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Changes in Builders Risk amid Tightening Capacity and Rising Rates

As investors flee the markets and businesses freeze operations during the coronavirus pandemic, the landscape for agents is shifting.
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Before the coronavirus pandemic, more than 776,000 construction starts were projected for 2020, according to the 2020 Dodge Construction Outlook report, which meant that there would be plenty of opportunity for independent agents in the builders risk market. However, as investors flee the markets and businesses freeze operations, the landscape for agents is change.

“We are seeing the overall risk appetite shrinking,” says Alan Ferguson, president, US Assure. “Most providers are tightening eligibility guidelines and restricting limits, specifically on high-value frame course of construction.”

“In recent years, fires on large frame projects have significantly impacted underwriting profits,” he says. “This market tightening has created some overall increases in rate, as well as inconsistency with respect to market availability as many carriers struggle to consistently offer capital.”

Matt McManus, AVP of inland marine at Acadia insurance, agrees that capacity is tightening and expects “to continue to see rates moving upwards,” he says. Prior to the public health emergency, the reason for “a lot of shifting on pricing and capacity” was “down to three factors,” he says.

“First off, reinsurers are tightening. And that's due to some large loss activity nationwide in the builders risk world,” McManus says. “We're also seeing increasing construction costs that are really challenging and pushing the boundaries of capacity.”

“And then lastly, we see a lot of coverage requirements in construction contracts being handed down from project owners and general contractors that are ultimately being pushed to those that are purchasing the builders risk policy,” he adds.

Carriers are still interested in smaller projects and it remains a competitive market, McManus explains, but at the pricier, more limited end of the scale are large projects, new construction and frame construction or wood construction.

Over 295,000 new construction starts were originally planned in the single and multi-family sector for 2020, according to the 2020 Dodge Construction Outlook report, which represents a lost opportunity for agents. But whenever coverage is sold, it’s still vital for agents to avoid some of more frequent pitfalls in the market.

In residential construction, “the new construction is often not properly insured throughout the course of construction due to contract change orders. These alterations in the project plan regularly increase the value of the total completed structure,” Ferguson says. “However, the change in the home value is rarely reported to the agent and provider, which causes coverage gaps and penalties should a loss occur.”

The same is true for remodeling and renovation projects, which are seen as “a higher risk project in this space,” McManus says, who points to the renewable energy sector as an emerging high-risk segment of the builders risk market.

“Solar energy is an increasing topic of conversation,” he says. “It’s being driven by states with favorable tax incentives and there are certainly some unique risks and coverages that come along with solar energy,” McManus adds. “For example, we offer solutions to address energy replacement losses or damages for the client.”

In the builders risk market, it’s common for coverage to be requested at the very last minute. InsurTechs are looking to change the process for the better. They are seeming to “provide brokers with 24-hour access to an online shopping experience with real-time ability to quote, bind and issue a construction client’s needs in minutes,” says Tyler Van Spanje, CUO, Vindati. “This frees up the agent to think broadly about coverage that supports various project types and construction and gives them the space to focus on the often more difficult lines to place.”

Will Jones is IA managing editor.

For more information on builders risk, register for the Big “I” Virtual University on-demand webinar “Builders Risk and Installation Floaters,” taught by Steven A. Coombs.

Tuesday, June 2, 2020
Builders Risk