Ep 136 - Understanding the insurance process for timber buildings

Intro (00:07):

Timber Talks is brought to you by WoodSolutions. Stay up to date with the latest in timber, the building material that is strong, safe, and sustainable. Here is your host, Adam Jones.

Adam Jones (00:20):

As timber products enter new markets, the importance of understanding and managing the insurance landscape really cannot be overstated. Ensuring mass timber projects presents unique challenges and opportunities, making it a critical topic for anyone involved in this innovative construction sector. Now in this episode, we're lucky to be speaking with one of the global experts on this topic. Michael Hastings from MD Hastings. He offers practical advice on achieving adequate insurance coverage in today's market. He explores the ways to improve insurability of mass timber buildings and discusses how the industry can handle major innovations on the horizon. Now this topic is super important if you've been in the space of mid rise timber projects. So, without any further ado, here is my conversation with Michael.

(01:07):

Thanks so much for coming on the podcast. Mike, can you start by telling us a little bit about yourself and the line of work that you're in?

Michael Hastings (01:14):

Sure. Adam, thanks for having me. I am a 40-year veteran of the insurance industry. I focus on construction and my superpower is with 40 years of paying attention to how insurance works for all parties involved, including insurers, design firms, contractors, owners, lenders, landlords, tenants, I'm able to consult on large and complex construction projects, working primarily with owners and contractors.

Adam Jones (01:52):

I’m keen to know Mike. It might be obvious to some, but it's always worth almost explaining it as if you like explaining to a 6-year-old. But how does the insurance market work? What is it and what are the levers that shift the insurance dial and the world that you see this through?

Michael Hastings (02:09):

Yeah, sure. If we look at property insurance, the challenge with mass timber is the property insurance which pays to replace the property. In effect, when you buy or purchase, an insurance policy, you are trading a known and manageable expense that being the insurance premiums that you pay plus any deductible, you assume in return for a promise by the insurer to pay a large amount that you couldn't recover from on your own direct physical damage to your building either during construction or after completion, that you would have no way of funding if you are unfortunate enough to have that occur. From the insurer's point of view, they collect premiums from all of their customers, all of their insureds. They also put substantial capital to back the premiums. So, in essence, an insurance company is going to have its own capital at risk equal to at least the same amount as the premiums they collect. And that capital determines how much they can write. That's both regulators and rating agencies because being able to meet their promise to pay, being able to fulfill the claims payment promise is the most important thing an insurer can do. Obviously if you have a big claim, a potentially business ending claim and the insurer is unable to fulfill their promise to pay, it would be disastrous for you at that point.

Adam Jones (03:49):

Gotcha. Can you get your thoughts on how drilling into three different building types, three different buildings, right? You've got a concrete standard building, how would that be looked at? Then you've got a pushing the envelope, innovative mass timber building, call it like 13 story, fully exposed, building in a seismic zone, something like that. And then you've got a four-storey low rise, partially exposed mass timber building. So just an off the cuff scenario, how would you look at these types of buildings and is there hesitancy or anything when you're looking at 'em?

Michael Hastings (04:26):

Yeah, and I may modify my answer to fit a little bit. If insurers are looking at a ported in place, concrete, building a tip up, precast concrete building, a light timber building, a steel frame building, they have over a hundred years of data of what it will cost. How badly would the building be damaged if it were subject to a flood, a hurricane, a fire, water damage, or any other peril. And they also know that there is a robust industry that knows how to affect those repairs because virtually every building on the planet is comprised of one of those types of construction. The challenge with mass timber is, although there has been large timber buildings that aren't made of composite elements, there's a little bit of experience with that, but not a lot of it. And for mass timber, there's virtually no usable data by the industry to say, what will it cost to repair this or replace it?

(05:48):

And keep in mind the insurer is also going to pay the resulting financial effects. If it's during construction, they'll cover your loan service because you're not going to turn the building over on time. There's other expenses they're paying, or after the building is complete, they're paying the business interruption expense, those expenses that continue, even though you're not able to charge rents, you're not able to have customers in your building because it's out of commission. So not understanding how much it will cost or how long it will take is a big issue for insurers. And quite frankly, it's keeping a lot of insurers on the sidelines because they don't know how to insure it. They don't know what to charge.

