Developers: Understand Project Data And Analytics For Better Insurance Results

If there is one thing insurers don't like, it is uncertainty. But in a time of looming inflation, labor shortages and coronavirus-influenced changes, commercial real estate is rife with unprecedented uncertainty. This complicates developers’ ability to find the best coverage for their projects.

The solution, according to experts at Aon Risk Solutions, is straightforward: Developers need to demonstrate that they understand their risks by providing carriers or brokers with thorough, accurate and up-to-date information about their projects. Aon, which provides risk management and insurance brokerage services, is intimately involved with clients in this process. 

“There are a lot of unknowns in today’s economy,” said Brian Hearst, managing director and a broker for the Aon Construction Services Group. “It's kind of a Wild West right now with all of these variables. The problem for developers is getting the return on investment to look right when their construction costs have gone through the roof.”

The stressors facing the CRE industry also unnerve insurers, who are facing challenges of their own.

“We’re seeing a big exodus of carriers from the Northwest region,” said Kathryn Swazo, a vice president and account executive with Aon's Construction Services Group. “There's capacity issues, and they just don't want to be involved in insuring many construction projects right now. They've taken a beating on some of these projects.” 

Adding to these complications is the growing social unrest in some cities, including in the Pacific Northwest, where Aon Risk Insurance Services has a regional office. Insurers who were already wary of the economic conditions are now doubly concerned about backing projects in some of these areas. 

“We're having a pickle of a time trying to get extensions,” Swazo said. 

So how can a CRE company calm anxious insurers' nerves? The answer, Hearst said, lies in demonstrating to carriers a complete understanding of all the risks surrounding a project and showing clear steps for how to address them if or when they arise.

“It's an information game,” Hearst said. “In today’s more competitive marketplace, the more information my client can give us, the more effective we can be and the more competition we can create in the marketplace to get the client better terms and conditions.”

The good news, Hearst said, is that developers already possess much of the risk-related information carriers want to see because they routinely collect it when getting projects off the ground. This ranges from geotechnical reports and documentation of the steps they are taking to mitigate site risks to information about their general contractors. 

Of course, a developer will not have all pertinent information at its fingertips. This is where a company like Aon can help clients assess threats that are out of their direct control. 

“We have always looked at things like flood and earthquake risk,” Hearst said. “But we can also run a political risk report ahead of time and be able to discuss this with underwriters, because they're really running scared in certain cities.”

Fortunately, most risks are more mundane — if still expensive — and a carrier likes to see that a developer has a plan to mitigate them.

“Half the losses that builders risk experiencing are inevitably at about 80% completion,” Hearst said. “That’s when someone hits a charged waterline on the fifth or 10th floor, and all of a sudden you have multiple millions of dollars in water damage that has to be cleaned up and repaired. Carriers are looking at what mitigative measures the contractor and the developer are taking to prevent that. That's really critical.”

A Different Market Today

An Aon study of the coronavirus's impact on risk management and insurance practices found that, prior to the pandemic, 66% of real estate and construction companies didn't have a plan in place to deal with a major health crisis. Most said their organizations proved resilient during the pandemic, but nearly 40% agreed that they would have benefited from more preparation, an acknowledgment that things have changed dramatically from the pre-pandemic environment.

“It’s a different market today,” Swazo said. “Real estate developers are really having to rethink, ‘How are we going to build this building?’ Is it just going to have small workspaces because of work-from-home arrangements and companies only need smaller spaces? It's a matter of trying to stay ahead of the trends and determining what they are looking for. And it's just a big unknown right now.”

Liability insurers, too, are looking for answers. One prevalent option involves an arrangement where the insurer shares premiums and losses with other insurers to reduce its own risk and free up capacity to deploy across other projects.  

“One thing that we're seeing is more liability insurers are sharing coverage limits to meet capacity in the builders’ risk markets,” Swazo said. “Our carriers are sharing the risk today like they never have before.”

One way for a developer with multiple projects underway to manage today’s challenges, Swazo said, is to consider a master builders risk program to address as much of the work as possible. That can allow the developer to negotiate a better deal with the insurer, as opposed to insuring one-off projects.

But in general, success for developers still comes down to their ability to gather information thoroughly and use it wisely, and that extends well beyond insurance matters. 

“I tell clients, ‘Are you in touch with legal professionals in your state who understand its labor laws, construction laws? Are you speaking to accountants who understand how your state works?’” Hearst said. “They need to have a core of trusted professional advisers. Then, from an insurance standpoint, we can advise them ad infinitum.”

This article was produced in collaboration between Aon and Studio B. Bisnow news staff was not involved in the production of this content.

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