After the rapid price increases of recent years, the frame builders' risk market has stabilized, but carriers remain disciplined about rates. While capacity is adequate, carriers are looking at the aggregation of projects in areas and declining or limiting capacity on those in close proximity to each other or insured by the same company. Ensuring continuity of terms/conditions around coverage, warranties, and deductibles on quota share placements is also essential when seeking coverage.
In addition, underwriting criteria have become stricter. Markets are demanding more detailed information about projects and more active mitigation measures to combat fires and water damage. Deductibles have been trending higher, particularly for water damage and convective storms in hail-prone areas. Amid a booming multi-family housing market, communication and clarity on financing and project timeless are more critical. Clients who come to market too early may find that quotes have timed out, and existing projects may face challenges in obtaining coverage extensions. As carriers seek to have insureds shoulder more of the risk, it's more important than ever to work with wholesale brokers who have built strong relationships with markets and offer a deep understanding of frame builders' risk.
Rates in the frame builders risk market were driven sharply higher in recent years by steep fire losses that led some key markets to pull back or exit entirely. Shrinking capacity fueled rate increases and tighter terms. Formerly straightforward placements became more complex, often involving up to a half dozen carriers instead of one or two. When it comes
to Mass Timber or Cross Laminated Timber (CLT) construction, some frame markets will no longer write projects with any CLT components, while other direct/standard markets that have limited frame appetites will consider projects that include CLT. Builders’ risk is also seeing an uptick in the amount of single building podium-style wood frame construction, and the market for those risks is tight. A $70M - $80M podium-style project will likely require engaging multiple carriers via quota share to find adequate coverage.
Developers and contractors who experienced project delays have also often found that rates had soared between their initial inquiries and when they sought to have the coverage requoted. Today, participating carriers are more committed and knowledgeable about the market. Overall construction budgets have also come more in line with the new marketplace realities as projects continue to be plagued by supply chain issues, including shortage of materials and increased costs of materials. In addition, construction labor shortages due in part to the pandemic and workforce changes are pushing building costs higher.
After stalling at the outset of the pandemic, multi-family housing construction has come roaring back, particularly for podium and garden-style frame construction projects. Steep increases in housing prices have made renting more attractive for many people. That demand is driving a ramp-up in constructing apartment complexes, multi-family structures, and student housing from coast to coast. Historically cheaper than concrete or steel, and with simpler construction and lower labor costs, frame building projects have taken off. The U.S. Census Bureau reports that starts for projects including five or more units rose a seasonally adjusted 28% in March 2022 over March 2021, while building permits soared more than 33% over the same period.1 The strong growth in multi-family starts outweighed a decline in single-family homes, leading to a seasonally adjusted 3.9 percent increase in total privately-owned housing starts in March.
RATES STEADY, DEDUCTIBLES RISING
Rates have reached a stable plateau, but carriers are seeking higher deductibles to manage their own risk and motivate project owners to take enhanced risk mitigation measures. Deductibles for water damage are still trending higher, with some ranging from $100,000 to $250,000 on specific projects. Markets are also pushing wind and hail deductibles, particularly in the hail belt, where percentage deductibles are becoming more common. Carriers are more actively modeling both convective storms and wildfire risks. Instead of a flat deductible in hail-exposed areas, carriers may be seeking 1% or 2%. For coastal exposures, deductibles are moving from 3% toward 5% for named wind. All Other Perils (AOP) deductibles have been rising on larger projects as carriers seek to stem attritional losses. Builders should be prepared to bear more risk overall. For instance, the waiting period for delay of completion coverage is lengthening. While coverage may have started after a seven-day period only a few years ago, that waiting period has grown to 14 to 45 days.
TECHNOLOGY MITIGATES RISKS
Along with modeling natural catastrophes, more markets are considering neighborhood crime scores for projects. Due to unfavorable scores, carriers may pull out, require higher deductibles, or tighten terms. That's because of the correlation between crime scores and arson, which is a major cause of building site fires. While projects typically have to be fenced, lighted, and locked, carriers may also demand that project owners provide additional security and deploy technology enhanced prevention measures to protect against fires and water damage, such as internet connected sensors. In many cases, carriers are partnering with vendors to offer preferred solutions. For enhanced security, projects that in the past might have only been fenced are more likely to have a watch guard on site after hours or around the clock. Additional measures may include security cameras live wired to third-party sites that are constantly monitored and thermal imaging intrusion detection technology.