Adam Jones (06:42):

So, it sounds like for a traditional building and the way most projects are run as a project team, you don't really have to think about it, right? You, it's just something that just gets done. But then for these buildings, whose responsibility is essentially to fill this gap and what needs to get done to get adequate insurance for a project?

Michael Hastings (07:04):

Yeah. Well, and it really falls on the shoulders of the people who wish to build and own mass timber structures. And let me tell you why. It's less than 1% of buildings. New buildings are mass timber, although it's growing exponentially. When you're small, you can grow exponentially. It's very exciting. But no insurer is obliged to ensure mass timber and look at some other challenges that the industry has risen to. Way back in the previous century, pollution insurance arose when we found out about asbestos, which we loved, that made things fireproof. It was you wanted it everywhere you could get it. We found out it causes cancer. The industry found a way to ensure against that risk. We had terrorism insurance, which is a relatively new risk. We have cyber threats, which are a relatively new risk. The insurance industry has risen to every one of those.

(08:14):

But the key thing is if you're an insurer, virtually every client you have is exposed to those risks. If you're an insurer anywhere in the world today, it's very unlikely that many of your clients will be exposed to mass timber. So, you could live a long and healthy career as an insurance company without ever underwriting mass timber, which is why it's incumbent upon the mass timber industry to educate insurers and make them understand. And importantly, even the insurers that write light frame, because it has been very linear in the development, and they were saying this three years ago when I became involved with mass timber or interested in mass timber. Timber is wood, wood burns. We are leery of it, and you still hear that repeated. The thing is a light frame building one, they're not nearly as big as mass timber can get. Two, you pretty much assume that your light frame is going to go up in flames and you're going to rebuild it, and the pricing reflects that.

(09:35):

The thing about mass timber is insurers know that it is much more resilient than light frame, but they don't know who's qualified to assess the damage, structural damage, let alone cosmetic damage. How can they test who's going to fix it? How will we test the efficacy of the repairs and how long it will take? So what I've seen as I've drilled down with the industry, gotten to know the industry better, and especially at the International Mass Timber Conference in Portland that we both attended is you listen to the teams talk about how they overcame challenges of how to build fascinating designs, how to overcome the challenge of getting code approval, which has been a huge hurdle for mass timber everywhere that it's built. What's necessary now is take that same talent and turn it on. How are we going to repair this building once it's damaged by fire or water damaged or earthquake windstorm?

(10:50):

And actually, timber does pretty well in an earthquake and a windstorm, it flexes. That's not bad. But when it is damaged, we'll be waiting 50 years for usable data, and nobody wants to wait that long. So, what we can do is model it and present insurers with an industry and with design and construction teams that have put the thought into this that is necessary to grow comfort, that it's a good risk that an insurer who does insure mass timber buildings will not see a substantial dent in their capital because losses have far exceeded the collected premiums.

Adam Jones (11:41):

Yeah, that's amazing. And from a practical point of view on a project, how can they approach the insurance industry? Do they need to bring them on the journey from the very start of projects or how should they be consulted? Basically, it seems like it's a new thing, I guess when you're innovating with new materials relative to what the status quo is.

Michael Hastings (12:01):

So, if you've got a team building today, because this is at two levels, there's industry wide and then there's What would I do if I were building mass timber today? One, you're exactly right. You need to include your insurer as a partner, and the first step in that is to look at your insurance broker relationships. Keep in mind, as we said before, concrete light frame, timber, steel buildings, insurance brokers have been placing policies for that exposure for years. There's a simple, you can almost go on autopilot going to the markets that you deal with to get insurance for those risks for mass timber that doesn't exist. So, the first step is to make sure that your insurance broker understands the complexities or at least appreciates the complexities of mass timber and the repairability issue. It's also important to look at the insurers that you may have done business with, the insurer that has done all your projects so far, that's done all your buildings so far.

