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Developments and issues in the construction and engineering insurance and reinsurance markets

Published

2020

Tue

23

Jun

 

 

 

 

 

 

 

 

 

Chris van Gend, Global Head of Energy & Construction, Allianz Global Corporate & Specialty (AGCS) and Robert Ter Morshuizen, Head of Property, Engineering and Construction Africa  

At AGCS we currently see a number of developments and issues shaping the construction and engineering insurance and reinsurance markets.  First, and foremost, is obviously the ongoing impact of the coronavirus pandemic. The global lockdowns and resulting shuttering of many engineering and construction sites are likely to lead to aggravated risk in a number of areas.

The potential for losses from events such as fires, vandalism and theft and flooding not only remains when sites have been idle or largely unoccupied, it can even be exacerbated. In addition, AGCS has a number of active claims where the replacement time of spare parts has been pushed out due to Covid-19 plant stoppages and/or the inability to get repair crews into countries to carry out the repair work.  Both instances are leading to increased claims costs.  

At the same time, restarting projects after shutdowns can also result in an uptick in loss activity.  Inadequate/postponement of machinery or equipment maintenance during a shutdown can cause further disruption at the worst possible time, when a project is finally able to restart. Testing and inspections should be a critical focus of loss prevention prior to reopening any project site.

The current heightened risk circumstances, coming off the back of years of challenging results due to the prolonged soft market, have caused underwriters to reassess again what terms and conditions are appropriate for large, complex risks.  Policy language is being re-evaluated to ensure intention matches wordings and price, and deductibles are being more closely considered in accordance with an insured’s risk profile. 

At AGCS we are working with clients to mitigate risk to our insureds’ assets due to shutdowns and restarts.  All our underwriters and engineers are focused on the technical aspects of closures and re-opening. Our risk consulting team has created industry-specific guidance addressing loss prevention considerations. 

Concurrently, everyone will be watching closely to see how quickly the construction and engineering industry resumes.  Many governments plan significant spend on infrastructure in their post Covid-19 economic recovery strategies.

Construction spending is a good way to create both jobs and demand for local materials and equipment, so a number of countries have announced a refocus on infrastructure expenditure to help stimulate their economies.  This presents significant opportunity for insurers with a continuing appetite for risk.  

However, the impending global economic downturn following Covid-19, alongside a number of macroeconomic factors are also impacting the landscape.  Sustained low interest rates, oil price volatility, continued US-China trade tensions and increased litigation make for challenging market conditions.

Trends outside of the pandemic

Large engineering and construction projects have changed beyond recognition in recent decades. Sites are now much larger, more complex and more expensive, meaning more is at stake if things go wrong.  With larger sums insured – projects with values of $5bn to $10bn are not unusual – claims can be in the tens of millions of dollars.  

Large projects can take as long as five to 10 years to complete and involve contractors and suppliers from around the world, making them vulnerable to sanctions and trade disputes. For example, sudden and large increases in US import tariffs can add millions of dollars to claims for plant equipment and machinery imported from countries such as China.  

The continuing growth of renewable energy projects also brings challenges as well as benefits.  The rising pressure to move to reduced-carbon economies will result in new business models, investment and opportunities.  However, as the demand for green energy has increased, solar and wind projects are becoming larger, the locations more remote and wind turbines bigger – with blades as long as a football pitch!  Offshore wind can be a particularly challenging area for risk assessment and any subsequent claims, as turbines can be difficult to access.  

As larger, more complex, higher value projects continue to emerge, the need for more complex insurance solutions will increase but the insurance market for these risks has contracted.  Following years of challenging results, a number of carriers have exited certain segments or the construction sector in its entirety and the number of markets with an appetite to write, and lead, large complex projects has reduced.  This is leading to some significant terms and conditions changes in a number of segments (such as heavy civil engineering risks, oil and gas plants and complex power projects). 

Claims insights

A recent AGCS analysis of more than 13,000 engineering insurance claims over a five-year period worldwide identified trends in engineering and construction projects, driving some of the largest losses ever.  Fire (not including wildfire) was the biggest cause of loss for engineering claims, accounting for over a quarter of losses by value and causing in excess of $2.35bn of insurance losses in five years. Natural catastrophes are another source of large claims. For example, storm damage is the second biggest cause of loss by number, accounting for one in 10 claims. 

Defective product and quality control losses are the single biggest source of engineering claims by frequency, and the second largest by severity, according to this AGCS claims analysis. There are almost three times as many defective product and quality control claims as storm claims. For example, two major power generation claims — $200mn events — were caused by defective welding. 

New technology

As large engineering and construction projects become more complex, assessing risks has become much more difficult.  Similarly, if things do go wrong, it is also harder to investigate claims and establish the ultimate cause of loss.  However, insurers have an increasing array of new technology at their disposal to offer support to construction and engineering clients.

AGCS has recently utilized drones, laser scanning, and computer modelling to determine the root cause of a machinery explosion at an inaccessible site. Drones and satellite imagery were also used to assess engineering claims after the wildfires in California.  And AGCS is currently coupling 3D topographical data from drones with hydrogeological modelling software and rainfall simulation data to predict flash flooding risk on construction sites.

 
Source: Allianz Global Corporate & Specialty (AGCS) Africa
 
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