The slowdown in for-sale multifamily housing projects is largely due to high interest rates, increasing insurance costs, and dropping rental prices. Despite these challenges, there is cautious optimism regarding the costs of builder's risk insurance in the wood-frame construction market.
This niche space for insurance carriers is shaped by several factors: trends in the larger global property market, the frequency and severity of claims (specifically fire losses), and the total insurance capacity that is available. While there are reasons for optimism in each area, a deeper examination is necessary for a comprehensive understanding.
Coming off a very challenging period in the overall global property market, signs of improvement emerged at the end of 2023 and thus far into 2024. January 2024 saw reinsurance treaties typically renewing as expiring, following significant increases in 2023. In addition, capacity already appears to be more abundant in 2024 compared to 2023, which had experienced significant reduction in reinsurance capacity due to losses from natural catastrophe events in 2022.
Looking ahead to 2024, insureds should still anticipate some pressure at renewal around rates, valuation, and terms. An insured’s overall risk profile, cat exposure, loss history and risk mitigation measures will heavily influence their renewal.
Compared to the prior years, 2023 experienced an abundance of wood frame fire losses ranging both in size and geographic location. By WTW estimation, there were 16 different substantial fire losses totaling nearly $400 million, with the largest loss estimated right under a $100 million. The 2023 annual total of builder’s risk frame losses nearly doubled compared to 2022 and quadrupled compared to 2021.
The volatile nature of the wood frame construction market for builder's risk insurance carriers has caused many Managing General Agents (MGAs) to enter the scene. MGAs act as middlemen, helping insurance companies enter or exit the space. The recent economy and construction activity has attracted new MGAs, fostering new capacity in the builder’s risk wood frame marketplace.
Over the past five years, and specifically the last 12-24 months, notable new capacity has entered the wood frame market. Currently, the total market capacity is the largest that it has been in the past five years. However, as the total insurance capacity grows, so do the size of the projects and thus the size of the insurable risk.
Despite the significant number of fire incidents in 2023, WTW remains optimistic that base rates will stabilize. The increased market capacity and reduced number of project starts will create competition among MGAs that will help maintain steady rates. Nevertheless, projects in high-crime areas, cat-prone locations, and regions with large project concentrations might experience different trends. Developers proactively implementing site protection and water damage mitigation plans (or technology) will be in high demand by insurers in this space. Now more than ever, it is critical for developers to employ top-tier risk mitigation techniques.
The 2024 period presents a nuanced picture for the wood frame builder’s risk insurance market. Despite the challenges posed by significant fire losses and a dynamic insurance landscape, there are reasons for cautious optimism. The influx of MGAs and increased market capacity are positive signs, indicating a potential for more stability in rates and terms. However, the market's response to large-scale projects and high-risk areas remains a crucial factor to watch. Insureds must continue to focus on robust risk mitigation strategies and adapt to the evolving perils in this space. By doing so, they can navigate the complexities of this sector and capitalize on best-in-class rates and terms. WTW remains steadfast in our focus to find additional capacity and equitable solutions for our clients in this sector.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
