Construction Industry Faces ‘New Age’ Risks Along with Strong Growth Outlook

The global construction industry’s risk landscape will be transformed by radical changes in design, materials and processes as the industry enters a sustained period of strong growth.

The post-Covid-19 growth will be driven by government spending on infrastructure and the transition to a net zero society, according to experts from Allianz Global Corporate & Specialty (AGCS) in their report, Managing The New Age Of Construction Risk, which explores risk trends for the construction sector.

Meanwhile, the construction risk landscape will be affected by the move to more sustainable buildings and infrastructure, the upscaling of clean energy facilities and the adoption of modern building methods. These challenges will add to currently-stressed supply chains, shortages in materials and labor, and increased costs, which all come against the backdrop of years-long tight margins in the industry, the report adds.

Current shortage of materials and skilled labor add to long-term challenges around new design, materials and building methods driven by sustainability and net zero strategies.

AGCS analysis of €11 billion worth of construction and engineering claims identifies top causes of loss by value: fire and explosion (26%), faulty design/poor workmanship (20%) and natural hazards (20%).

Construction companies need to improve cyber resilience and protect buildings sites against flash flooding and other extreme weather events driven by climate change. “Out of hours” water damage is a major source of loss.

“Covid-19 has brought about a new age for the construction industry,” says Yann Dreyer, Global Practice Group leader for Construction in the global Energy & Construction team at AGCS. “While construction projects continued during the pandemic, and further growth is to come, the overall environment has changed fundamentally.”

Dryer said cost-cutting strategies and new technologies and designs may well result in accelerated risks for construction companies and insurers alike. “Continued risk monitoring and management controls will be key moving forward,” he said.

Investments in infrastructure and energy, along with rising populations in emerging markets, support a growth outlook. The report maintains that a shift to electric transport will require investment in new plants, battery manufacturing facilities and charging infrastructure. Buildings not only will be expected to improve their carbon footprint, but will also require improved coastal and flood defenses, and sewage and drainage systems.

Governments in many countries are planning major public investments in large infrastructure projects. In the U.S., a $1 trillion infrastructure package touches everything from bridges and roads to the nation’s broadband, water and energy systems.

At the same time, the U.S. has announced plans to invest in a number of large infrastructure projects around the world in 2022 in response to China’s ambitious Belt And Road Initiative, which could stretch from East Asia to Europe.

Four countries — China, India, U.S. and Indonesia — are expected to account for almost 60% of global growth in construction over the next decade, according to the Allianz report.

Downsides of the Boom

The expected boom brings specific challenges in addition to benefits. In the medium term, sudden surges in demand could exacerbate existing shortages of materials and skilled labor, causing schedule and cost overruns. In addition, many in the industry may accelerate efficiency and cost-control measures if profit margins have been impacted in the Covid-19 economy, which can often impair quality and maintenance levels and increase susceptibility to errors, the report warns.

Analysis by AGCS shows that design defects and poor workmanship are among the leading causes of construction and engineering losses, accounting for around 20% of the value of almost 30,000 industry claims examined between 2016 and the end of 2020.

The enhanced sustainability and net zero focus will strongly influence the traditional risk landscape in the construction sector. According to the UN Environment Programme, buildings and the construction industry account for 38% of all energy-related carbon dioxide emissions. In order to cut carbon emissions, existing buildings will need to be refurbished and repurposed.

Additionally, the market will require new materials and construction methods, which may invite an increased risk of defects or create unexpected safety, environmental or health consequences. For example, the report continues, the increasing use of timber in construction has implications for fire and water damage risks. AGCS claims analysis shows that fire and explosion incidents already account for more than a quarter (26%) of the value of construction and engineering claims over the past five years — the most expensive cause of loss.

Upscaling Clean Energy

AGCS experts also advise that expanding clean energy brings new risks, too. Offshore wind projects are growing in size, moving further out to sea and into deeper waters, meaning the costs associated with any delays or repairs is increasing. Offshore wind farms, as well as onshore wind and solar projects, can also be exposed to serial losses. A design or manufacturing fault in a turbine, for example, can impact many projects.

According to AGCS, there have already been large claims from faulty foundations in solar parks and farms. Repairs to undersea cables can take more than a year. An offshore converter station alone can cost as much as $1.5 billion, comparable to an oil rig.

“Huge investments in green energy will mean larger values at risk, while the rapid adoption of prototype technology, buildings methods and materials will require close cooperation between underwriting, claims and risk engineering in-house, as well as between insurers and their clients,” says Olivier Daussin, Construction Underwriting lead in AGCS’ global Energy & Construction team.

Modular Construction

Ultimately, modern building and production methods have the potential to radically transform construction, transferring more risk offsite and incorporating greater use of technology. Modular construction in particular provides many benefits such as controlled factory-based quality management, less construction waste, a construction timeline cut in half compared to traditional methods, and reduced disruption to the surrounding environment. However, it also raises risk concerns about repetitive loss scenarios.

“There is an increased risk of serial losses with modular and prefabricated methods as the same part could be used across several projects before a fault is discovered,” Daussin explains.

The shortage of skilled labor in the construction industry is likely to further the trend towards offsite manufacturing and automation. At the same time, digitalization of construction creates cyber exposures, which engineering and building companies need to strengthen their defenses against.

Building Site Damages

Construction sites themselves also need to pay more consideration to mitigating the impact of climate-driven events, such as wildfires, flash flooding and landslides.

AGCS claims analysis shows that natural hazards are the second most expensive cause of construction losses, behind fire and explosion, accounting for 20% of the value of claims over the past five years.

Meanwhile, water damage continues to be a major source of loss during construction. AGCS says it has seen a number of surprisingly large losses from leaks from pressurized water or fire systems that go undetected or occur out of business hours, on weekends or during periods when site personnel are not present. Water leak detection and monitoring systems can help reduce the frequency and severity of water damage, mitigating expensive repairs and project delays.