Allianz: Construction companies to see robust growth and “new age” risks post-Covid

“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. The industry faces new challenges around supply chain volatility and spiking material costs, skilled workforce shortages and the heightened focus on sustainability. In addition, the accelerated deployment of cost-cutting strategies and implementation of 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. Together with our clients, we will help manage these challenges as AGCS is committed to the construction industry as a key target sector for our growth initiatives.”

Global top 10 construction markets see continued shift to emerging markets, with China and US clear leaders in 2030. These 10 markets are expected to represent two-thirds of global output in 2030.

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The strong growth outlook for the sector is based on a number of factors, such as rising populations in emerging markets and significant investment in alternative forms of energy such as wind, solar and hydrogen, as well as power storage and transmission systems. The shift to electric transport will require investment in new plants and battery manufacturing facilities and charging infrastructure. Buildings are not only expected to improve their carbon footprint, but will also require improved coastal and flood defences and sewage and drainage systems in many catastrophe-exposed regions in response to more frequent extreme weather events. At the same time, governments in many countries are planning major public investments in large infrastructure projects to both stimulate economic activity after the pandemic crisis and drive the low carbon transition. In the US, a $1trn+ infrastructure package touches everything from bridges and roads to the nation's broadband, water and energy systems. At the same time it has announced plans [1] to invest in a number of large infrastructure projects around the world in 2022 in response to China’s ambitious Belt And Road Initiative [2], which could stretch from East Asia to Europe. Four countries – China, India, US and Indonesia – are expected to account for almost 60% of global growth in construction [3] over the next decade.

Downsides of the construction boom

The expected boom brings specific challenges in addition to benefits. In the medium term, sudden surges in demand could put supply chains under additional pressure and exacerbate existing shortages of materials and skilled labor, causing schedule and cost overruns. In addition, many in the industry may need to accelerate the implementation of 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. Analysis by AGCS shows that design defects and poor workmanship are one of 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 [4], 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, new materials and construction methods will need to be introduced across the market in relatively short periods of time. This will bring an increased risk of defects or may have unexpected safety, environmental or health consequences. For example, as a sustainable and cost-efficient material, the use of timber in construction has increased in recent years. However, this 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 – renewable risks

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. There have also been large claims from faulty foundations in solar parks and farms. Repairs to undersea cables, which weigh thousands of tons and require special ships to lay, can take more than a year. An offshore converter station alone can cost as much as $1.5bn, comparable to an oil rig. A fire or explosion involving a converter, as seen recently in China, can result in a total loss.

“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.

The two sides of 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. Today, the numerous parties involved on a construction site are interconnected through various shared IT platforms, which increases their vulnerability. Cyber risks can range from malicious attempts to gain access to sensitive data, to disruption of project site control and associated theft, to supply chain disruption, to potential corruption of project design data, resulting in delays and ultimately reputational risk for parties involved.

Better protection of building sites against natural hazards and water damage

The need to reduce greenhouse gas emissions will not only drive a more sustainable approach to residential and commercial buildings as well as infrastructure but may also hasten the trend as the industry looks to achieve efficiencies and minimize waste. Construction sites also need to give more consideration to mitigate the impact of climate-driven events, such as wildfires, flash flooding and landslides. AGCS claims analysis shows that natural hazards is already 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 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.

[1] CNBC, U.S. plans January rollout of projects to counter China’s Belt and Road Initiative, official says, November 2021
[2] CFR, China’s Massive Belt and Road Initiative, January 2020
[3] Marsh, A global forecast for construction to 2030 issued in partnership with Oxford Economics and Guy Carpenter, September 2021
[4] United Nations Environment Programme (UNEP), Building sector emissions hit record high, but low-carbon pandemic recovery can help transform sector, December 2020

About Allianz Global Corporate & Specialty

Allianz Global Corporate & Specialty (AGCS) is a leading global corporate insurance carrier and a key business unit of Allianz Group. We provide risk consultancy, Property-Casualty insurance solutions and alternative risk transfer for a wide spectrum of commercial, corporate and specialty risks across 10 dedicated lines of business.

Our customers are as diverse as business can be, ranging from Fortune Global 500 companies to small businesses, and private individuals. Among them are not only the world’s largest consumer brands, tech companies and the global aviation and shipping industry, but also satellite operators or Hollywood film productions. They all look to AGCS for smart answers to their largest and most complex risks in a dynamic, multinational business environment and trust us to deliver an outstanding claims experience.

Worldwide, AGCS operates with its own teams in 31 countries and through the Allianz Group network and partners in over 200 countries and territories, employing around 4,400 people. As one of the largest Property-Casualty units of Allianz Group, we are backed by strong and stable financial ratings. In 2020, AGCS generated a total of 9.3 billion euros gross premium globally.

 

The Allianz Group is one of the world's leading insurers and asset managers with 126 million* private and corporate customers in more than 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 716 billion euros** on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage nearly 1.8 trillion euros** of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we are among the leaders in the insurance  industry in the Dow Jones Sustainability Index. In 2021, over 155,000 employees achieved total revenues of 148.5 billion euros and an operating profit of 13.4 billion euros for the group.

These assessments are, as always, subject to the disclaimer provided below.

*Including non-consolidated entities with Allianz customers.
** As of June 30, 2022
Lesiba Sethoga
Allianz Global Corporate & Specialty (Johannesburg)
Daniel Aschoff
Allianz Global Corporate & Specialty (Munich)
Olivia Smith
Allianz Global Corporate & Specialty (Rotterdam)
Ailsa Sayers
Allianz Global Corporate & Specialty (London)
Sabrina Glavan
Allianz Global Corporate & Specialty (New York)
Camila Corsini
Allianz Global Corporate & Specialty (Sao Paolo)
Heidi Polke
Allianz Global Corporate & Specialty (Munich)
Florence Claret
Allianz Global Corporate & Specialty (Paris)
Wendy Koh
Allianz Global Corporate & Specialty (Singapore)
As with all content published on this site, these statements are subject to our cautionary note regarding forward-looking statements:

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