RHONDA DEMENO: Welcome to The WTW Senior Advisor Podcast. My name is Rhonda DeMeno. I'm thrilled to be your host. WTW Senior Advisor podcast series is intended to bring you firsthand information on trends and hot topics facing the senior living industry. Today's podcast is titled WTW Senior Living Builders Risk Solutions.
This podcast will provide exciting news on WTW's approach to senior living and key concepts on builders risk. Today's podcast is the second episode of our builders risk series for senior living, and will be presented to you by Wayne Wills. Welcome, Wayne.
WAYNE WILLS: Thanks so much, Rhonda. Pleasure to be here. Thank you so much. OK. We are all set with round two of our senior living builders risk podcast. Once again, I am joined by Zac Hernandez. Zac is our Multifamily Lead within the Willis construction practice. Zac, so good to have you again for our podcast.
ZAC HERNANDEZ: Yeah, absolutely. Thanks for having me again, Wayne.
WAYNE WILLS: Fabulous. Well, we've got a lot of content to cover here. Where we left off at the end of our part one, we had created our premarket submission, and now in part two, we're ready to take that market submission to prospective builders risk insurers and do what Zac and his team do best, negotiate optimal coverage terms and pricing.
So, Zac, now that we've got our market submission created ready to take it to the market, granted, at the of the day, this is a construction project. At what point in the process of the construction build do we actually send the submission out to the market and work towards securing coverage for the project?
ZAC HERNANDEZ: Yeah, absolutely, Wayne. So it depends on the line of coverage. But I would say for builders risk coverage specifically, we like to have it, you know, 45 to 60 days out from when you want to buying coverage. So I always tell clients saying, hey, we're not going to get penalized for sending a submission out too early.
So I think the earlier the better. So if we could aim to target 45 to 60 days out, that gives us plenty of time to make sure the carriers are comfortable, go to the entire market, and make sure that everyone's comfortable and we have best in class terms and rates for our clients.
WAYNE WILLS: Great. I've always heard it's X amount of time before, quote, "going vertical." So it sounds like that time period is, as you said, 45 to 60 days from after the loan closing and before going vertical. Does that sound correct to you?
ZAC HERNANDEZ: Yeah, absolutely. So we always advise clients that every project is different. So from a 30,000 foot view, for binding builders risk coverage, first party coverage, on a construction site, if you think about it, there's a loan closing and then you just have land there. So there's a lot of site clearing work. So we think the real exposure really starts when you start to go vertical.
So what does that mean? So if there's any sort of utility work or, when you start to lay the foundation. But that's kind of how we define going vertical. So a lot of times in between that two items that you just said, between loan closing and going vertical. Again, obviously, the more time the better for the submission.
And that gives us kind of plenty of opportunity to make everyone comfortable with the risk and understand why we're buying what? Are you buying sublimits for CAD coverage? Are you buying full limits, et cetera, et cetera? Yeah, you were kind of spot on there with saying afterload closing but before going vertical.
WAYNE WILLS: Great. Thank you so much. One thing I wanted to ask you about, in a past conversation you and I have spoken about, you mentioned some proprietary technology that Willis has as it relates to projects of this sort that model the buildup of the project exposures for the respective marketplace over the course of time. And it helps to identify that maximum risk point in the life of the project. Would you mind sharing with the audience what that technology is all about and how it helps to differentiate Willis in the marketplace?
ZAC HERNANDEZ: Yeah, absolutely. So if you think about a construction project, you clearly have a buildup of values throughout the term of the project. So let's say you have a 24 month project term. Month one, the exposure on the ground there is small. Because like we just said, you're starting out with dirt and then you're building something.
So historically, when you model an asset for either flood or named windstorm or quake or the PML, in construction, you historically would just model as if the asset was already built. So if you were building $100 million assets, to model it and make sure everyone's comfortable with how much sublimits you're buying, you would go ahead and model the full $100 million.
But like we just said, in reality, there's a real buildup of values. And Willis has done a great job. There's an entire team here who kind of built out the modeling system and the modeling team. And it really shows the buildup of values at any one time. So we can use that modeling and say, hey, in a 24-month policy, month three, your exposure is 10 million out of 100, 15 million out of 100, which that clearly correlates down to your flood exposure, your earthquake exposure.
So it's kind of twofold. We can show clients of saying, hey, this is kind of the buildup of values. And your year one's obviously going to be less exposure than year two. But it also helps in talking with markets. So if a market ever feels uncomfortable with the amount of named windstorm they have or earthquake, et cetera, we can look at the modeling with them and walk through with them saying, hey, listen, in reality, you're building a $100 million project over 24 months.
Your real exposure comes kind of that last eight months. So let's see the buildup of values throughout the term. And we can use it as a negotiating point and make sure that everyone is comfortable with the insurance pricing and the insurance coverage for all parties, clients, and then insurance carriers also.
