Market Updates in Builders Risk

There are new challenges in the builders risk space, as capacity for natural catastrophe risks remains limited in consideration of past experience, paired with evolving weather trends and continued strains in supply chains. However, the continued rise in “megaprojects” will present opportunities in the builders risk market and is expected to drive growth.

“We are operating in a dynamic market, which in some cases is resulting in more disciplined underwriting scrutiny; to that effect, there is opportunity for new approaches to be deployed in our space,” says Patrick McBride, Head of Construction Property.

The size of projects and their values continue to grow, largely driven by the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Investment Act signed into law in 2022. The act authorizes around $280 billion in funding to spur domestic research and manufacturing of semiconductors in the U.S.

Aspects of the Inflation Reduction Act, also enacted in 2022, along with the continuing demand for artificial intelligence and cloud computing technology, have encouraged a boom in tech-related construction.

These projects include data center construction, manufacturing plants for electric vehicles and their batteries, as well as other “megaprojects,” defined as projects valued at more than $1 billion USD. “The demand for data centers has moved from exponential to “algorithmic growth,” which can create challenges in providing sufficient capacity in the builders risk marketplace, McBride adds.

As the trend towards megaprojects continues, the number of new, less complex, office, retail and hospitality projects has moderated. That affects the insurance market, McBride explains, as those smaller projects offer a counterbalance to the larger, more complicated project placements and require less underwriting scrutiny. “The markets need to require more detailed submission information before underwriting more complex risks, which is a larger up front time investment for all parties,” he says.

Post COVID-19, the construction industry still faces supply chain strains, with some equipment parts remaining hard to find, and a lack of material availability slowing construction.

Items such as switch gears, for example, are seeing significant delivery delays, McBride says. “The feedback we receive from customers in some cases, is that it may take over a year for replacement components. This supply chain pressure remains a concern for the construction industry and can escalate claims related to time-element coverages in addition to the replacement costs. Delays are not as severe as when supply chains were interrupted during the pandemic, but it is a continued challenge and is expected to remain so”, McBride says.

Natural hazards such as hail, straight-line winds and tornadoes are becoming more intense and are affecting areas of the U.S. that historically haven’t seen the kind of activity, leading to additional scrutiny and study amongst property insurers.

“This is a very challenging scenario, given the size of projects that we see in the builder’s risk space,” McBride says. “When you think of a tornado, it has to be the right time, the right place and exact path to strike a project site,” says McBride. “But when those stars do align, it can be an absolutely catastrophic event, both from a physical damage perspective and a health and safety standpoint.”

Concerns over severe weather have insurers looking carefully at how their strategies may have to change to account for additional losses. Some are considering changes to risk sharing mechanisms like deductibles and are beginning to treat the risk of severe convective storms in the same way they look at traditional natural catastrophe exposures, with modeling and forecasting playing a bigger role in projecting potential losses. Helping protect property and strengthening resiliency against severe weather calls for “geographical awareness,” McBride says.

Understanding potential weather threats is particularly important when contractors expand into new regions or territories. Knowing what types of severe weather are possible in the area will guide risk management approaches. In hail-prone areas for example, temporary coverings should be deployed to help protect property from that threat, while in high wind areas, methods of moving and protecting equipment out of harm’s way entirely should be utilized.

The risks are changing as urban sprawl takes hold and assets are built in previously undeveloped areas, McBride points out. “A decade ago, tornadoes and hail would have had little or no effect on vacant land that now is home to 1-million-square-foot data centers, 15-acre photovoltaic solar fields or other projects,” he notes. “Now, there’s something to actually cause damage to.”

A study published in the Journal of Applied Meteorology and Climatology found that the most active tornado corridor is now focused in the lower Mississippi Valley, but remains active into the Ohio Valley and Southern Plains.2

The term “derecho” recently entered the severe weather lexicon to describe the widespread straight-line winds that are strong enough to knock down walls and scatter equipment. - Derechos are generally defined as storms with gusts that exceed 58 miles per hour and cover a damage swath of more than 240 miles.

“We have seen those winds in areas of the country that we wouldn’t have expected, like the Dakotas, Wyoming or Montana,” McBride says.

While derechos and other wind hazards are becoming more severe, the annual hurricane threat is growing as well, McBride points out.

The National Oceanic and Atmospheric Administration is predicting an above-normal 2024 Atlantic hurricane season, with 17 to 25 named storms. Around half of those storms are expected to develop into hurricanes.3 That factors into Zurich’s strategy of maintaining capacity for builders risk customers, McBride says. “We are judicious about how we deploy capacity in high-hazard areas. Our nat-cat strategy has remained unchanged. When we deploy it, it’s for longer-term customers operating in those areas,” he adds.

While traditional natural hazards such as earthquakes floods and hurricanes will always be of top concern in the property insurance space, severe convective storms, also known as secondary natural catastrophe perils, will become more prevalent concerns for underwriters and customers in years to come.

Meeting the demands of a booming construction market creates opportunities for new approaches that can help manage builders risk exposures. One of those opportunities is Zurich’s creation of fronting programs for master builders risk and project builders risk exposures.

Traditionally, when risks have become too large for a single insurer, they are shared by multiple companies through a quota-share arrangement,” explains McBride. “That can often come with administrative burdens for the broker and customer because they must wait for sign-off from all the insurers. Also, there could be issues of non-concurrency if insurers want different terms, conditions and pricing,” McBride says.

Zurich has addressed that issue for multiple customers by issuing policies that transfer the entire risk, via a fronted solution, which delivers the needed capacity through a single-insurer solution. Customer’s engage with a single market backed by the support of participating insurers. “This approach allows us to meet the customer’s needs for capacity, while thoughtfully deploying our own. This solution often allows them to insure larger projects with a more efficient capacity-deployment structure,” McBride says.

Such fronted programs are also available for international risks to meet the demand created by the globalization of megaprojects, he adds.

As construction project values continue to rise and severe weather events increase in frequency and severity, contractors are making every attempt to carefully manage these new risks to their people and projects. Meanwhile, some of the old concerns remain – hurricane threats and supply chain issues among them.

Experienced construction insurance providers are helping with these issues by introducing solutions in builders risk, including capacity and deep underwriting knowledge, that contractors need to ensure their workplaces are safe and well-protected. Despite the complex challenges of the marketplace, coverage solutions can be designed to meet the wide range of exposures that contractors face and help ensure projects are turned over successfully, even if losses do occur.