Specialty Podcast: 2024 Trends and Challenges of Builder’s Risk Insurance

Intro (00:00):
You are listening to the Alliant Specialty Podcast, dedicated to insurance and risk management solutions and trends shaping the market today.

Matt Walsh (00:08):
Welcome to another Alliant Specialty Podcast. My name's Matt Walsh, I lead Alliant's construction practice, and I'm happy to have this conversation with Greg and Bill today. Gentlemen, how are you doing?

Bill Marutsos (00:21):
Great, Matt. Thank you.

Matt Walsh (00:23):
Terrific. A lot of dynamic trends in the builder's risk space. From a very macro perspective, how do you see the economic trends and project scale and scope impacting the builder's risk marketplace?

Bill Marutsos (00:38):
Thank you, Matt. I think one of the big issues right now in the overall economy itself is the stimulus packages that have been released and are starting to take shape across the country, especially in the heavy civil and infrastructure side. We are starting to see a lot of issues associated with some of the projects, especially the heavy civil projects that are long in duration and are large, much larger. Whether it's a chip plant that's 15 billion plus or a rail project that is 15 billion plus, the market is still having some issues with being able to absorb those types of risk. That coupled with other issues such as some of the catastrophic exposures that are out there, whether it's wildfire in the west, flood issues across the country and especially wind exposed areas with hurricane season right in the middle of the year. Those are all complicating the placement with a lot of the different risks we have out there.

Greg Melton (01:35):
Yes, to echo that, a lot of the traditional four wall developers are not as active in 2024 as we've seen in the past. At this point that trend looks like it'll carry into 2025 as they wait for interest rates to normalize at a lower rate. Most of the projects that we're seeing these days that our contractors are pursuing generally have a public entity as the owner. There's a lot of infrastructure investment going on right now, but as one would expect, we're not seeing office buildings. And then, the multifamily, like I said, it's waiting for the interest rates to find a lower point.

Matt Walsh (02:10):
You have these large values. You have projects that have from design, long tail construction exposures. How do you manage projects that may end up going over their forecast at original period of time and deal with the extensions that are necessary in that context?

Greg Melton (02:30):
I would say a lot of it is being honest with the schedule upfront, that if we can be honest with underwriters that this is a six or seven year project, it allows them to secure the appropriate reinsurance if they're going to or at least manage their own expectations that this is not a three year project. So, I think a lot of the answer is being honest about the schedule when we're placing the policy. Otherwise with the extensions, it's finding the reasons why they're extending. COVID is no longer a reason that underwriters are taking as a valid reason for an extension, so we're seeing that supply chain issues, as much as we wish they were in the past, are still a thing. It's being able to evidence, hey, we really do have supply chain issues and let Alliant help you with the reinsurance in the background of it, if that's the struggle, if you have the treaty issues there.

Bill Marutsos (03:20):
Just as a follow up to what Greg mentioned as well, Matt, we do in most cases, especially in large projects, try to anticipate some extension and negotiate that extension while we're placing the actual coverage itself. As Greg mentioned, reinsurance is a very important key to builder’s risk, especially when it's a large project and carriers are not willing to take large slices of that actual risk themselves. It's important to know upfront if those carriers are anticipating trying to reinsure their position, so we're looking for pure capacity. There’s a lot of research that we have to do upfront, that we do upfront on these projects to try and discern where that capacity is actually coming from. Is it net capacity that the carrier's going to deploy, or are they going to try and reinsure something off? That makes a big difference in what we're trying to do, but negotiating the potential for an extension upfront could in most cases help moderate that issue. Obviously if it's something that's going to be delayed for two to three years on the backend, that's a little bit more difficult to assume, but that's how we try to anticipate those issues up front.

Greg Melton (04:24):
I think especially with the public and the infrastructure projects, as we get ready to celebrate construction appreciation week on the 16th, it's reminding these underwriters that this is for the public good, that we all benefit from these projects. Sometimes we wish they were two years, but these large infrastructure projects that these GCs are undertaking are not easy, and sometimes they do take longer than we'd all like, but it's all for our benefit that they do these projects.

Matt Walsh (04:49):
There's a lot of risk bearing that's being pushed into the marketplace. When you get into issues of convective storms and hurricanes and earthquakes and different perils that are catastrophic in nature, how do you see clients managing through that risk retention from time to time? I know we've discussed parametrics and captives and other solutions that can be brought to bear and certainly as Bill, as you pointed out, reinsurance, deductible buy downs. How are those dynamics in the marketplace today?