WAYNE WILLS: Yeah. Thanks so much. Great explanation. It's interesting to see how we utilize technology to best leverage the overall result for our client. So next topic I wanted to ask you about is one of these ones that I get questions about all the time. They're a little bit mysterious. And the topic is soft costs.
Sort of, what exactly are soft costs as it relates to a construction project? What's included in them? And what is not? And how can we help clients that are building the project quantify what these costs are so we build that into the overall budget? Would you mind sharing your thoughts on that?
ZAC HERNANDEZ: Yeah, absolutely. So if you think of, you know, there's hard costs and then there's soft costs. So hard costs are the values that are going into the physical asset. Soft costs are not directly related to the physical materials that are going into building an asset. So if you think about it, it's your architects and engineering fees, your marketing fees, your legal fees.
That's all fees and costs that you need to build the project, but they're not actually hard materials that go into the project. So when you think about insurance, right. Insurance is meant to make you whole. If you look at insurance and you look at soft costs, there's a lot of those costs that you wouldn't reincur in a total loss.
So we always love to sit down and walk through and educate developers and clients and whoever, in a sense of, OK, let's look at your soft costs. Let's look at your architects and engineering fees, your permits, your legal, your marketing, et cetera and go through and get to know the client and say, hey, in a total loss, how much of this marketing fee would you re-incur? And these permits, architectures, and engineering fees.
And again, it's a business decision, and it varies client by client. But it's also very important to basically-- again, it's our job to educate developers of, why are they buying the insurance that they are? It's essential to get people comfortable with the situation and understanding, hey, why are we insuring all of architects' and engineering fees?
And if you're not, why are you insuring 25%, 50%, whatever that number is, right? So it's more of thinking about from a 30,000-foot level, what would you reincur in a total loss? And again, because insurance is meant to make you whole, so it's just understanding why are you buying and why are you reporting these values?
WAYNE WILLS: Yeah. Asking the right questions to help quantify the risks that you want to insure for.
ZAC HERNANDEZ: Yeah.
WAYNE WILLS: Next topic I wanted to cover with you is, we're out to market now. We're meeting with prospective insurers regarding the project. Let's talk a little bit about ongoing communication with the markets, risk control, surveys, meetings of that nature, anything that would need to be done prior to binding coverage. What is the optimal way to do this? You're out to market with a number of insurers. Can you share your thoughts on meetings and communication with them, site surveys, and risk control?
ZAC HERNANDEZ: Yeah, absolutely. So I think insurance companies, they are a partner, right? So they want to partner with a developer. If you think of the word partner, that goes both ways. So it's always important to understand. And it's the broker's job to really illustrate and be the voice of what a client is doing from a risk mitigation standpoint and relaying that to the carrier.
And vice versa. If a carrier has an opinion and saying, hey, we think you should raise your fence or lock it here. Hey, your job site is next to this sort of assets we consider a higher risk. So it's more of creating that partnership. And I think it's the broker's job to really advertise and understand both parties in a sense of making sure everyone's comfortable and everyone feels like it is a partnership.
And I think, like you said, job site visits is a big way to do that, right? And I think it's eye-opening in the sense of it's eye-opening for a developer to learn what a carrier is focusing on during that site visit. And vice versa, right? It's important for the carrier to understand from the developer, why are they doing certain things from a risk mitigation standpoint too.
It's just like anything else. Everyone's constantly learning. And especially with technology and new things coming out, it's everyone's in a learning mindset, and it's just understanding the why. A couple years ago when times were crazy, construction projects were binding left and right, people were just pushing paper from the client to the insurance carrier.
And I think that's a disservice to the developer. I think it's your broker's duty to really sit down and learn about the client, learn exactly what they're doing from a risk mitigation standpoint, and then relaying that to the insurance carrier and making sure that it's a right personality fit and it's a right partnership.
Because you and I talked about this in the past, Wayne, of it's vital to find a partner going forward to look at all future projects. Let's look at it from a 12 and 24 and a 36-month plan. You want to find a partner that's kind of in it with you through the ups and downs of the construction cycle. And again, it's the broker's job to find the right personality fit and make sure that it does feel like a partnership between both parties.
WAYNE WILLS: Yeah. Well said. As we look through the year in 2025, we see a number of senior living organizations with significant development pipelines. And hopefully, they will realize that and continue to build. So it feels, just as you said, you were accentuating the relationship component. There's only so many markets that are in this space. So it seems to me that the relationship part is so key.
And we've talked before about periodic meetings on an ongoing basis with respective markets. As it relates to keeping them updated, we've talked about providing Gantt charts and things of that nature in addition to site visits. Can you share your thoughts on specific means of communication beyond a meeting with the markets, just to keep them apprised, particularly when we're talking about multiple projects in a builders risk portfolio approach?