(13:22):

If they don't understand mass timber, they may make an accommodation for you if you're a good customer, but they may not be the appropriate insurer in terms of cost, in terms of terms and conditions for the project. So, you really want a broker who is able to educate the insurers that you do know and access insurers that maybe you don't know in order to very early gauge their interest and get their input for what they know about mass timber. They will have a lot of questions. They'll perhaps have some guidance, and by involving them early and giving them a chance to provide input, the team can come up with an appropriate response that makes the insurer comfortable. So I quickly add, if your insurance broker doesn't understand mass timber, but they understand you, they understand your business and they put in the homework to learn about it, they could do a great job if they seem unwilling or unable to do that, you may want to look at changing your broker relationship and the time to undertake that is as early as possible at the same time.

(14:48):

So, we've listened to insurers, we're cultivating their interest, we're growing their comfort. The design team and the construction team, the same thing, and I know you've had other discussions about that. You can have a very partnered approach and you can have a traditional design bid build. I would say that for mass timber, whatever size of your project, it's very important to have early teamwork and effective teamwork between your design team, your builder, your manufacturer, your installer, to really contemplate all of these issues about constructability protection during and after construction and repairability issues. And that's the team you want at the right time, at the right place, put them in front of insurers, and there are a lot of checklists that are available to say, all right, we're going to fill out this 23-page mass timber addendum that answers every question any underwriter could ever have about the project.

(16:08):

Think of that as a reference. And remember that insurers, you've got underwriters, you've got loss control engineers, you've got senior management, you've got to win over the hearts and minds of people that are going to go to bat for you and your project. So, by all means, fill out that 23-page form, but it's important that you understand and you're able to convey this is why this is a good risk for you, this is why this is a good project. Our building is going to have lost control if something does go wrong, we're going to catch it early and we're going to fix it quickly. So, we are a good risk. We're a good customer for you, the insurer, and an important thing to remember is to incorporate all of this into the project. It's not a matter of adding a silo or, as they've been called, a cylinder of excellence.

(17:11):

That's just going to focus on risk management, and you have one person talking to insurers. One, it could be very expensive, two, it's not going to work. The key is all of these talented people that are working to design and plan the structure and the building and the logistics, have them think about how do we protect it from a claim? What would happen if we did have a loss? How would we fix it? It doesn't take that much more time. It's simply a matter of mindset and redirecting it. And there's nothing more impressive to an insurer than a cohesive team that when they ask questions, they're able to answer, yes, we've thought about that. If there is water damage, this is who we're going to call. This is what we're going to do.

Adam Jones (18:04):

Yeah, that's great advice. And you've mentioned a few things that would be on their mind from a technical point of view, from a risk point of view, what are the big ones and what are the sort of things that the design team can be proactive in thinking about in helping the insurers understand their building?

Michael Hastings (18:22):

In answering this, I need to explain. I made the conscious decision not to be an engineer, but as I've toured buildings and thought about, all right, what if this beam is compromised because of a fire? This post, this panel, something that has occurred to me is because of the relative modular nature of mass timber, you certainly have a decision to make early on, can we repair this in place, or shall we just replace the entire element? Because it seems as though the construction method would lend itself to replacement as a worst-case scenario pretty easily. So, thinking about that in advance and incorporating it into the design, all right, we make our connectors. How can we create them in a way that we could, if we had to shore up the work that wasn't damaged, the part of the structure that wasn't damaged and replace the damaged element, faulting that, think through the process of who's qualified to assess the damage, to prescribe the in-situ repair and to do the work effectively.

(19:49):

And I think that's where the industry, the larger mass timber industry can really help, and I'm working here to try to make that happen. All of the testing we've done, the shake tests, the burn tests, all we've done to prove the resilience of mass timber, that everyone gets out alive, the next big step is to build a large mass timber structure, damage it, repair it, and demonstrate the repair process in the real world and have some more concrete answers to those questions. We're not going to have actuarial damage, but we can certainly have practical testing that can be extrapolated and can inform a more robust insurance market.

Adam Jones (20:42):

One of the things we do on the podcast and the industry in general, we're always highlighting the potential costs improvements when it comes to speed of construction, but to be fair, we also got to balance it the other way and find out the things where you're paying a bit more on. In this case, for insurance you have, I mean, it might be a difficult answer, it depends on the project, everything there, but just a rough guide of magnitude relative to the status quo of cost differential developers and project owners are looking for in these buildings.

Michael Hastings (21:11):

And I'm going to give you a very evasive answer because that's all I ever get.

