What Does a Cyclone in Madagascar Have to Do With Rising Builders Risk Costs in the United States?

In February, another category 3 tropical cyclone hit the republic of Madagascar, the second largest island nation in the world. This is the third cyclone to hit the island this year, with the last one hitting 16 days prior.

While it’s not yet understood what the insurance ramifications of the cyclones in Madagascar are, it is an opportunity to explain how interconnected the insurance world is today. Another example is reported by Business Insurance that Storm Eunice, which pummeled the UK on February 28^th,  may cost insurance carriers more than $470 million. These losses will affect every aspect of property insurance across the world.

Insurance carriers utilize insurance too. One way insurance carriers can ensure large risks with multiple insurance buyers is by utilizing reinsurance. A reinsurance carrier provides more capacity to an insurance carrier’s balance sheet. When losses of this magnitude occur, it is going to cost reinsurance carriers a lot of money.

Reinsurance is a global offering. Swiss Re, Munich Re, and Berkshire Hathaway are some of the largest reinsurers in the world. David Fickling of Bloomberg reports,  “Reinsurers cover more than half the cost of insured losses from natural disasters.” Last year alone, Munich Re reports, “The industry paid out $82 billion in such losses last year alone.”

What does this have to do with builders risk in the United States? Builders risk is intended to provide property coverage for the entire construction team for a building under construction. The reinsurers who are paying for these natural disasters, whether it’s a cyclone in Madagascar, an ice storm in the United Kingdom, or forest fires in California, are the same reinsurers providing your builders risk policy for the projects under construction in every city in America.

As losses from natural disasters continue to worsen, so will your builders risk prices. The financial repercussions associated with Builders Risk pricing will continue.

Sources: Bloomberg, Business Insurance