How Agents Survived a Falling Housing Market

By Andrea Wells | January 14, 2013

It has not been easy being an insurance agent specializing in the homebuilders insurance market during one of the worst economic recessions in U.S. history. Survival in the recession meant change and a lot of hard work.

“I’ve worked harder in the last three or four years than I have in the 30 years I’ve been in business,” says one survivor of the downturn, Ronny Robinson, CEO of Home Builders Insurance Services (HBIS) based in Waxahachie, Texas.

Robinson, an independent agent who specializes exclusively in the homebuilders and contractors insurance market, works with more than 600 homebuilders throughout the state of Texas. He’s seen down cycles and up cycles in construction during his three decades in the business. But nothing has come close to the dismal market conditions he saw during the Great Recession of 2008-2010.

Survival required doing more than just the norm. It meant changing the way he did business. “Everybody really has had to learn a different way of living, spending and buying with the recession,” he says.

Everyone really has had to learn a different way of living, spending and buying.

While some of his competitors downsized employee size when the construction market contracted, Robinson’s agency upsized. The customer service issues that developed in competitor offices gave him an “in” with new clients.

“We actually added staff so that we could stay ahead of the curve on service,” Robinson says. The focus on service didn’t go unnoticed either. “These new clients were glad that they came over to us.”

The recession also meant traveling wherever he could to generate new homebuilder business. “I’d go to El Paso, Houston, Austin, San Antonio – wherever I could write a guy that was building two houses a year,” he says. “To survive I had to continue to write new business whether there was new business going on or not.”

He also didn’t hold back spending on advertising even when the agency’s bottom line suffered.

“We also continued our advertising and email campaigns so that the builders would know we were continuing our level of service regardless of the economy,” Robinson says.

Robinson knew he had to remain active in the homebuilder market during the recession to stay relevant and known with current and future clients.

“We belong to every major homebuilder’s association in Texas. We’re really active and we’re known. We’ll do seminars for builders to talk about the builder’s risk, general liability, worker’s comp, and how all that relates to a residential builder,” Robinson says.

He also teamed up with industry partners, including Bush Rudnicki Shelton, a Texas-based law firm with a focus on homebuilders. “We’ll do seminars together. They’ll talk about the contracts, subcontractor agreements, and we talk about the insurance piece of it,” Robinson says.

And of course maintaining solid relationships with carrier partners played a key role in survival.

“We also have very close relationships with our underwriters,” Robinson says. “They trust our ability to know the builder market and competitors and to know what coverage requirements are important and where the premiums need to be. This also translates into very favorable loss ratios, which is not common in the builder markets.”

So favorable that HBIS boasts a 29 percent loss ratio in general liability. Robinson says that’s good for most any insurance market, much less contractors and homebuilders.

His hard work and dedication to his homebuilder clients paid off. Sales are up about 25 percent in 2012 over 2011, according to Robinson. While those figures are up from a historic down cycle, Robinson feels satisfied with the growth.

“We really felt good because we had heard that other agencies that write builders had as much as a 65 percent decrease in one agency and 80 (percent) or so in another,” he says.

Given the dire conditions of construction homebuilding in recent years, Robinson feels fortunate to have any growth at all. “We consider ourselves pretty lucky,” he says.

But it wasn’t just luck that helped his agency persevere – success came with a lot of hard work from everyone in his agency.

Diversify

Surviving in a falling housing market meant some agents had to diversify their book of business. Many left homebuilders all together.

For California, one of the hardest hit states in the recession, everything changed, according to independent agent Rob Dutto, principal for California-based EPIC, a retail property/casualty and benefits brokerage firm.

California’s construction market took a huge hit 10 years ago in construction defect litigation. “That really shut down the insurance industry for residential construction,” Dutto says. Then when the economy started to slow, construction took another huge hit. “Residential construction was the engine running the California economy. It really affected everything,” Dutto says.

Dutto saw his large book of business for residential framers shrink dramatically.

