Builders Risk: Get It While It’s Hot

“It’s kind of like a drug.”

That’s how Alexander McGinley, vice president, marine underwriting at XL Catlin, describes the builders risk insurance market.

Pricing in builders risk tends to coincide with two sectors of the U.S. economy: construction and transportation. And according to McGinley, for all of 2015, construction growth jumped about 10.5% to $1.1 trillion. That’s the highest total since 2007—and far eclipses U.S. GDP growth of only 2-3% in 2015.

“When the construction market is doing well, you try to do as much of it as you can,” says McGinley. “But unfortunately, you’ll get a bad hangover when a financial crisis occurs. You have to be very quick to adapt, leveraging the benefits of a diverse portfolio.”

“The U.S. underlying construction market has rebounded quite a bit over the last few years, so talking to our contractors and our insureds, we’re seeing more opportunities to quote projects that are coming up,” notes Joe Vierling, vice president, construction at XL Catlin, who works with larger risks above $100 million in value.

Wondering what construction trends are affecting builders risk underwriting and pricing? Here’s what’s happening in this fickle market.

Construction Trends

Last year, the energy sector was one to watch in the builders risk arena. Not anymore: “A lot of the oil and gas projects will probably slow down just because of the price of oil,” Vierling says. “In the past few years, oil was driving a lot of new construction. That’s probably not going to happen for the next 12-18 months.”

Instead, keep an eye on new construction trends in the infrastructure, road and bridge spaces, as well as residential high-rise construction in major cities. For example, in New York City, Vierling has observed heightened investment in high-end condominiums near Central Park. “And as of recently, we’ve seen an awful lot of investment in combined cycle power plants under construction too—that has to do with the price of natural gas,” he says.

When it comes to power plant construction, Vierling says the big insurance question is whether the insured is using proven technology with the equipment. For example, “are you using a new gas turbine that has not been utilized in the field for a few years?” he points out. “That’s something we as underwriters have to keep an eye on when we’re looking at it.”

Anthony Gadaleta, vice president of inland marine’s property and construction practice at Travelers, observes significant construction growth in commercial buildings, warehouses, hotels and multifamily housing. He also notes that construction of manufacturing facilities is increasing slightly, while institutional construction—educational and health care—is mostly flat.

In public works, Gadaleta notices more local governments using a process called accelerated bridge construction. “It’s a means for replacing your aged workhorse bridges—a short-span bridge maybe 200 or less in linear footage,” he explains. “What you’re doing there is actually completing construction so that the old bridge will be removed and the new bridge will be basically lifted into place. In that cost-effectiveness, you’re getting potentially more bridges built and replaced.”

Another trend on the rise: use of lightweight steel. “When there’s offsite steel fabrication, a lot of the elements are computer-based design and computer-controlled manufacturing, and this is all done at an offsite facility,” Gadaleta says. “The computer-based designs allow for a little bit more intricacy. From that point, those materials will be just-in-time delivered to a jobsite.”

Using lightweight steel offers significant benefits in terms of not only speed and efficiency, but also safety. With a wood roof framing system, for example, “depending on the fire retardency of that wood trust system and its reaction to fire, it may or may not be unfavorable to untreated wood,” Gadaleta points out. “Using lightweight steel, you don’t have to worry whether it’s going to rot out. And if you have a fire, some of that fire loss potential gets minimized just by the nature of the construction type.”

Overall, “construction materials are becoming more sophisticated,” McGinley says. “The structures themselves are becoming larger, and that’s helping to drive a lot of the private building boom.”

Pricing Developments

As a result, “the insurance market is competitive, but I wouldn’t say rates are in a free fall—not at all,” Vierling says. “If you’re looking at a more complex type of project, infrastructural tunnel or bridge, you’re probably getting better terms and conditions for the insurance company, and higher rates than you would be if you’re looking at standard four-wall construction.”

“For builders risk, it’s very difficult to say definitively that rates are changing X%. It’s just not broken out to that level from a statistical reporting standpoint,” McGinley cautions. “But generally speaking, rates are flat to a bit lower than where they’ve been.”

Across the board, builders risk marketplace is “pretty flat,” agrees Steve Coombs, president of Risk Resources, a risk management and insurance consulting firm. “I’m not expecting any major decreases; I’m not expecting any major increases.”

But Coombs notices heightened underwriting scrutiny in two areas in particular: large frame commercial construction, rehabilitation and renovation projects—“there have been a few very large losses in the industry,” he says—and coastal construction projects.

“There’s much greater scrutiny with water intrusion loss prevention protocols,” says Coombs, who co-wrote “The Builders Risk Book” with Don Malecki. “There will be a dip in rates on coastal properties, only because reinsurance is less expensive as compared to past years just because we haven’t had major hurricane losses in several years now.”

Another pricing factor is the construction period: “Projects with longer construction terms tend to see higher rates than ones with shorter construction terms,” Vierling explains.

But McGinley cautions against focusing on price as your main selling point. “Whether you’re selling towels or any other kind of product, price is important, but it’s not the only thing,” he points out. “Your knowledge as a broker, particularly of how coverage and construction projects work—it’s just as important to have that as being able to sell the lowest price.”

For insight into builders risk coverage issues, keep an eye on and upcoming editions of the Markets Pulse e-newsletter.

Jacquelyn Connelly is IA senior editor.