Bill Marutsos (05:18):
It's very interesting, especially on the real estate holding side. Where we have developers that are building in certain areas, especially there's a lot of attention right now in South Florida. South Florida is basically taking a lot of that capacity up on the construction side, and we're seeing issues associated with those construction projects being rolled into the operational side. So, there is not an infinite amount of capacity. Obviously that capacity is finite, especially when there's a lot of activity and when you're starting a project right in the middle of hurricane season. But it is being done, and we are seeing some signs of efficiencies, especially with those real estate clients when we try to negotiate the actual catastrophic capacity as a whole for the portfolio, not just for the construction project. We're able to carve away some of that capacity that is being purchased from an operations perspective to begin with. Parametrics, like you mentioned, Matt, that's gained a lot of traction lately, and we're still seeing positive signs as far as capacity easing up on the parametric side as well. But it's still all about how you establish what that parametric trigger is, and that's the magic to being able to have a successful program. Greg?

Greg Melton (06:31):
With any industry, as we continue to watch the evolution, we watch the losses. Losses that at one point, I don't know, 20 years ago, might have been seen as fortuitous. They aren't anymore, and the market's pushing back on those where it's almost these losses. Some of them are to be expected, and they're going to ask the insured to take some of that risk as opposed to transferring it. So then we're forced to look at what are some other risk financing techniques as Bill points out. It's the parametrics. It can be a captive. It can be looking at alternative market structures, and that's why we're always looking to create markets maybe where one doesn't exist and new needs have been created through this evolution is how can we stay ahead of it and create a risk transfer when the traditional market is saying, hey, we don't want that risk anymore.

Matt Walsh (07:17):
One of the deductible pushes historically has been water damage, interior water damage. How have you seen clients respond to that? Are they using technologies or other techniques to mitigate that, and has that been successful?

Greg Melton (07:34):
Absolutely. We're seeing the water shutoff valves. There are a couple names out there that are fairly well known. We're seeing master service agreements being set up when there's a frequency of projects to put it on every project because it also benefits the permanent insurance, not just under construction. The benefit too is that we see a lot of different technologies, whether it's shut off valves or just flow monitoring. There's a lot of opportunities to identify when water is acting abnormally and look at ways to prevent the two and three days where it runs nonstop, and the losses are seven or eight figures.

Bill Marutsos (08:07):
It's a fairly new requirement now with basically, and when I say fairly new within the last what year and a half to two years, where the carriers have been mandating the use of those water shutoff systems. Some general contractors have their own systems in place now where they've created, but overall we haven't seen a reduction in deductibles because a lot of clients expect deductibles to be reduced if those systems are in place. And the opposite continues to happen. We're starting to see deductibles push up even higher now with the use, but it seems to be gaining traction. Most clients understand that they have to use some system at the point of construction, and now like Greg mentioned, that is carrying over onto the operational side where a lot of the operational carriers on various portfolios are requiring those systems in order to provide insurance. So, I think it's a good thing for the market to have identified something that could keep a significant loss from occurring, especially on four wall construction, and there is more to see how that evolves in the future.

Greg Melton (09:09):
I would say as a first step, whether it's a developer GC, they should plan to have a water mitigation plan even short of the technology because carriers are wanting that water mitigation plan. When we can't produce one, more often than not, that's when we're being mandated to put the valves or some technology that the carrier has endorsed. Whereas if we can have a water mitigation plan up front, a lot of times we can direct our own destiny and show to the underwriter that hey we know what we're doing, we take this seriously. We're doing everything in our power to prevent losses, whatever that may be.

Bill Marutsos (09:40):
Yes, and keep in mind that the water detection systems still don't solve the issue of the roof hatch being left open over the weekend and rain infiltrating the inside of the building or the fact that the roof hasn't been installed in a two- or three-story building and the drywall's in. It doesn't solve those types of issues. Those are simple issues that should be rectified from the beginning from a training perspective. But for the most part, as far as a system, a fire extinguishing system or a water system being activated overnight, it does remedy hopefully some of those issues and mitigate an overall loss.

Matt Walsh (10:15):
When it comes down to it, project scale, project complexity, project duration, all add up in a challenging marketplace to an opportunity for invoking creativity and invoking an intelligent strategic approach. Both of which, all of which, both of you execute every day along with all of your colleagues. We greatly appreciate it, and we look forward to the next discussion. Thank you.