The softening in the builders risk market over the last few years not only showed no sign of a turnaround in 2007 but has expanded into catastrophe-prone areas as well, leading players in the niche warn.

The softening market came back "with more of a vengeance in 2007," according to Rick Girden, managing director of the property construction practice in the Chicago office of Mercator Risk Services, a national wholesale insurance broker.

"Based on how insurers did in 2006, they all had very, very lofty budgets for 2007, and very few markets even came close to meeting their budgets. So there's pressure for the top-line growth," he said, explaining that pressure is coming from senior management and those putting up investment capital.

Mr. Girden also said that for the first time in a while, companies that had usually stayed away from construction risks have hired new people to write this business.

Builders risk insurance is property coverage put in place while a structure is being built. It can cover buildings and structures in the course of construction, as well as machinery, equipment, materials and supplies used.

Not only have new companies come into the market, but existing companies have expanded current writings, Mr. Girden said.

"There are a number of markets that have doubled or tripled their capacity this year just to take a larger share of the...risk," he said. "So we've seen a significant change in the standard markets."

One change that separates 2007 from other recent years is softening in catastrophe areas at risk for hurricanes, "which, up until about three months ago, had maintained a fairly hard approach," Mr. Girden said.

Similar to the coastal homeowners market, the industry began to reevaluate its exposure for construction risks after Hurricane Katrina and the other major storms of 2004 and 2005.

But unlike the homeowners market, capital is returning after two quiet hurricane seasons. "In the last month, there's over $500 million in new capacity coming into the marketplace," said Mr. Girden.

Bill Muir, marine vice president and national inland marine director at RLI, sees the same trends for builders risk inland marine exposures. He said that Florida and the Gulf Coast are still the toughest areas in which to write business, but, like Mr. Girden, Mr. Muir said the market in those areas is softening as well.

"Anytime you have two or three years where [hurricanes] hit, that means the market's really going to harden there. But it's amazing how, already, just two light hurricane seasons have made it so that a lot of companies are back writing risks along the coast," he said.

However, it's still not exactly a buyers' market in storm-prone areas, according to Mr. Muir, who noted that wind and flood deductibles--particularly in catastrophe regions--have generally gone up.

Explaining insurers' decisions to re-enter the coastal markets, he said carriers have short memories and are willing to take a chance.

Mr. Girden offered his own take. "I think...when insurers look back on the historical cycle for losses within the construction industry, they realized that, over the last couple of decades, the combined ratios were in the mid- to high-80s, which is probably one of the most outstanding classes of business within the insurance industry," he said.

He added that "what happened, probably early first-quarter [2007], after the results started coming out, a lot of senior company executives started focusing their attention on areas where they could capitalize on larger profitability, and construction was one of them."

Todd Rowland, senior vice president for construction specialty products and services at Zurich North America Commercial, said insurers can engineer coverages more easily with builders risk than with liability lines.

For example, he said insurers can look at the period of construction, and if a project has a short time frame, it will not be impacted too much by the hurricane season. "So there are things you can look at more specifically on a risk-to-risk basis" in builders risk, Mr. Rowland explained.

On the coastal builders risk market overall, Mr. Rowland agreed with Mr. Girden that there is plenty of capacity but said pricing in those areas is still expensive. "The biggest thing that's affecting both insurability and capacity is in those coastal states where flood and wind are a big problem," he said.

Conditions in the builders risk market also vary for commercial and residential risks. Mr. Girden said much of the competition and capacity are on the commercial side.

For commercial risks, "we are seeing rates right now that are getting close to 1999-2000," when they were at historic lows, he said, but he noted that rates have not reached those levels yet.

Mr. Girden's biggest concern in the commercial market is that some of the new capacity coming in might not truly understand the risks and might try to underwrite construction the way they write other unrelated markets.

"And that's ultimately what ends up happening," he said. "They'll do fairly well at certain classes of business, but because they want more, and they're being pressed for more, they'll expand their base to assuming other risks and other exposures, and ultimately that's where they fail.

"That's the one thing that's continued to plague the industry."

On the residential side, Mr. Girden said insurers have backed off of risks in part because of the problems associated with the housing market in general. He said the insurance industry has typically avoided liability risks associated with the residential market because of the construction-defect issues, but now carriers are backing off of builders risk as well.

Specifically, Mr. Girden said the financial collapse of many lenders, as well as projects that are considered overpriced prior to them even starting, have given insurers cause for concern.

"A lot of insurers are backing off of that because they are very concerned with insuring something that is not going to sell, and then [it] becomes a financial liability for the insurer in the event that, three quarters of the way through, the client decides that he can't sell it and abandons the project, and then there's some pressure on the insurers to stay on the exposure."

Mr. Girden added that, on the residential side, there is a lot of inventory--much of it vacant and deserted. "One insurer told me yesterday that the top person at this very large E&S company will not allow any of their underwriters to write any homebuilders unless the executive vice president of this company personally reviews and signs off on the financial statements. And that is just unheard of. But that's how concerned the companies have gotten."

However, John Mentz, executive vice president of construction for Arch Insurance, said he does not believe the slumping housing market has greatly affected the insurance industry. "Honestly, I'd say it has little impact," he said.

Mr. Mentz added, "I haven't seen that be a big driver of insurance market terms and conditions. I think the insurance market terms and conditions are driven by the insurance market cycle, not exactly the economic cycle."

He did, however, note the effect of the market on contractors themselves. "There's much less residential work out there, and the impact on those contractors has been significant."

Mr. Girden expects the market to continue softening through this year, although he conceded that a couple of catastrophic events would cause insurers to slam on the brakes and head back toward a hard market.

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