a backdrop of low interest rates. Canadian insurers have experienced an increase in the frequency and severity of natural catastrophes, coupled with challenges in both personal and commercial auto. Water damage claims continue to impact property insurers across residential and commercial sectors, and casualty lines are also performing poorly. The net result is a transitioning marketplace with most renewals facing rate increases in 2019,” Rae told Insurance Business, pointing to results for domestic commercial insurance companies that showed a jump in combined ratio (COR) to 106.5% for the first half of 2018, from a 2017 year-end COR of 95% – and these numbers continue to deteriorate.
“Canadian results for Lloyd’s of London have also been poor – COR of 87% in 2017 has worsened to 94.6% by the end of the first half of 2018. Poor investment returns also add pressure to the deteriorating combined ratio,” said Rae. “While some insurance companies are still showing an underwriting profit, there is agreement across the industry that a focus on underwriting profitability is necessary to maintain a stable marketplace for the coming years.”
