Builder’s Risk Remains Difficult But Manageable, Advises Mercator

June 13, 2007

The rest of 2007 will continue to be a difficult time for developers and builders to secure builder’s risk insurance for their projects, according to experts at independent wholesale insurance broker Mercator Risk Services.

This downturn has its origins in the record setting hurricane activity of 2005, which made the builder’s risk market extremely expensive and, for some, unobtainable in disaster prone areas of the United States, they note.

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 threat insurance. As the market provides more capacity this year, pricing should remain fairly firm, making investments in builder’s risk insurance companies inevitable.

“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. Insureds need to be well-educated on the limits they purchase and how they structure their programs.”

Treanor said that the difficult builder’s risk market in 2006 could be attributed to three major disasters – Hurricanes Rita, Katrina and Wilma. Insurers learned that they had not calculated and located risks properly from these catastrophic events. For builder’s risk insurance, these events have especially impacted the industry, resulting in drastic price increases for certain wind, flood and earthquake zones. In Florida, New Orleans and California, the demand to build is outpacing the availability of builder’s risk insurance.

The builder’s risk 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. 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.

The experts at the New York-based Mercator offer a prescription for a better builder’s risk market.

They say the first step toward a more stable builder’s risk market is for insurers to familiarize themselves with their catastrophe exposures nationwide. Catastrophe modeling has dramatically changed insurers’ and reinsurers’ aggregates by assuming greater loss during a catastrophic event. However, interpreting change in catastrophe accumulations will take some time. In the interim, domestic insurers continue to play it safe and take a conservative approach to increasing catastrophe accumulations.

“We believe it will take another year for insurers to better understand their aggregate exposures,” commented J.C. Sparling, executive vice president for 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.”

With the high cost of builder’s risk insurance causing many owners and contractors not to build, Sparling believes these strategies can ensure the proper coverage they need to move forward with a construction project:

Carry only a percentage of probable maximum loss. This requires a more thorough analysis of the risk with risk modeling.

Keep hurricane season in mind when planning a project timeline. If a builder can show a timeline that includes work through only one wind season, a better rate can be secured. Also, plan projects so that the core structure is complete and all window and door openings are closed prior to the start of hurricane season.

Strategize with a broker. Ensure that the broker has the knowledge and expertise to develop an individual strategy for the unique risk. In the past, builder’s risk insurance was approached on a cookie-cutter basis. It is now apparent that success depends on not only knowing the risk exposure, but also knowing the marketplace in order to choose the best possible players with the most available limits.

Source: Mercator Risk Services
www.mercatorrisk.com

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