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Builders risk capacity abundant, but cats could firm market: IRMI speaker

Builders risk capacity abundant, but cats could firm market: IRMI speaker

SAN DIEGO—U.S. construction contractors and project owners still can find plenty of capacity and some loosening of certain exclusions in the builders risk marketplace, but an expert at the IRMI Construction Risk Conference said catastrophes and changes to risk modeling could lead to some market firming for the construction industry in 2012.

The earthquake and tsunami in Japan in March, the flooding in Australia and Thailand, Hurricane Irene and the rash of tornadoes, windstorms and wildfires in the U.S. likely will produce a reduction of capacity of builders risk coverage for residential, commercial and industrial contractors, Kelly Kinzer, a Minneapolis-based vp for Marsh Inc. said during a presentation on builders risk trends at the San Diego conference.

“At this point, the market is thought of as being one in transition,” Ms. Kinzer said. “There's still a ton of capacity, even in critical catastrophe coverage, so the market is still ultracompetitive. But there has been some talk of price firming over the next 12 months.”

New model

The release of Risk Management Solutions Inc.'s new hurricane model as well as anticipated changes to reinsurance rules and conditions also are predicted to negatively affect builders risk capacity.

“Most carriers are anticipating increases in their 2012 reinsurance treaty costs,” Ms. Kinzer said. “As such, we'd anticipate the carriers in turn will attempt to pass some of these increased costs along to their clients. This could be one of the contributing factors to a potential market firming in 2012.”

Though pricing may harden in the coming months, Ms. Kinzer said during her presentation that brokers and their clients are continuing to see the terms and conditions of many domestic builders risk policies—which are written largely on a manuscript basis—fall in line with offerings in London and other global markets.

“For example, we've gained traction with carriers in trying to scale down their cancellation provisions to limit the ability to cancel the policy to nonpayment of premium only,” Ms. Kinzer said. “We've also had some success with carriers getting them to state in their ‘other insurance' provisions that the builders risk policy is the primary policy. And we've noted that some carriers are now providing automatic sublimits for contract penalty (coverage) within the builders' risk policy form.”

Underwriters endorsing more cover

Most builders risk policies still contain exclusions for faulty workmanship, design and materials and U.S. insurers historically have covered only the resulting physical damage. However, Ms. Kinzer noted, some underwriters have demonstrated increasing willingness to endorse some coverage of damage to the insured property as a result of an underlying defect.

“Up until a few years ago, that was very rare in the U.S.,” Ms. Kinzer said. “Only a couple of carriers were doing it and they were charging an arm and a leg for it.”

But as pricing has softened during the past few years, those endorsements have become “more mainstream,” Ms. Kinzer said. “More carriers are willing and able to provide it, and the price has come down accordingly,” she said.

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