Builders risk insurance capacity is plentiful and prices are stable, but some concerns lie on the horizon as catastrophe losses take a toll.

Although underwriters would like to raise rates in the wake of wildfires and hurricanes, the ocean of capacity that can be tapped makes doing so difficult. But issues such as uncertainty over the future of the federal government’s terrorism insurance backstop — slated to expire in 2020 — are causing some concern in the market.

Builders risk is a property policy that covers the first-party property for projects under construction.

“It’s an all-risk policy that covers either a stand-alone construction project, which we call a project-specific builders risk, or covers an insured’s portfolio of projects, which we refer to as a master builders risk policy,” said Joe Vierling, senior vice president, builders risk unit North America at Axa XL, a division of Axa SA, in New York. Both types of policy cover the term of the project and can include a delay in start-up endorsement, he said.

Delayed start-up or delayed opening is essentially business interruption for construction risks, said Mark Gadaire, senior vice president, inland marine major accounts for Chubb Ltd. in New York. Delay in opening involves “soft costs” such as loan interest, fees and real estate taxes, with the biggest component being interest expense, he said.

Unlike standard property coverage, where delay in start-up coverage is triggered by time of loss, builders risk delayed start-up claims are triggered at the anticipated completion of the project, said Sedat Kunt, Marsh LLC’s national construction property leader in New York. All parties with an insurable interest in a project — owners, lenders, vendors — can buy builders risk coverage, but “from a purchasing standpoint, we see owners procuring

the builders risk insurance more than the general contractor,” said Mr. Kunt. “We would argue the owner should be procuring the policy because they have a more vested interest in the project.”

Daniel Feige, vice president of inland marine for national insurance property for Liberty Mutual Insurance Co. in New York, said that while both owners and contractors buy the coverage, Liberty Mutual estimates that owners comprise 70% of buyers, with contractors accounting for the remaining 30%. But he said larger contractors are becoming more insistent that they control that part of the program.

“They have very particular needs — it’s better served when they do the placement,” he said.

“The market right now is pretty client-friendly,” said Lance Ewing, executive vice president, global risk management for Katy, Texas-based Cotton Holdings Inc., an infrastructure support services company. “From a risk manager perspective, premium is at a reasonable rate. I think any drive for rate increase is going to be pretty much cat-driven. It’s not like traditional insurance from a market standpoint. It’s basically premium creep, where it creeps along slowly and methodically.” He said that the residential section of the market could be affected by events such as this year’s western wildfires.

“Due to the events in the Gulf last year, the cat part (of builders risk) is walking lock step with the fixed property side,” said Richard Flanagan, president of RT Specialty LLC in Irvine, California. General construction insurance is “pretty flat to soft; a lot of folks want to play in that space, both admitted and nonadmitted.”

According to Mr. Flanagan, 2016 and 2017 were difficult years for those insurers in the multifamily wood frame sector because of fire losses.

Capacity is not a problem, said Marsh’s Mr. Kunt: “It still remains client-friendly. While there is more emphasis on deductibles, rates are stable. There’s a lot of capacity in the market. Underwriters want higher rates, but they can’t get that because of the capacity,” he said, adding that $4.5 billion to $5 billion is available from U.S. and London market insurers.

Mr. Kunt said uncertainty over the federal terrorism insurance backstop created by the Terrorism Risk Insurance Act of 2002 is challenging for some segments of the builders risk market, where insurers tend to be reactive rather than proactive. Since builders risk is a long-term policy, most of the medium to larger projects that are binding at the end of 2018 will move into the future. This raises uncertainty over whether TRIA will be reauthorized to cover those projects, as the program is slated to expire in 2020. “Some carriers are struggling to provide a long-term policy without a sunset clause,” although not the larger insurers.

“TRIA is definitely an issue for some insureds,” said Chubb’s Mr. Gadaire. “Mother Nature is another issue,” with wildfires and hurricanes presenting challenges, he said. In addition, internal water damage issues and various forms of pipe breakage usually happen at the top floor and usually toward the end of the project when most of the finishings are in place, he said.

“The larger carriers are able take a number of hits and still keep on moving,” said Mr. Ewing. He said that while he did not want to disparage the middle market, “some carriers got into the market because it’s slow and steady; I think a lot of time they don’t weigh the risk such as terrorism or catastrophic losses.”