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David E. Armstrong is a senior vice president and manager for Willis' Railroad Industry Division, providing insurance and bond services for contractors throughout the U.S. Additionally, he is an NRC Board director and serves on the Association's Safety Committee.

The NRC asked me to prepare a forecast of the insurance and bonding industry. The industry dynamics discussed at January's NRC Conference still drives the "hard" market that you are faced with.

The reinsurance industry is continuing to absorb the cost of the World Trade Center disaster. Increased reinsurance rates and extremely-restricted underwriting, coupled with insurance providers abandoning this industry, reduced capacity and further increased pricing pressure on railroad contractors' insurance costs.

Plaintiff attorneys are doing their part to add to the insurance industry's woes. The number of lawsuits, judgments and awards for construction defects, renewed asbestos suits and new suits involving mold have grown exponentially. One residential lawsuit in the amount of $32 million was recently awarded in Texas, with the affected insurance company subsequently withdrawing from the state. While these lawsuits have nothing to do with railroad contracting, they effectively reduce the number of underwriters willing to look at contracting risks.

Terrorism has had a profound influence on the insurance companies' psyches, as the industry can't statistically calculate the costs associated with these types of events. They respond by eliminating coverage out of all of their policies. The federal government is wrestling with how to back-up this serious financial exposure.

Investment income from Wall Street previously played a big role in "propping" up the favorable rates you received over the past decade. Since the bursting of the tech and Internet stock bubble and the horrendous slide in stock values, insurance company financial results have been slammed. Senior managements, fighting for a return to profitability, face a tough assignment when looking at private rail contractors' pricing relative to other industries with less risk, so you pay top dollar for insurance protection.

Contractors, who have been very proactive in their safety and loss control efforts, will see rates increase moderately by 15 to 20 percent for general liability, workers' compensation, property and equipment coverages. Similar-sized rate increases for pollution liability, design errors and omission coverage, employment practices liability and perhaps directors and officers insurance. Railroad protectives will increase 20 to 25 percent, with minimum premiums of $4,500 to $6,000.

Reinsurance-driven coverages, such as automobile and umbrella, will have rate increases 25 to 100 percent over previous year costs. Remember, underwriters are looking to keep more of your insurance premium dollar to pay for their reinsurance and rebuild their balance sheets.

The bonding industry situation is not as dire, but some storm clouds are brewing. September 11 also affected bonding companies though their use of reinsurors. The rapid meltdown of Enron, KMart, WorldCom and Global Crossing slashed billions of dollars from the surety industry's capital base with these stock portfolio devaluations.

To put the bonding industry in perspective, of the approximate $68 billion in 13.5. premiums written in 2001, only $3.5 billion was derived from bonds. While designed to be a zero-loss industry, in 2000 and 2001, the losses exceeded premiums paid to reinsurors by more than $500 million each year. Throw in an additional $1 billion for claims currently being reserved for financial guarantee bonds written for Enron and the industry results fall still further. Not good news.

This past decade, the surety industry also experienced consolidation. Of the top 10 writers of bonds in 1990, three remain today. For this industry to return to profitability, it will have to regain underwriting discipline. Contractors using bonding need to prepare for the following forecast.

Over the next 12 to 24 months bonding companies will increase rates by 15 to 25 percent, require CPA-audited financial statements at fiscal year-end with full job detail, interim financial statements, personal indemnities and very detailed job bid information (with more lead time). Expect questions regarding the quality of your financial information.

In summary, rail contractors today have to be better managers than they have been in the past. Profit margins are going to be squeezed as the economy cools down and competition grows. Reducing your cost of risk is best managed by providing excellent safety training and avoiding accidents. Workers' compensation insurance costs can be reduced by up to 50 percent through the development of a good modifier. Contractors should plan to incur additional premium costs over the next 12 months and consult frequently with their insurance and bonding representatives on these matters.

I encourage all NRC contractor members to participate in the extensive safety initiatives provided through the Association. Also, plan to attend the 2003 NRC Conference and Exhibition in January to help refine your management skills. An example of a new NRC safety initiative is its exclusive Web-based safety training program, developed by CANAC, Inc., in conjunction with the Railroad Transportation and Operation Agreement's Railroad Training and Education Fund. The program consists of two courses in Roadway Worker Protection and Track Safety Standards, plus a weekly safety-briefing message all accessed through the NRC Web site. In addition, the NRC hosts an annual Safe Contractor of the Year Award and Certificate of Commendation. For contest information and an application, please call 202-638-7790. We hope all of our NRC contractors apply for the safety awards. Each one of our members is dedicated to working safe, and we want you to be recognized among your customers as having a high-quality safety program.