ZAC HERNANDEZ: Yeah, absolutely. Yeah. So I think kind of a constant touch point of communication is key. So I think it's much more than just the Gantt chart, like you said. It's essential, if a carrier has hesitations about a certain project, it's important for the broker to go and find the correct parties on the client's side and conduct a meeting.
So whether that's a geotech engineer to be more comfortable with the site itself, whether that's a waterproofing consultant, whatever that is. Because again, it's just making sure there's a clear line of communication and all parties are connecting the dots and going down that route. And then once the site and the policy is already bound, it's important to do a site visit to get in front of your carrier.
Carriers want to partner with developers. And developers get the best-in-class rates when they're completely kind of transparent and showing and wanting to learn from a risk mitigation standpoint, too. From my shoes, clients get the best rates when they go into carrier meetings and they are asking, hey, what are we not doing? This is everything we're doing, A, B, C, D, E, F.
But what are we not doing? What else? What are other developers doing that we might want to do? Because again, that shows the partnership aspect of it. So again, it's constant form of communication. It's key, I think, also when you're binding multiple projects throughout the next year or two. Because again, it goes back to finding that right partner.
And I think it's just essential to have a constant line of communication and for the carrier to actually get to know the client. And I think I said in the last podcast too there's there was a number where I was told a couple of years ago that a carrier had 10,000 submissions on their desk, and they only opened 2,000 of them.
What does that show? That shows there's so much volume going to some of these carriers that how does a client stand out on paper and in a submission. So it goes back to your broker. It's key for your broker to be the voice and to advertise these clients. And it's key for the clients to get in front of the carriers and really get to know each other. Because again, it's the only way to stand out in the market.
WAYNE WILLS: So well said. Appreciate that. So you mentioned rates within your discussion there. So now's the time that you break out your crystal ball and give us some insights here. So as it relates to rates for the next 12 months, we'd love to hear your thoughts in that regard. How are things looking, Zac?
ZAC HERNANDEZ: Well, it's always tough to forecast in the wood frame space. But as of now when we are recording this podcast, rates are going down. We're definitely in a soft market. And I think that contributes to a lot of different things. There's a lot of new capacity in the market. There's a slowdown in multifamily starts and residential units last year.
So what does that mean? That just means there's less supply and there's more competition. So it's been really healthy for this niche market. But that said, it's a soft market for now. We're heading into hurricane season here in a couple of months and there's always-- you mentioned earlier, there's a limited amount of carriers in the space.
So even though there's new capacity, all it takes is a couple large fires and the market can swing. And that's why when I'm helping clients forecast for budget numbers six months, 12 months out, I always caveat it with saying, hey, here's the right now. But let's stay in touch and let's kind of, you know, every couple months I'll give you a pulse check on whether I think that number is still sound for you to use, or whether that number has gone up or down.
But right now, it's definitely a soft market, which if you're a developer, it's important to meet and be a partner with your carriers through all cycles of the insurance process. If a carrier all of a sudden whenever the market goes hard again and rates are going way up, and then all of a sudden, clients want to meet carriers, carriers remember of, hey, who was our partner during a soft market too when it was harder for them, rates were going down.
So it's just important, I think, to always have that relationship with your carriers through the ups and downs. And carriers will remember, in a sense of the next time a hard market comes, they will remember the soft market partners of saying, hey, who's really a partner in the soft market. So yeah. But, Wayne, to short answer to your question, we're definitely in a soft market right now. Rates are decreasing.
But again, it's one of those things that it can change within a week depending on fires. It contributes to the smaller number of total units starting in 2024 and then the new capacity that came into the market. So everyone's feeling optimistic about 2025, and there are a lot more projects starting. But it's good. It's a very healthy market. It's kind of good for all parties.
WAYNE WILLS: Great to hear. So in a market that's a bit soft with a lot of competition, are there certain, if you will, bells and whistles, coverage enhancements that our listeners should be mindful of as they're negotiating terms for their next construction project?
ZAC HERNANDEZ: That's a good question, right? I mean, I think that from my perspective, one of the biggest pain points is extensions of projects. So I would encourage developers when they can to build in some sort of pro rata extension at the end of their project. There's a lot of unknowns in the economy right now with all the stuff going on with tariffs and deportations and all of that.
So it's a big unknown in a sense of, how is that going to affect construction projects? So I would just say, from my perspective of-- and the carriers should want to get around that too because it shows the partnership. But it's saying, hey, there's a lot of unknowns. We don't know how tariffs are going to affect lumber coming from Canada and so on and so forth.
So I think it's just important to think about, on the back end right now because if you think about it, project is 24 to 36 months. It's obviously hard to predict what the economy is going to be 24 months from now. So I would say from my perspective, one of the key things is built in extensions just because I think it's the biggest pain point that I see for clients on that.
