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

[email protected]

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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Subcontractor Default Insurance

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