Mitigating risks in construction projects
Companies around the world are accelerating their commitments to net-zero emissions by 2050. While the construction sector is playing its part by switching to sustainable energy and adopting modern building methods, the move towards carbon neutrality will likely see a significant shift in the risk landscape, and the need for greater collaboration within the insurance industry to help underwrite new risks.
A shifting risk landscape will see radical changes in design, materials and construction processes, as well as the deployment of new technologies. While the latter can bring many benefits to the construction industry, it can also bring new risk scenarios such as potential defects, unexpected safety or environmental consequences.
As the insurance industry makes the transition to a more sustainable future, Allianz Global Corporate Specialty (AGCS) is supporting clients across the construction sector in their sustainability efforts, whether it's building green hydrogen facilities, sustainable construction projects or offshore wind farms.
For both investors and consumers globally environmental, social, and governance (ESG) issues are a top concern, with a certain level of ESG reporting required among various jurisdictions.
While companies work towards meeting carbon reduction targets, there will be a need for greater collaboration between underwriting, claims and risk engineering as well between insurers, brokers and clients to help underwrite what can be prototypical risks.
The roll out of new technologies can bring new risk scenarios, such as potential defects or unexpected safety or environmental consequences. For example, using modular construction methods can mean less construction waste, shorter timelines and reduced disruption to the environment; however it raises risk concerns around repetitive loss scenarios.
The 2023 Allianz Risk Barometer highlighted that the top five risks facing engineering and construction companies are business interruption, natural catastrophes, the energy crisis, a shortage of skilled workforce and macroeconomic developments.
It ranks business interruption (BI) and supply chain disruption as the second top corporate risk. Higher prices for energy as well as increased costs, and in many cases the scarcity of raw material due to logistics, shipping and supply-chain bottlenecks means the likelihood of losses in property damage and business interruption is significantly higher than before the Covid-19 pandemic.
“The biggest issue is whether organisations have the ability to transform their supply chain with local reinvestments for example or partners in safer geopolitical regions,” says Marianna Grammatika, regional head of risk consulting at AGCS.
Furthermore, the costliest cause of loss in the construction sector is fire and explosion, accounting for 27% of the value of claims analysed by AGCS over a five-year period, while natural catastrophe claims account for almost a fifth of claims and are the most frequent cause, totalling 18% by number.
Indeed, construction companies have taken the appropriate steps to ensure fire safety, however they can be difficult to implement due to the nature of the work being carried out. For instance, the application of heat with equipment like hot tar boilers or the generation of sparks during leadwork and grinding. Therefore, undertaking these activities in the vicinity of combustible materials increases the potential for a loss event.
Looking ahead, the construction industry's long-term future outlook is positive, however at this present moment it faces a number of challenges, such as climate change and the rising cost of key equipment and materials and compromised supply chains.
"2023 is likely to be another heightened year for BI and supply chain disruption, as companies navigate uncertain geopolitical, economic and climate risks, as well as long-term transformations, namely digitalisation and decarbonisation," says Georgi Pachov, head of portfolio steering and pricing at AGCS.
“Businesses are now more vulnerable following recent macroeconomic turmoil and the war in Ukraine, which triggered shortages and price increases in energy, food and certain raw materials."
As the sector adapts to the changing climate, new coastal and flood defenses will be required, as well as sewage and drainage systems. Additionally, commercial buildings and plants will need upgrading to protect assets from storms and floods and ageing infrastructure will need to be upgraded to withstand extreme weather events.
For the insurance industry, collaboration with industry players on two key areas, innovation and exposure, will be vital to support the construction sector in years to come and as the risk landscape continues to evolve.