To survive, Dutto looked into diversifying his book of business. “Looking for more non-construction or commercial construction. Looking into more wrap up opportunities – urban in-fill type business, apartment construction, condominium construction, things like that,” he says.

Dutto also found opportunities for growth in the construction workers’ compensation market. “Workers’ comp still continued to create an opportunity. As the economy improved there was more payroll. That’s something we have definitely been focusing more on.”

HBIS’ Robinson also found diversifying a good option. Robinson’s focus remained on construction, but he expanded outside of the homebuilding market. During the heart of the recession, in late 2009, Robinson launched the Builders & Contractors Insurance Services, a division focused on serving commercial builders, trade contractors and suppliers.

“The fact is when the homebuilders were trying to figure out how to pay rent for another month, a lot of them dropped their general liability and other insurances,” Robinson said. So by putting a focus on the subcontractor market during that time, Robinson was able to generate new business.

Troy Stanton, senior vice president of Schaumburg, Ill.-based Assurance Agency Ltd., says at one point the homebuilders market was considered a big specialty for his agency. But when business dried up, the focus moved more to heavy construction, underground contractors, street and road-type contractors to survive.

“The growth in the homebuilding is not as traditional as it used to be,” Stanton says. Opportunities in insurance come mostly from wrap-ups or project-specific programs, a change from before the recession.

In the Chicago-land area, homebuilders are building homes using mostly discounted labor. “The union labor is basically dried up,” Stanton says. “There has been very little union labor in Illinois. It’s all non-union, smaller contractors that are servicing the homebuilders.”

That change in the construction labor force creates some concern for builders when it comes to making sure the subcontractors they use have appropriate insurance protection, Stanton explained. “There’s an inherent concern as far as being able to provide the appropriate coverages needed in order to protect the homebuilders.”

Wrap-ups or project-specific insurance programs have helped to alleviate homebuilder coverage concerns for subcontractors.

“Project-specific or wrap-up programs will protect the actual project itself,” he says, including subcontractors hired to work on the specific project. “The homebuilder is guaranteed the appropriate coverage and protection while the houses are being built,” he says. Builders and their insurance partners then allocate a cost back to the subcontractors. The project-specific insurance program makes sure that those contractors have adequate insurance coverage, while also saving builders money as well, Stanton says.

“They’re (builders) trying to be as economical as they can when building homes,” he says. Stanton says, as an example, a builder in the Chicago suburbs may have built a home in 2008 for $325,000. Today that same home has to be built for about $250,000. “How is that being done?” Stanton asked. One way is by using discounted labor. Project-specific insurance programs are helping to make sure the builder remains protected when making such a change.

Project-specific coverage typically includes the workers’ compensation insurance, general liability and excess liability for the entire project.

Trends in Homebuilding

The good news for agents and brokers working in the homebuilding construction market is that the worst may be over.

“There’s no question that on the ground we are seeing an uptick in builder confidence as to what 2013 and 2014 are going to bring,” says George Dale, director of U.S. operations, Cove Programs, a managing general agency with a focus on U.S. homebuilders.

Dale describes builder confidence as moving from just “hanging on from a year and a half ago” to “cautiously optimistic” early in 2012 to feeling confident enough in improving market conditions “to bet in terms of buying insurance and staffing up” that 2013 and 2014 will be good years.

Several market indicators in recent months have shown a recovery in the housing market. Slow but steady growth continued throughout 2012 despite challenges in home lending, reported the National Association of Home Builders (NAHB) in late December.

“Consistent, positive reports on housing starts, permits, prices, new-home sales and builder confidence in recent months provide further confirmation that a gradual but steady housing recovery is underway across much of the nation,” says David Crowe, chief economist for the NAHB.

Kevin Hastings, managing director, Cove Programs, says overall the demand for new homes is increasing, with some pockets stronger than others. “Our book is looking at a predictive 10 percent growth year-over-year in terms of unit numbers.”