Carriers are also looking to technology to prevent damage from water, which can intrude into the frame and warp the building shape, requiring costly repairs. A review of claims by Zurich showed that weather and escape-of-water events were behind nearly 50% of its builders' risk claims from 2007 through 2016. That included damage from rain and snowstorms, flooding, hurricanes, and internal systems. According to Zurich, almost 25% of builders' risk claims stemmed from internal water system failures.2 While security and water damage control measures add costs for builders, carriers are more comfortable offering better terms with those measures in place.
Given the massive fires in California and other Western states in recent years, wildfires represent a growing concern. In 2021, the Dixie Fire in California burned nearly a million acres and more than a thousand structures. The Marshall fire in Colorado destroyed more than a thousand buildings near Boulder.3 This year's wildfire season has started well above the 10-year average, with more than 1.2 million acres burned by early May as massive fires blazed in New Mexico and Arizona.4 The wildfire risk is aggravated by drought and increased building in wildlan–durban interface areas. Carriers are increasingly modeling wildfire risk and seeking additional property details as well as mitigation measures, such as clearing brush in the surrounding area and installing gravel moats around projects.
Communication about project status and potential delays is crucial between the contractor, retailer, wholesaler, and carrier. Project owners should be transparent about financing status and be realistic about the time securing financing will require to come to the insurance markets when they are ready to buy. If financing is delayed, quotes obtained earlier may no longer be valid.
While extensions are not typically negotiated more than 30 days before expiration, carriers are very reluctant to offer extensions on current or expiring builders' risk. Some carriers have exited the marketplace (both standard and E&S), and that lost capacity has to be replaced. Any new carrier will rate back to inception because they’re exposed on day 1 of the risk; therefore, underwriters will have questions, and applications may be required. Some carriers are questioning the value of projects that started 2+ years ago. This means project owners should set reasonable deadlines that acknowledge potential delays related to labor availability and supply chain snags from the very beginning. Ultimately, it's better to plan for uncertainties and ensure the coverage can accommodate potential delays, even if there is an additional up-front cost.
Because the wood frame builders' risk market is primarily wholesale-driven, it’s essential to work with brokers who can scrutinize construction budgets and policies to ensure the best possible terms and pricing and ensure that nothing is included that wouldn't be covered under the policy form. For instance, the pricing may include a potential $10 million in soft costs tied to delays, but the policy might only provide coverage for $5 million.
Partnering with a specialty wholesale broker with the broadest market access can make securing the best available coverage easier. For instance, some specialty carriers may offer a broad policy form and up to $25 million of lead capacity for podium-style construction on larger projects and full project value on garden-style projects on certain placements. Blue-chip construction markets may offer $10 million of lead or follow capacity. Brokers who can access London on follow capacity may be able to secure $10 million to $15 million on follow capacity for projects.
While the builders' frame risk market has stabilized, obtaining the optimum coverage can be challenging. Carriers want insureds to retain larger portions of the risk with higher deductibles for everything from water damage to wind and wildfires. And, markets are increasingly modeling a wider variety of risks from crime to wildfires, making it critical that agents work with wholesale brokers who have strong market relationships, understand their appetites, and know their underwriting goals. Assembling the right insurance program from the start is a critical component for completing a project in the current environment. Contact your CRC Group producer today for more information about how we can help you obtain optimal builders' risk coverage.
- Joseph Donlan and Adam DePietro are Brokers with CRC Group's Chicago office, specializing in Property, Construction, and Stock Throughput coverages.
- Chris Carlson has more than 15 years of experience in Global Property Insurance and is the Director of CRC Group's Property Practice.
- Phil Mazur is the Office President for CRC Group’s San Francisco office. With more than 30 years of wholesale brokerage experience, Phil is a trusted advisor for clients across a variety of industries including Real Estate, Construction, and the Beverage Industry.
- Monthly new residential construction, March 2022, U.S. Census Bureau, https://www.census.gov/construction/nrc/pdf/newresconst.pdf
- Water intrusion mitigation program for construction, Zurich Services Corp., https://www.zurichna.com/-/media/project/zwp/zna/docs/kh/const/water-intrusion-mitigation-program-for-construction-fs.pdf
- 2021 weather and climates catastrophes: Looking for the climate change signature, Robert Muir-Wood, RMS, Feb. 10, 2022. https://www.rms.com/blog/2022/02/10/2021-weather-and-climate-catastrophes-looking-for-the-climatechange-signature
- National Fire News, National Interagency Fire Center, May 9, 2022. https://www.nifc.gov/fire-information/nfn
- Overcome Top Construction Risk Challenges in 2022, Construction Executive, January 12, 2022. https://constructionexec.com/article/overcome-top-construction-risk-challenges-in-2022