Engineering/Construction Trends

As construction projects become bigger and harder to fund, market challenges mean many insurers are exiting the engineering sector. Regulatory scrutiny and socio-political uncertainties threaten investments and project delays impinge on contractors’ expenditures. Add to the mix the strain of new technologies and growing cyber threats, and it’s tempting to sound “retreat”. But there are rewards for staying the course, explains Chris van Gend.
Chris van Gend
Many insurers are exiting the construction sector or scaling back their offerings. The past year saw many losses from fires, mechanical failures and natural catastrophes, including the Hidroituango dam collapse in Colombia which is estimated to be more than $1.2bn1 and which may prove to be the largest construction loss in history. The sector’s problems are years in the making: growing portfolio volatility; years of declining rates; and widening coverages. Construction is a long-tail business. Today’s premium is from projects written several years ago.
Construction projects are far more global than in the past, as sizeable infrastructure projects are moving more to international companies. Equipment is being sourced internationally and  construction site risk management is improving – a positive development from both a cost perspective and from the standpoint of a continuous process improvement, knowledge-sharing strategy among contractors. But there are downsides: contractors operating in new territories must comply with new regulatory environments, building codes, etc. which can lead to delays, pressuring schedules and creating overruns. Political uncertainties can result in project delays and even cancellations. Projects will doubtless continue, since developing countries need continuing infrastructure investment and developed countries need to replace aging infrastructure. Uncertainty is the enemy of investment, however, so we’d like to see a more stable socio-political environment.
Business interruption (BI), contingent BI, supply chain risks – each has had significant insurance coverage in property markets for years. Construction DSU insurance take-up has increased as customers see the need to protect completed project revenues – often driven by lenders – while, at the same time, coverages and the insured parties have broadened. BI losses can be substantial, but construction risks are volatile because there is greater uncertainty regarding rebuild-times and the project completion. DSU exposures are much more difficult to assess. Thankfully, DSU losses are rare, but they can be significant. In 2018, AGCS had enough DSU losses to erode several years of DSU premium. Engineering portfolios for many carriers are much smaller than property books, so these covers bring a level of portfolio volatility to support losses and, since projects are non-recurring, there’s no chance to recoup losses at renewal.
The construction sector is slow to adopt innovative technologies, but we’ve seen them start to gain traction. For example, building information modeling (BIM) – 3D model-based technology that allows for more efficient planning, design, construction and management – is replacing traditional 2D design methods and may change how projects are designed and delivered. But increased reliance on technology increases cyber threats – an exposure much less focused-on in this sector than in others. We help customers become aware of new technologies, but simultaneously educate them about new cyber threats and the importance of adding cyber risk management to their risk registers. Cyber awareness is key in today’s world and we offer a variety of coverages in the event of a cyber incident.
Read this article in Global Risk Dialogue. Appearing twice a year, Global Risk Dialogue is the Allianz Global Corporate & Specialty magazine with news and expert insights from the world of corporate risk.

SOURCES

1. Insurance Insider, Ituango Dam loss $1.2bn and rising. October 9, 2018

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