Property and Casualty price hikes for developers: why we’re living in a materials world

Jul 21, 2022

New insurance challenges are emerging around the construction materials developers need to get their projects off the ground.

With inflation the highest it’s been in 40 years you don’t need a weatherman to know which way the wind blows. But let’s take a closer look at the changing attitude of insurance carriers toward construction materials and how this has contributed to rising costs and greatly reduced options for coverage for U.S. property developers.

High profile claims relating to fire have resulted in carriers putting frame construction buildings under the magnifying glass in recent years. From a builder’s risk and insurance perspective, developers are being quoted rates that can be five times, sometimes even closer to 10 times, the cost of property insurance for projects using alternative materials.

Around eight years ago, it was possible to insure a significant 200,000 sq. ft. project, that was primarily wood stick frame or what is commonly referred to as “podium” construction, with a single carrier.

The average construction cost for frame could be as low as $135 to $150 per sq. ft. eight years ago. So, the limit that brokers and their clients were requesting a carrier to put up on a like building was much lower than today’s equivalent.    Requesting a single location limit for the entire project wasn’t nearly as big an ask as they had the capacity.

Today, the cost for residential building frame construction in New York City can be as high as $600 per sq. ft. Although it’s very region specific, and even the lower cost tertiary markets have seen prices swell to over $250 per square foot, representing a 50%-70% increase from the $150 per square foot we had been accustomed to a decade ago.

For carriers, there’s safety in numbers

Property insurers move in different circles to maritime risk but the running aground of the ironically-named container ship Ever Forward in Chesapeake Bay on March 13 (refloated April 17) has parallels with the way five or more of the largest reinsurers in our industry are now more likely to share the risk of big-ticket development projects.

Risk diversification goes even further back, of course, to 3000 BC when Chinese merchants divided their wares between vessels to lessen the blow that shipwrecks were inflicting on their collective bottom line.

So shared limits have always been there. However, the shift in P&C is that the capacity level at which reinsurance carriers are looking to share risk has moved from $100 million to no more than $50 million at any given location for a specific construction type. In other words, the capacity line is coming down, the cost of construction is going up, and the cost of insurance per square foot certainly isn’t what it used to be.

For developers, the line in the sand keeps shifting

One of the biggest challenges facing developers at the moment is balancing the increased cost of construction with the increased cost of using that type of construction.

Securing pricing that’s going to be consistent throughout the duration of a project is also hard to pin down. The market has recently seen some relief on the lumber side, coming down from $1,800 per thousand board feet to under $800, but suppliers aren’t able to guarantee prices even just a few weeks ahead of breaking ground.

It’s incredibly difficult for developers to project and tally their costs without knowing for certain the materials they’re going to be using, and then there are the insurance complications that arise once the materials are finalized. So there are multiple forces at work, pushing and pulling.

New reports just in

As I stated at the beginning of this article, frame construction is becoming ostracized by some carriers due to its perceived low levels of fire retardance.

Joisted masonry also raises underwriter eyebrows, as it’s basically a wooden framed joist and brick. So, when you hear that the largest insurer of multifamily residences in New York’s five boroughs is temporarily not underwriting any additional joist and masonry construction, alarm bells start to ring.

Sometimes the numbers sound quite arbitrary. But when carriers said 20 years ago, “We’ll only insure multifamily buildings newer than 1979” there was
an underlying reason. Asbestos and lead paint had stopped being used in multifamily buildings by that point in time.

When it comes to renovating older buildings, my feeling is that carriers are going to want to see a full architectural, engineering, and geotechnical report prior to underwriting a project. It’ll be expensive, but necessary, and will apply to all types of materials of construction.

Our firm has already seen this in relation to a client’s recent building renovation project in New York City. This was helpful because it was actually misclassified by the City as “joist and masonry” and the architectural report came back showing that it was “masonry non-combustible.” So that was an improved result with an immediate impact, saving the client around 15% a year on their premiums.

Of course, sometimes the structural engineering report is going to come back and say, “You probably shouldn’t buy this building.” But that’s just how it goes.

Optimistically speaking, carriers are always going to be the most competitive on project developments that use best-in-class materials. A steel and concrete apartment building is just as attractive to underwriters today as it was five years ago, so the escalation you’re going to see on your insurance rate is much slower.

Finally, agents need to bring together all of the up-to-date information they can about the development in question. Only then can they make a compelling case for their clients, answer any carrier concerns, and secure the best possible rates.

Jack Cowie IV is the Senior Vice President of Commercial Real Estate for Varney Agency.

This article was first published in PropertyCasualty360


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