Adam Jones (21:16):

I'm sure you've never had this question before, right? It's one of those,

Michael Hastings (21:21):

It's all the time. And the thing about insurance and construction, it's always changing, but in essence, for those insurers who will write mass timber, you have the price for concrete and steel. You have a price that's maybe three or four times that for light frame mass timber is going to be in the middle and it's going to be a lot closer to light frame than it is to concrete or steel. But the thing to keep in mind is, in my experience, the insurers that are writing it, they're really guessing and they're making a commitment in large part because they have a contractor client that's doing enough mass timber that they've decided to make a market, or they've got a customer. Google likes mass timber. I'm pretty sure they were able to get their insurer's attention. No direct knowledge, but if your mass timber building is 0.001% of a 40 billion worldwide exposure, your insurers, you're going to have their attention.

(22:46):

The key is to provide not only data, to bring the rate down. Everybody says in their heart of hearts, we think it's more expensive than it has to be. I am in no position to say that's true. I respect that. I can see that it charters everybody got out safe, but there's no data. And in 40 years of getting insurers to do what I want them to do, both working for an insurer, working as a broker, and now working as a consultant, you've got to have the data. There's too much at stake. You've got to have the numbers to back it up.

Adam Jones (23:30):

Great. What do you see as the future of the industry, Mark, going forward? There's a lot of change you could imagine whether it's technological, you got climate, you got all these sorts of things happening. What is the future of the industry, in your opinion?

Michael Hastings (23:45):

Yeah. You mean mass timber in particular or yeah

Adam Jones (23:48):

Yeah. Mass timber. It's an open question to take it how you like, but mass timber and also how it relates to what you are doing as well.

Michael Hastings (23:56):

Yeah. Well, I like it and the way I got involved, well, we don't have time for that. I've been in mass timber structures, and I agree that they're absolutely beautiful. There's a certain peace of mind that's in place. It's renewable, which you have to like. I think part of the solution is reminding insurers of their goal to combat their corporate goal, to combat climate change, to promote sustainable solutions, and that's really one of our biggest levers. And then look at the actual lumber industry to see if they can push these studies in conjunction with universities, with other parties. I would love to see mass timber gain status that it is as common as other building types. Time will tell, and the challenge right now is I may be straying, but the challenge is what we've got is anecdotal evidence, and you've got some really scary anecdotal tales of losses.

(25:18):

The sky building in London, you may have heard there's undetected water damage of the roof is going to be a million pounds of damage just because the cladding on the roof let 'em down. If we increase that body of knowledge, gain acceptance, start building data, and actually prove that mass timber is not only resilient at time of loss, it's also repairable. I think we could very well see that it becomes commonplace, and it won't take well. All projects should have a team effort, and all projects should involve insurers early, but it won't have the dire need that it does once everybody figures it out.

Adam Jones (26:12):

To create a note to end it on. Mike, if people want to find out more about yourself, Michael, if they want to learn a bit more about the topic and get support, where should they go?

Michael Hastings (26:20):

Yeah, I'll tell you, an excellent resource is the Mass Timber Insurance Playbook, which was written by Jim Gling and Philip Callow in the UK. The original document does a great job of discussing the steps that I've gone over and more of how a team can get the best insurance program and the best risk management for their project over the life cycle. I'm working on the US version. The reason for that is there's very different legislative requirements. The way a project is conducted in the US is quite different. In my understanding, Australia is very similar to the UK, so I would very much recommend your base. Anyone building with mass timber in the UK should access the Mass Timber Insurance playbook. I'm happy to report that there's a version for Ireland that's underway, is catching fire, because the original authors, no pun intended, the original authors did a great job of getting into the detail of how to understand mass timber from the insurers' point of view so that you can get the insurance.

Adam Jones (27:43):

Amazing. Yeah, it's a very important topic and it's been phenomenal getting to learn from you today, Mike. So, thank you so much for coming on the podcast.

Michael Hastings (27:51):

It's my pleasure. Thanks for having me.

Adam Jones (28:04):

You've got a question on wood. There's actually expert advice option on the WoodSolutions website, so you can go out there and ask the question, and an expert will come back to you and give you the answer that you need.