The NAHB estimates that single-family home starts rose to 534,000 units in 2012, up 23 percent from 2011. The NAHB forecasts single-family new-home production will post a 21 percent gain in 2013 to 647,000 units, and that starts will continue their upward climb in 2014, posting a further 29 percent rise to 837,000 units.

Even with the rise in new home starts, the housing industry is nowhere near normal. Crowe says the single-family market stands at only 40 percent of what is considered a typical market.

Opportunities

One area where builders and agents are finding some success is in custom, local homebuilding.

Jett Abramson, senior vice president and director, complex casualty for Redondo Beach, Calif., based Bliss & Glennon Inc., is seeing an uptick in activity from the 50 or so custom homebuilders he writes in the Southern California market.

“I don’t know if I’d say huge uptick, but a decent uptick in new starts for custom homes over the past six to nine months,” he says. And that trend seems to be continuing for 2013.

“We have a homebuilder client in Orange County that has 12 custom homes on his plate that are going to begin [construction] in the next three months,” Abramson says. That builder’s normal annual turnover is about six new custom home starts. “So he’s seeing double the activity.”

That’s a huge change from the bottom of the recession, he says.

“Between 2008 and 2011 we had a lot of our clients significantly drop in their gross receipts,” Abramson says. “On average, I’d say, between that three year span, we saw most of our clients lose half of their gross receipts. … Now, we’re seeing that pick back up. We’re seeing it actually, at least recover back to 2007 levels, if not higher.”

Now is the ideal time, he says. “All the ingredients are right for people to get back into building themselves custom homes.”

Outside of Southern California, Cove Program’s Dale says some areas of the southeast, including the Carolinas have fared well. Texas and the Phoenix area seem to be rebounding pretty strong, he says.

“Builders are telling us they see growth it in the western area – not so much Las Vegas although people are starting to think about building in Las Vegas as well,” Dale says. Even some of the recession’s hardest-hit areas are starting to come back in housing, he added.

Availability

When it comes to insurance availability most of the same homebuilder markets remained consistent throughout the recession, says HBIS’s Robinson, at least in Texas.

“Because there are so few players in the market, it’s very competitively driven, coverage wise and premium wise,” Robinson says. “Everything really has stayed pretty much the same. Pricing has. The coverage has.”

In Stanton’s view, standard markets have turned their back on the residential industry in several ways. “From a coverage standpoint, the exclusions that are put on some of the (standard company) policies have been problematic,” he says. “But fortunately, the E&S marketplace has been solid in that they can include some of the coverages that the traditional markets cannot.”

Stanton says residential exclusions can now be found on many insurance policies. “These policies have typically been written by ‘contracting’ insurance carriers that do not want to assume coverage for residential work. The exclusions typically exclude all ‘residential work.’ The primary intent of these exclusions is to eliminate property damage on an on-going and completed operations basis. However, the majority of these policies will also exclude bodily injury claims. Some carriers might allow residential work but will include high deductibles in order to write the coverage.”

In that regard, the excess and surplus lines (E&S) industry has been a very important partner in securing coverage for a homebuilders today, Stanton says.

Bliss & Glennon’s Abramson says capacity has the biggest impact on pricing and coverage availability in the marketplace.

“The capacity for homebuilder insurance has declined precipitously in the past three years,” he says.

“It’s actually a very tight market for excess casualty on homebuilders. On primary casualty for custom homebuilders, there’s still a decent amount of capacity, but the rates have risen quite a bit in the past three years,” he says.

Despite capacity concerns, Abramson and other specialists seem optimistic for prospects in homebuilding.

“We’re probably close to, if not, out of the woods on the dark period of homebuilding,” Abramson says. But the industry may never return to its heyday. “I don’t think we’re ever going back to where we were, but we should be back to some sort of homeostasis where maybe we’re seeing a bit of a surge in 2013.”

From This Issue

Insurance Journal West January 14, 2013
January 14, 2013
Insurance Journal West Magazine

Contractors / Subcontractors; Employment Practices Liability Insurance; 2013 Insurance Agents & Brokers Meetings / Conventions Directory

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