WAYNE WILLS: Yeah, great point. Best to be prepared and negotiate that on the front end. Thinking about some of these, larger construction projects, let's say 100 million or greater, what does the market look like from a capacity standpoint? How many markets do we need to pair together to insure a project of that size?
ZAC HERNANDEZ: Focusing on wood-frame construction. So it's funny, right? So if you look back in 2012, '13, '14, '15, there was a lot of smaller projects going on. So it'd be normal to see a $30, $40, $50 million project. But now we're seeing $300 million wood frame projects going up. So one, historically, the rates have gone up. But then the total project size has also gone up. So it's more than just the rate because now it's being rated against the larger TIV as well.
So to answer your question, there's a few carriers for $100 million project who can write 100% of it, the more MGA-type carriers. So with that said, though, if you look at even like the larger projects of $200 to $300 million projects, it's very much a quota share placement. Meaning that you're going to chop it up and you could have anywhere between 5 to 6 to like 12 to 15 different carriers on that project.
It's a constantly changing space, right? And that's and that's why personally, I love the space just because it is a very volatile space, and the space is constantly changing. There's constantly new carriers coming in, new carriers going out. So there's kind of a joke in our industry. The expert is the person who did the last deal, meaning that the space is constantly evolving so much. From deal to deal, it could change on a switch.
But right now, again, there are carriers that are rights, and you can get $300 million in capacity. Two years ago, it was really hard to get that much. And it was a real challenge. but. There's carriers now who will write excess for wood frames. You can structure a primary and excess layer. And then there's definitely creative ways you can do about it.
If it's a big mixed-use project where you have a high rise paired with a podium-style wood frame project, you can do a primary and excess layer. So the thought process there is let's say you're building a $200 million project, $50 million of that is frame. Why don't you do a primary layer up to $50 million and then do an excess layer of 150 above that?
And the thought process is that you can go to wood frame carriers for that $50 million. And then the carriers to write the excess, they could be carriers that maybe don't necessarily play in the wood frame space or write in the wood frame space too. So it's creating a market for the right project. And it's creating a schematic.
And I think you have to be nuanced and creative enough to constantly be adapting and thinking outside the box of, OK, how do we structure it to bring in the correct capacity for the correct appetite? So you're building in South Florida. So all of a sudden, most of your carriers don't want to write in South Florida anymore. So then let's do that. So again, I think it's the broker's job to create the market for the right project in the right spot.
WAYNE WILLS: Great. Very well said. So last question for you, Zac. It's kind of a two-parter. We talked earlier; we want to start this process 45 to 60 days out from project inception. How long does the underwriting process take?
And then if the project is of a significant size, like you were just describing, with so many partners in the mix, how do we best stay in communication with them, so everyone stays apprised of how the project continues to develop over time and just keep in communication?
ZAC HERNANDEZ: Yeah, absolutely. So it falls on your broker. So it's getting enough time to allow the broker to connect with all the carriers really illustrates for the client the project and the exposure there. And then once the project's built and it's during the construction phase, no client volunteers to do a site visit. Carriers will require site visits throughout.
But again, it's the little things. So for a client to offer to host the carriers and to come out and kind of say, hey, this is who our company is from a cultural standpoint. This is why we do it. What are we not doing right? Those little things go a long way. And I think it's important to look at insurance carriers as a partner in a sense because you will always need them in a sense.
So it's just like a finance partner, an equity partner, a law firm. It's important to partner with those guys and think of a long-term relationship. So whatever clients can do, whatever brokers can do. Brokers are here to help. And the broker is doing a disservice to the client if they don't recommend these things, come up with ideas and kind of come up with those things for their clients.
WAYNE WILLS: Great. Fabulous answer. Zac, I've really enjoyed this conversation. Really do appreciate your time. I hope this has been very helpful to as it relates to developers, investors, and operators in the senior living industry looking to build in 2025. Zac, greatly appreciate your time.
ZAC HERNANDEZ: Absolutely.
WAYNE WILLS: I'll turn the call back over to Rhonda.
RHONDA DEMENO: Well, thank you very much. That was great information. I know I personally learned a lot of information. I do want to thank Wayne very much for spending time with us and our audience today. Thank you, Wayne.
WAYNE WILLS: My pleasure. I enjoyed it.
RHONDA DEMENO: And Zac, many Thanks to you for all that good information. And I know you're a busy guy, and we appreciate you spending some time with us and our audience today. Thanks, Zac.
ZAC HERNANDEZ: Absolutely. Always happy to help.
RHONDA DEMENO We hope you enjoyed our discussion today. If you want to obtain additional information or you have questions for either Wayne or Zac, you can review their contact information on our podcast page. We hope you found today's information very helpful. And again, many thanks for listening in to The Senior Advisor.
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In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, incorporated in the United States, and Willis Canada, incorporated in Canada.
