Builders risk insurance is property coverage put in place while a structure is being built. It can cover buildings and structures in the course of construction, as well as machinery, equipment, materials and supplies used.

As insurers contemplate their next move in this economy, contractors and developers are watching business slow significantly.

On the residential side, Dean La Pierre, senior vice president and National Construction Practice leader at Mercator Risk Services in Andover, Md., said the market is nearly at a standstill. “Residential building is just not happening out there at the moment for obvious reasons, given the economy,” he said.

As for homes and condos that are being built, many of them remain unoccupied after construction is complete, according to Paul Primavera, senior vice president for Lockton's National Construction Practice and claim services in Washington.

Bruce Bitler, property vice president, construction for Zurich in Schaumburg, Ill., said construction on the residential side is “incredibly slow,” and at its lowest level since the 1970s.

But for insurers, the housing segment of the insurance market remains one of the most competitive sectors in terms of pricing and conditions, according to Joe Vierling, regional vice president of onshore energy and builders risk at Arch Insurance Group in New York. “Insurers are competing for decreased amounts of new construction. Basically, the same capacity is chasing fewer start-up projects,” Mr. Vierling said.

Zurich's Mr. Bitler agreed that the insurance market for residential construction remains very competitive. Insurers are still looking for new business where there is not as much to be found, he said, adding that companies must realize there is a bottom to every market.

Noting that there is still a lot of capacity and competition in the marketplace, Lockton's Mr. Primavera recounted how the industry ended up in what he called a “unique situation.”

As the residential construction market rose and crested over the years, the availability of insurance was scarce–particularly among traditional carriers, he said. Pricing and terms varied depending on the carrier, Mr. Primavera added.

The situation evolved, and when the housing market began to boom, coverage became abundant, from many different markets and at competitive prices, he said.

Now, Mr. Primavera said, companies are reacting to the slowdown in housing construction by reexamining programs within residential coverages in an effort to try and secure additional premium.

As for pricing, Mr. LaPierre at Mercator said there has been discussion in the industry about the need for residential rates to go up, but he added he does not see any significant increases in 2009 because of the economy.

“The reality is hard market times and recessions generally are opposing forces,” according to Mr. LaPierre.

He noted there is a case to be made that underwriters should be in position to raise rates.

At the start of 2008, Mr. LaPierre said estimates were that the industry in the construction market was overcapitalized by $100 billion. But events throughout the year–such as catastrophe losses and issues with investments and the economy–have taken a lot of that capital out.

However, Mr. LaPierre explained, the residential construction market is projected to be down around 5-to-10 percent for 2009 with respect to new project starts. With contractors dialing down their exposure base, and not a lot of building in the pipeline, insurers may find difficulty raising rates, even though they may want to do so.

On the commercial side, experts agreed that, as on the residential side, there has been a construction slowdown. Mr. Primavera said many contractors who do business with Lockton are working from a backlog standpoint and will likely continue to do so through 2009 and 2010.

He said there is still sufficient work for contractors, but it is slowing. But with contractors working now on projects backlogged for 2010, Mr. Primavera said it is unknown if there will be a flattening or decrease in business that will not be seen for around 18 months.

Much could depend on financing staying in place and owners moving forward with planned projects, Mr. Primavera noted. He said many industries and projects serviced by commercial contractors–such as hospitals, schools and prisons–are still doing well and are relatively unaffected by the economy.

So far, indications are that commercial construction will continue to experience a slowdown, but not as much as the residential side, Mr. Primavera said.

But Mr. LaPierre maintained commercial construction has been one of the worst-hit sectors, noting that residential project starts have actually been more steady compared to their commercial, institutional and manufacturing counterparts. He said commercial starts are projected to be down 12 percent in 2009.

Mr. Vierling said commercial fared better than residential in 2008 partly because the price of oil was high for much of the year. He said there is a lot of construction associated with oil and power generation, and the high amount of capital flowing through oil companies allowed for those construction projects to take place.

Now that the price of oil has fallen off, Mr. Vierling said he expects some of the more marginal projects for that industry to be delayed a few years or cancelled.

For insurers, Mr. Primavera said incumbent carriers are trying to hold onto the business they have. He said even a slight decrease of customers will affect a carrier's premium base, and insurers are doing what they need to on pricing and terms and conditions in order to keep risks.

Many insurers are hoping 2009 sees a pickup in infrastructure projects, as has been mentioned by President-elect Barack Obama. Mr. Primavera said expectations in the insurance industry are that there will be some sort of highway funding bill from the federal government, noting that both contractors and insurers would benefit from that.

Mr. LaPierre said some in the insurance industry that did well in residential construction coverage during the housing boom are now putting programs together that focus on infrastructure.

Mercator, he said, is putting strategies in place around alternative energy–another industry that received attention during the recent presidential campaign.

Speaking to further opportunities on the commercial side for 2009, Mr. Vierling said the fundamentals of the energy market are unchanged.

To meet the future demand in China, the Middle East and India, he said he expects new energy projects would be built. The major oil companies still have significant cash reserves, and a competitive construction market will help reduce the cost of completing major oil and gas projects, Mr. Vierling observed.

But for both residential and commercial construction, Mr. LaPierre said insurers are probably in for a difficult 2009. While some in the industry will try to push rates up, he said he believes pricing–as well as returns–will stay flat for the year.

Insurers will need to find ways to stand out among the crowd in 2009, according to Mr. Vierling. For Arch, he said that means targeting relationships with contractors and energy firms. Additionally, he said Arch has been marketing its strong balance sheet to these potential insureds.

The biggest risk for insurers heading into 2009, he said, is the falloff on the residential side–warning that the market might become even more competitive as the volume of new housing starts continues to go down during the recession and continuing credit crunch.

Existing contractors in 2009 will likely be under pressure, said Zurich's Mr. Bitler–both because of fewer general building opportunities and because the lack of available credit has delayed and changed the scope of a number of projects.

For insurers, Mr. Bitler said the builders risk insurance market will harden “a little slower than one might think.” Eventually, he said, loss ratios will suffer as companies will not be making money at the level at which they are writing business.

He said on the reinsurance side, terms for catastrophe coverage already appear to be tightening going forward. He said two different reinsurers have told him they will not support catastrophe risks if the pricing is not where they want it.

Another reinsurer, he said, indicated that it wants to spread catastrophe risk among as many vehicles as possible behind the scenes. Catastrophe capacity for January renewals, Mr. Bitler said, were being offered at stronger terms and a higher pricing than in the past.

Ultimately, though, it is the insurers who will control their own fate on pricing, and Gary Kaplan, president of construction for Zurich, said that while the market is still competitive, there are signs it might be hardening–possibly as soon as the first quarter of 2009.

Mr. Kaplan said the “wild behavior” among insurers seen in pockets of the construction business seems to be slowing, and he noted that the industry took serious losses over the course of 2008. These losses included not only hurricanes and fires, but also widely publicized crane collapses earlier in the year.

With the market deteriorating, Mr. Kaplan said Zurich has taken the position that it needs to move toward profitability, and he added that he believes now is the right time to do that.