Asian construction market back on track as insurer appetite returns

Inflation, material prices, supply chain strains and labour shortages mean sharp focus on risk profile

Ahead of Commercial Risk’s first Construction Risk Management Conference Asia, which takes place on 28 September in Singapore, Adrian Ladbury caught up with Vincent Banton, Aon’s recently hired head of construction and infrastructure for Asia, to assess the challenges and opportunities faced by the Asian construction and insurance industry.

Adrian Ladbury (AL): How would you describe the state of the Asian construction and infrastructure industry and outlook as a whole?

Vincent Banton (VB): Market data is projecting the construction industry in southeast Asia over the next four years to grow by 6.2% per year on average. If we see a further slowdown in inflation there is a reasonable possibility that the central banks in the region may lower interest rate increases. This could further support investment in construction projects.

China has been a major driver of construction growth in Asia for many years due to the country’s massive urbanisation efforts, infrastructure development projects, ongoing investments in residential and commercial construction, and overseas investments along the Belt & Road.

Even with a reduction in future growth targets, caused by a weakening demographic outlook and lower investor returns, it is expected that China will spend more than $1.5trn on construction over the next 15 years. In addition, India has one of the fastest-growing markets in the world, with governments focusing on infrastructure development, affordable housing, smart cities and industrial projects.

Shorter-term growth is generally supported by state and government focus on infrastructure projects and development in the regions with continued support from overseas and private investors. Aon expects to see the record levels of government stimulus cause an acceleration in the pipeline for regional mega infrastructure projects.

We also expect the recovery of the Asian construction industry to continue after the relaxation of the ‘zero-covid ’ policy.

AL: Which countries are the main growth markets for Aon and what are the challenges?

VB: In addition to India and China, there are four key southeast Asian countries with the fastest-growing construction markets over the next 15 years: Philippines, Vietnam, Malaysia and Indonesia.

These countries are all experiencing rapid urbanisation, population growth, infrastructure development and foreign investment. Growing populations and consumer spending are producing a rising economic performance, which in turn is increasing government investment appetite.

Road, rail, ports and transport infrastructure look to be the biggest areas off the back of this significant government support. Public-private partnerships are the usual vehicle that governments use with the aid of strongly supported foreign investment. These major transportation infrastructure projects will improve connectivity, which in turn will encourage the development of commercial and industrial precincts along the networks.

Some of the challenges we see affecting growth include the volatility and unpredictability of the industry. It remains dynamic, so economic and political factors can influence growth markets at any time.

Governments need to continually encourage further private investment to maintain the flow of development. Political changes and local elections always have an effect and potentially disrupt this flow from time to time.

In Thailand, for example, the current political situation is restraining a strong pipeline of infrastructure projects that are currently planned. In other areas, such as Nusantara in Indonesia, some foreign investors remain cautious about the development of the new capital city because of upcoming elections in 2024 and other ESG implications.

AL: What has been the impact of Covid-19 and the Ukraine war on the Asian markets?

VB: The pandemic clearly had several impacts on all organisations, and the uncertainties around business flows, available capital, liquidity, labour shortages and changing risk profiles across the board resulted in large financial implications and concerns. We are all acutely aware by now of the impacts this had on inflation, material costs and supply chain availability.

Markets reacted after the pandemic with strict communicable disease exclusions and much-increased demands for client retentions on business interruption coverages.

I believe that the conflict in Ukraine may have contributed to a resurgence in volatility in pricing and supply for core construction commodities, such as steel and aluminium.

There is still a large dependence on this region for raw materials so the high prices will continue to influence the materials availability and project costs. It is fair to assume that the conflict has affected the speed of the recovery of construction in the region after the pandemic, and created challenges for insurers as they review risk profiles and increasing claim costs due to inflation.

However, there has been a big resurgence recently and the industry is evolving. Lockdowns and restricted movements have meant digital underwriting and policy issuance is now the norm which enables faster, more efficient and secure workflows. We see this as a big positive for the future.

AL: How would you describe the state of the construction and infrastructure insurance market in Asia?

