Builder’s risk: difficult but manageable

By | July 2, 2007

New capacity enters the market, but terms and conditions not easy for many

The rest of 2007 will continue to be a difficult time for developers and builders to secure builder’s risk insurance for their projects, at least in catastrophe prone regions. But outside of coastal areas and California earthquake issues builder’s risk coverage continues to be available and affordable, with rates down 20 percent to 30 percent, industry experts say. But that rate trend does not exist in the southeastern part of the country.

This change in the builder’s risk market has its origins in the record setting hurricane activity of 2005, which made builder’s risk coverage extremely expensive and, for some, unobtainable, says experts at independent wholesale insurance broker Mercator Risk Services.

“In terms of capacity and pricing, we are seeing 2007 begin where 2006 left off,” said Chris Treanor, CEO and president, Mercator Risk Services. “The builder’s risk market is experiencing the same lack of capacity we saw throughout 2006 and continues to be costly.”

Paul Becker, president of Willis North America’s Construction Practice, agrees. “Carriers will continue to be stingy with capacity and caution with allocation” in certain parts of the country, wrote Becker in a Willis report released earlier this year titled, “Construction Insurance Property & Casualty Market Update.”

However, in 2007, Mercator estimates that approximately $1 billion in new property capacity will become available, with 25 percent of that, or $250 million, available for builder’s risk insurance. As the market provides more capacity this year, pricing should remain fairly firm, making investments in builder’s risk insurance companies inevitable.

Rick Girden, leader of Mercator’s Construction Practice, says some capacity has already entered the marketplace, and he expects more to come in from Bermuda and Londond within the next 60 to 90 days. “We expect the same thing to happen where they (insurers) will gravitate to lower exposure limits but will get higher premium for that exposure,” he said.

Willis’ Becker agrees that the amount of capacity for builder’s risk is gradually growing, but says the terms and conditions are so different than prior to 2005’s hurricanes Rita, Katrina and Wilma, that the market is still in full crisis mode. “In many cases the actual economics of a building going up have been impacted,” he said. “In other words, they have been pulled off line; the lenders can’t make a play of it.”

The 2005 hurricanes especially affected the builder’s risk insurance market, resulting in drastic price increases for certain wind, flood and earthquake zones, Mercator’s Treanor said. In Florida, New Orleans and California, the demand to build is outpacing the availability of builder’s risk insurance.

The market is also being affected by forecasts of a very active Atlantic hurricane season with at least one major hurricane hitting the U.S. coast, Mercator noted. According to William Gray, head of the Tropical Meteorology Project at Colorado State University, the probability of a major hurricane striking the U.S. coast is estimated at 74 percent, compared with the average of 52 percent over the past century.

The hurricane history and forecasts, coupled with the threat of earthquakes along the New Madrid fault line, mean builder’s risk will remain a costly and difficult insurance to obtain in many areas of the country, according to Mercator.

Willis’ Becker added that the other area the the industry, and certainly the construction industry, remains concerned about is the passage of the federal Terrorism Risk Insurance Act. “If we don’t get terrorism done, it will have an impact, specifically it will have an impact on builder’s risk,” he said.

Mercator says the first step toward a more stable market is for insurers to familiarize themselves with their catastrophe exposures nationwide. “We believe it will take another year for insurers to better understand their aggregate exposures,” said J.C. Sparling, executive vice president, property brokerage, at Mercator. “Insurers will need to work in partnership with their reinsurers to understand the catastrophe exposure they have, and to properly negotiate terms and conditions that will allow them to continue to write or expand writing.”

From This Issue

Insurance Journal West July 2, 2007
July 2, 2007
Insurance Journal West Magazine

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