“You'd expect in a soft market that more carriers would disappear since they don't have a critical mass [of business], but the contrary has happened,” says Vincent Zegers, Chicago-based national Builder's Risk practice leader at Marsh Inc.  

Zegers estimates that Builder's Risk market entrants have plowed $300-$400 million of new capacity into the market over the past year or two.

“It has been a little bit ironic,” observes Bruce Jervis, San Francisco-based executive vice president of Commercial Marine at Ace USA. “In a weak economy, there have been a number of new entrants in the Inland Marine space as activity has declined” in the construction market. (Many insurers provide Builder's Risk insurance through their Inland Marine units.)

“I'm not aware of any policyholders unable to get the limits they want,” Jervis adds.

Insurers are attracted to the Builder's Risk market “because of its good loss ratios,” says Frank Catalano, a Chicago-based executive vice president and the co-leader of the Builder's Risk group at AmWINS Brokerage of Illinois.

“If you can make money with a short-tail risk, that's where you want to put your capital,” notes Eric Zimmerman, head of engineering lines for Zurich North America in Edina, Minn. But, he acknowledges, “it's a little counterintuitive” to enter a market that has shrunk significantly. Because of the drop-off in construction, “we're at one-quarter of what we used to have in premium in 2007.” 

CONSTRUCTION REBOUND AHEAD?

The pace of construction remains far off its peak in 2006. That year, the U.S. Commerce Department's Census Bureau reported $1.2 trillion of seasonally adjusted construction value in place. In August, the latest month for which the Census Bureau has data, there was about $837.1 billion of construction value in place. That was down marginally—about $5 billion—from the previous month but up 6.5 percent from August 2011.  

But there are indications that general contractors and project owners will be giving Builder's Risk insurers more opportunities in the coming months.

At Hardin Construction, business in 2012 has been stable to “maybe down a little bit,” Westmoreland says, but 2013 looks “fairly bright.”  

“Eighteen months ago in Chicago, there wasn't a single tower crane; now there are about 10” in use in downtown construction projects, observes Catalano. “That's definitely a positive sign for the construction market.” 

Market executives also note that contractors and project owners are restarting projects mothballed during the economic downturn and, significantly, are finding Builder's Risk capacity easily. 

“Five years ago, you'd never find an insurer willing to jump into the middle of a project,” says Daniel Rossen, vice president of brokerage at wholesaler Burns & Wilcox in Chicago. “Now, it's fairly routine.”

Surplus-lines insurers usually will underwrite the Builder's Risk coverage for re-started projects, Rossen notes.

AMPLE CAPACITY

Many insurers writing Builder's Risk coverage offer both admitted and nonadmitted paper, but brokers prefer the admitted market's filed rates and forms and the opportunity to avoid paying surplus-lines taxes, says Zegers at Marsh.

Buyers with non-catastrophe-exposed commercial and industrial projects easily can find up to $500 million of capacity from a single admitted insurer and perhaps up to $1 billion of limits from a single insurer that can line up backing from a reinsurer, says Catalano.

“But very large projects can be valued in the billions of dollars, and no one company has the capacity to cover that large of a risk,” notes Chaman Aggarwal, a Houston-based senior vice president and head of the U.S. Construction practice at Liberty International Underwriters, a unit of Liberty Mutual Group. 

Insurance buyers for costly, highly engineered projects might have to tap a few admitted markets to line up sufficient limits, says Ace's Jervis. Admitted markets most likely would participate on a quota-share basis. 

If a project's value is several billion dollars, however, an insurance buyer sometimes purchases Expected Loss Limits rather than Project Value Limits, when allowed by lenders financing the project, Aggarwal says. With loss limits, the buyer purchases enough insurance to cover the greatest loss calculated for a project rather than the project's full value.

Buyers with catastrophe-exposed risks and wood-framed-habitation projects typically have to turn to surplus-lines insurers for coverage, market executives say. A surplus-lines insurer typically offers $20-$25 million of capacity.

When multiple surplus-lines insurers participate on a risk, a single insurer writes the primary coverage and the remaining insurers usually write excess layers, Ace's Jervis explains.

There also is plenty of capacity for a Master Builder's Risk program, under which a contractor has $100-$200 million of limits per project, according to Tim McGinnis, a Dallas-based senior vice president and the Builder's Risk practice leader at Willis North America. 

In addition to the plentiful capacity available from well-established and startup domestic insurers, “there is a lot of capacity” being provided by foreign insurers, especially from the London market, says Westmoreland at Hardin. “We've entertained quotes from them,” he says, but ultimately decided to stay with the U.S. markets from which Hardin has purchased coverage for many years in order to maintain those relationships.

The construction company purchases a Master program that covers multiple projects as Hardin picks up that business; it also buys project-specific coverage for very large projects. 

RATE BREAKDOWN 

For non-catastrophe-exposed projects, rates are down 5-10 percent in the admitted market, says Catalano at AmWINS. Even better deals are possible if a buyer presents a shovel-ready project near the end of the month to an underwriter looking to meet a premium quota. 

Rates are always higher (but currently stable) for frame construction—even projects located outside of catastrophe-prone areas—because the sprinkler systems are not installed until the project is nearing completion, market experts note.