Builders risk opportunities grow despite inflation, supply chain snags
Insurance agents who go after the builders risk market would do well to follow its economic trends.
Even though the current home construction market might be deemed complicated, make no mistake — the long-term trend in residential construction is onward and upward. One key reason: Construction of more than 5 million homes is needed in the U.S. to meet the demands of those who want to buy a residence this year.
Before diving into the nature of this opportunity, it’s important to understand the challenges that accompany it. Total housing starts spiked at 1.6 million in 2021, up 15.6% from 2020, and the highest reported since 2006. Continuing to meet that demand in 2022 was an uphill battle because of multiple competing forces including the lingering effects of the COVID-19 pandemic, tight conditions in the construction labor markets, and a steep increase in inflation and mortgage rates. In fact, these elements actually pulled construction activity back down from 2021 highs. According to Wells Fargo, housing starts were projected to close 2022 at 1.57 million and forecast to fall to 1.43 million in 2023.
Another dominant factor constraining the construction market: persistent supply chain snags. In 2021, more than 90% of builders reported delays and material shortages (especially lumber and appliances), as surveyed by the National Association of Home Builders/Wells Fargo Housing Market Index. Construction jobs are simply taking longer. A home that might have taken eight to nine months in the past to build could now require 12 to 15 months for completion.
A significant issue in the supply chain is that building projects are subject to dependencies. For example, a resin shortage impacts the manufacturing of plywood, which is a key material used in construction. So, too, with computer chips used in home appliances. Another example noted by the National Association of Home Builders is a shortage of transformers and other electrical components, which is delaying projects and even stalling electricians from wiring power to homes. Windows, doors, hardware, asphalt, shingles, fiberglass, concrete, drywall and PVC pipe also have been in short supply or experiencing cost increases.
The combination of all these forces has culminated in pushing the price index for single-family homes to 187.5 as of July 2022, up 15.5% from 160.3 just one year earlier, according to U.S. Census Bureau figures. Despite these challenges, however, the outlook for housing remains positive. To illustrate, well-known retail brand Home Depot is bullish on construction: It’s in the midst of a $1.2 billion investment to build 150 new U.S. supply chain facilities.
Despite headwinds, demographics strong in housing
The housing market will remain healthy. While demand persists, it’s especially strong among younger buyers. Millions of young Americans want to buy their first home, giving agents who serve them a chance to gain long-term customers.
The continued strength in construction, especially residential building, makes for a good environment for independent agents to sell builders risk insurance to commercial and personal lines clients.
Builders risk coverage — also known as course of construction insurance — is a proven way to protect against the unique risks that endanger residential and commercial new construction, remodeling and installation projects. It usually combines standard coverages and optional endorsements to customize coverage for a specific risk and is based on area exposures. To name just a few, covered perils can include theft, fire, materials in transit, back-up of sewers, flood and earthquake.
How to prepare for builders risk business
Agents who want to go after the builders risk market would do well to follow the demographic, interest rates, and construction and economic factors that drive the market. You don’t need to be the expert; just maintain a high-level understanding of where the market sits.
Here are four ways to do that.
No. 1: Consider how today differs from the past. When assessing the current environment, some housing analysts conveniently point to the 2006-2008 period as a similar situation. But that earlier time was marked by speculative investing, whereas housing growth this time around is being generated by strong demographic trends.
Once inflation slows (or even slowly reverses course) and mortgages rates drop, both potentially in the second half of 2023, contractors will see home buyers flock back into the housing market.
No. 2: Pursue one or more of the core consumers. Nearly any person or entity with a financial interest in a new building, remodeling or installation project is eligible to purchase builders risk insurance: contractors, business owners and homeowners. That means there’s revenue to be made — from existing and prospective clients — whether you’re a commercial or personal lines producer.
No. 3: Don’t overlook younger generations. Those in the millennial population are now forming households for the first time. With housing decisions, this group tends to be more sensitive than others to increases in mortgage rates, and their jobs tend to be at higher risk during a recession (which a Bloomberg Economics forecast calls “effectively certain” for 2023).
As a result, many millennials are more content to sit on the sidelines, continue to pay rent and watch what happens with interest rates during the current housing deceleration. Those who do buy homes may be less likely to trade up to a different house during a time of recession and high interest rates, adding to the tightness of residential housing supply. For these individuals, remodeling may be a great alternative solution to create the home they want.
No. 4: Evaluate coverages even more thoroughly. Be aware that builders risk policies may need to be extended or renewed if supply chain slowdowns are extending the time to complete a construction project. For instance, contractors may have building materials stored on site longer as they await other items to arrive, increasing risk of theft.
Higher costs and scarcity of building materials may also increase theft. Materials are at risk when they’re transported, so agents need to pay attention to “materials in transit” limits. In general, from a valuation standpoint, agents must consider not only the value of items on the construction site, but items that will be part of the home but not stored on the job site.
The takeaway
The need for housing is constant. Future demand may shift between single-family homes to multi-family residences to retirement communities and assisted living, but residential needs will continue — followed by businesses and infrastructure — to support community growth. Agents who serve the builders risk market now will be well positioned to take advantage of upcoming economic opportunities.
Alan Ferguson (alan.ferguson@usassure.com) is president of US Assure, where he leads corporate strategy and the day-to-day operational decisions for the company. US Assure exclusively distributes, underwrites and services Zurich’s builders risk insurance program across the U.S.
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