AGCS report lays out key loss trends in engineering and construction sector

Allianz Global Corporate & Specialty (AGCS) has published a new report that lists key claims and insurance trends in engineering and construction projects, which it says are becoming bigger and more costly than ever. The report lays out engineering loss trends between mid-2013 to mid-2018, based on more than 13,000 claims around the world with an approximate value of €7.9bn. Fire/explosion caused the biggest loss, accounting for 27% of claims by value. The peril has cost insurers an estimated €2.1bn in the five-year period. AGCS says the stats also show that defective products claims are on the rise and were the second cause of loss by value (17%) but top in terms of frequency (27%). There were almost three times as many defective products claims as storm claims, the next largest cause of loss by frequency on 10%. “We are seeing an increase in claims related to defects and quality control across the board,” says Martin Eckel, senior general adjuster at AGCS. The other top five claims by value were faulty workmanship/maintenance (15%), storm (10%) and water damage (4%). The top five in terms of frequency after defective products and storm is completed by faulty workmanship/maintenance (9%), water damage (8%) and fire (7%). “Whether it is an airport, a power plant or a car manufacturing complex, sites are now much larger, more complex and more expensive, meaning more is at stake if things go wrong,” says AGCS its Engineering and Construction Claims and Insurance Trends report. Projects can run for many years. The expansion of the Al Maktoum International Airport in Dubai, for example, will not be completed until 2030 and is expected to cost about $36bn. The higher values at risk bring bigger loss impact for firms. “Sums insured are now much larger – projects with values of $5bn to $10bn are not unusual, meaning claims can be in the tens of millions of dollars,” says Raymond Hogendoorn, global head of property and engineering claims at AGCS. Flooding of the Hidroituango hydropower dam in Colombia in 2018 during its construction phase is estimated to cost insurers about $1.4bn, one of the largest engineering claims in history. The report also flags the Allianz Barometer 2019, published earlier this year, which ranked catastrophes as the top risk facing the engineering sector, followed by business interruption and changes in legislation and regulation. The Engineering and Construction Claims and Insurance Trends report says the number of business interruption/delay in startup claims is growing. “Growing awareness of BI exposures has seen an increase in firms buying BI covers, in particular delay in startup (DSU) insurance, which covers delays to construction or engineering projects following physical damage. DSU claims are usually expensive – indemnity for delay in startup has increased over time from around $200,000 per day to up to $500,000 per day,” according to AGCS. Its report also notes that greater supply chain complexity is increasing the size and cost of claims in the construction and engineering sector. “In the past, an airport or a power plant would most likely have been built by a national contractor using local suppliers. Today, it is more likely to involve multiple parties with machinery, equipment and other components sourced and transported from around the world,” says AGCS. According to Mr Eckel: “Technology is becoming more sophisticated and specialised, which can increase the costs to repair or replace machinery and equipment. If a turbine coming from China is damaged in transport, it might take as long as 18 months for a repair.” The report adds that political risk and sanctions are a growing concern for long-term projects. “Large construction projects can take as long as five to ten 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,” it says. Finally, it notes increasing roles for drones and new technology in risk and claims assessment. “Technology will create more certainty for engineering claims,” states Mr Hogendoorn. “There are so many parties on a site at one time and so many activities happening simultaneously, it can be extremely difficult to understand the sequence of a loss event. However, we can increasingly use technology to access data and information to better understand the root cause of loss and speed up the claims process,” he adds. AGCS says it recently utilised 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 record wildfires in California, and Hurricane Florence, in 2018. Meanwhile, insurers are coupling 3D topographical data from drones with hydrogeological modelling software and rainfall simulation data, to predict flash-flooding risk on construction sites. AGCS says satellite technology offers high-resolution images of a site within 24 hours of a loss, even at remote or hazardous locations. It can also be used to combat exaggerated or fraudulent claims.

AGCS report lays out key loss trends in engineering and construction sector

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