Insurance Agency

Builder's Risk Insurance Among Most Difficult Types of Coverage to Secure

According to experts, 2007 will continue to be a difficult year for developers and builders to secure builder's risk insurance for their projects. This downturn has its origins in the record setting hurricane activity of 2005, which made the builder's risk market extremely expensive and, for some, unobtainable in disaster prone areas of the United States.

However, in 2007, approximately $1 billion in new property capacity will become available, with 25 percent of that, or $250 million, available for builder's threat insurance. As the market provides more capacity this year, pricing should remain fairly firm, making investments in builder's risk insurance companies inevitable.

The difficult builder's risk market in 2006 can be attributed to three major disasters -- Hurricanes Rita, Katrina and Wilma. Insurers learned that they had not calculated and located risks properly from these catastrophic events. For builder's risk insurance, these events have especially impacted the industry, resulting in drastic price increases for certain wind, flood and earthquake zones. In Florida, New Orleans and California, the demand to build outpaces the availability of builder's risk insurance.

Top researchers predict a very active Atlantic hurricane season, with at least one major hurricane hitting the U.S. coast. According to William Gray, a forecaster with over 40 years experience in tropical weather research and head of the Tropical Meteorology Project at Colorado State University, the probability of a major hurricane striking the U.S. coast is estimated at 74 percent, compared with the average of 52 percent over the past century. Coupled with the constant threat of earthquakes along the New Madrid fault line, builder's risk remains a costly and difficult insurance to obtain in many areas of the country.

A Better Builder's Risk Market

The first step toward a more stable builder's risk market is for insurers to familiarize themselves with their catastrophe exposures nationwide. Catastrophe modeling has dramatically changed insurers' and reinsurers' aggregates by assuming greater loss during a catastrophic event. However, interpreting change in catastrophe accumulations will take some time. In the interim, domestic insurers continue to play it safe and take a conservative approach to increasing catastrophe accumulations.

Strategies to Get the Best Builder's Risk Rates

With the high cost of builder's risk insurance causing many owners and contractors not to build, these strategies, if properly implemented, can ensure the proper coverage one needs to move forward with a construction project.

Carry only a percentage of probable maximum loss. This requires a more thorough analysis of the risk with risk modeling.

Keep hurricane season in mind when planning a project timeline. If a builder can show a timeline that includes work through only one wind season, a better rate can be secured. Also, plan projects so that the core structure is complete and all window and door openings are closed prior to the start of hurricane season.

Strategize with your broker. Ensure that the broker has the knowledge and expertise to develop an individual strategy for your unique risk. In the past, builder's risk insurance was approached on a cooker cutter basis. It is now apparent that success depends on not only knowing the risk exposure, but also knowing the marketplace in order to choose the best possible players with the most available limits.

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