In the construction industry, rising interest rates and inflation concerns have added yet another layer of complexity to the challenges that builders face. Speaking to Insurance Business, Scott Gilmour (pictured), partner at Apex Surety & Insurance, a brokerage specializing in construction risks, said that economic shifts are impacting insurance for multifamily construction, particularly wood-frame projects, which have seen considerable fluctuations in capacity and pricing.
Gilmour explained that while many seasoned construction clients are accustomed to the variability in insurance pricing, developers in the space may be newer entrants, particularly with a growing national focus on home building, and may not be as familiar with the market.
“A lot of our construction clients have been in their industry for a long, long time,” he said, which gives them an understanding of the cyclical nature of insurance pricing. Developers, on the other hand, can be more transitory, leading to a gap in knowledge regarding pricing, especially for more complex projects like wood-frame multifamily constructions. However, Gilmour believes the market has begun to stabilize recently.
“I think that the market has... levelled off to some degree,” he said. “We’re certainly seeing a little bit more interest from insurers,” he added, cautioning that ongoing pressures remain, particularly due to the cost of rebuilding after losses.
Insurance companies are still grappling with the increased expenses of reconstruction, which have exceeded initial pricing assumptions. “It’s a lot more expensive to rebuild things than perhaps they had priced in,” Gilmour explained.
Wood-frame construction, specifically, has long been seen as a more challenging class for insurance, and, during the hard market, insurers began limiting capacity for these projects. Gilmour recalls when markets were severely limiting capacity on wood-frame insurance deals, requiring many more participants to fill out capacity.
“We were having to put a significantly larger number of markets just to fill out capacity,” he said. “I think there’s more pressure to grow right now, making that less of the case.”
The hard market conditions of 2019 marked a turning point. Prior to that, Gilmour explained, the focus was on growth during a “soft market” period, but the sudden shift forced underwriters to reconsider their strategies.
“Suddenly, they thought, ‘Oh man, we actually have to make money,’” Gilmour said, emphasizing how insurers began scrutinizing their books and reducing exposure in high-risk areas like wood-frame construction.
When asked about how the influx of new entrants into the insurance market could affect long-term sustainability, Gilmour was cautious.
“It’s a question of their expertise,” he said. “The question is always, how much do they know in terms of what they’re getting themselves into.”
A notable trend in construction insurance is the growing threat of vandalism and contractor defaults.
“Vandalism, in particular... is a growing issue,” Gilmour pointed out. In response, Apex focuses on educating clients about the importance of protecting their projects, stressing that their reputation is at stake.
“It’s your reputation, at the end of the day, that’s on the line,” Gilmour said. Insurers expect builders to take proactive steps in mitigating risks, with many of these mitigation strategies spelled out in the form of policy warranties - fence warranties, watchman warranties, and CCTV warranties among them.
“There’s an expectation from insurance markets that you’re going to take advantage of those mitigation efforts,” he explained.
Building in areas with high crime scores presents another significant challenge for underwriting projects. Gilmour, operating in Winnipeg, said the city’s varied crime landscape is well recognized by insurers, with some companies outright refusing to write policies for certain neighbourhoods.
“A number of insurance companies won’t write in certain areas of Winnipeg just because of the crime scores,” he said. For Apex, navigating these challenging areas requires a careful balance, as they prefer to work with developers who align with their business model and approach to risk mitigation.
Ultimately, while the market may be easing in some areas, significant hurdles remain. From fluctuating pricing to increased competition and evolving risks, Gilmour emphasized that careful navigation and expert guidance are crucial to ensure that both builders and insurers are prepared for the challenges ahead.
“Taking proactive steps to reduce risk is fundamental in the construction and development spaces, and we value our partnerships with many clients who share our approach,” he added.