VB: For construction/property material damage and liability risks, we are seeing insurers compete to retain well-performing accounts in lower hazard occupancies and they are demonstrating a healthy appetite for growth.

Natcat-exposed risks and higher risk occupancy types are facing a more conservative and challenging environment, which usually includes limitations on appetite and capacity.

Additionally, further rate increases are being driven by ongoing concerns around inflation costs, reinsurance costs and climate-related events. Alternative programme structures and solutions are becoming important tools in achieving a client’s overall programme goals.

Underwriters’ processes remain thorough, and they demand detailed and complete submissions for stringent underwriting practices.

Capacity is generally sufficient across most products and risk types, with some new capacity entering the market in areas of targeted growth.

Pressures remain on underwriters to grow their portfolios and innovate with their product offerings. However, just because the capacity is available, does not mean it is always deployed, and insurers and reinsurers are still being cautious generally.

AL: How is construction cover typically arranged and organised in Asia and how has this evolved in recent times?

VB: In my experience, insurance regulations in many Asian countries generally prevent unlicensed overseas insurance companies from selling direct insurance, meaning Singapore’s wholesale market primarily revolves around facultative reinsurance.

Domestic insurers will cede risks to reinsurers, with the majority of large and complex projects ceded via the Singapore reinsurance market. Smaller and lower complexity risks often remain retained within the local retail markets.

Many of the larger ongoing infrastructure projects across Asia use a public-private partnership or non-recourse financing model. As an insurance solution, the construction risks can be wrapped up under an ‘owner-controlled’ policy, which enables the attachment of delay in start-up coverage to meet a lender’s usual requirements.

The additional benefits we see with this type of insurance include the control the client obtains via a single coordination point for loss prevention, claims handling, policy wording and uniformity across the programme from pre-construction to construction through to operation, given the multiple contractors and sub-contractors involved across all project works.

AL: What should risk and insurance managers in the sector do to secure the best possible capacity, terms and conditions from the insurance market in the current environment?

VB: Start the renewal or broking process as early as possible. There is such an increasing focus on risk selection and increasing reliance on modelling data that means the underwriting process is taking much longer. This is especially the case for complex, newer technology and nat cat-exposed risks.

It is important to build insurer confidence and trust but to also give them adequate time to review and gain internal approvals or referrals where needed. All this contributes to managing timing and expectations among key stakeholders and decision-makers.

The other key consideration is how risk managers can use data-driven insights and analytics around their risk plans. These days there is available technology to enable identification and quantification of the associated risks.

They could use modelling and re-examine loss scenarios to better inform the decision-making process and identify risk management practices that can be improved to build greater resilience. Leveraging catastrophe modelling solutions can highlight exposed profiles and main causes of loss.

Data analytics is something Aon has in-depth knowledge of and can support our clients through the process through our global network. The construction industry is one of the least digitised industries in the world. For this reason improving tracking of risk, supply chain management, manufacturing and design data can improve transparency and certainty.

We also found that conducting thorough reviews of asset values with accurate replacement cost methodologies will lead to more secure appraisals and accurate maximum loss studies. This helps to optimise available market capacity.

Finally, we recommend working with a broker to explore alternative solutions such as parametric products, alternative risk transfer and captives, often in conjunction with insurance markets.

AL: What impact is ESG having on the Asian construction market and risk/insurance environment?

VB: There are significant growth opportunities in this sector, but it is important that the markets understand a client’s ESG strategies and requirements, and that clients understand insurer concerns around maintaining compliance with their own firms’ ESG policies.

We see underwriters generally remaining focused on their respective company’s ESG growth plans and development.

It’s certainly a challenge for the markets to underwrite some of the more progressive and sometimes prototypical risks when technologies are employed with ESG in mind. They need to manage these exposures in conjunction with their overall targets for portfolio growth and profitability.

When we speak to clients across the region, there is a familiar theme that their jobs are more complex. It used to be enough to know their core product and industry but now they need that plus ESG knowledge and expertise.

We understand the challenge ahead here and are constantly working with our clients to improve the newer technology risk management and potential mitigation action needed to ensure our markets can continue to support within their underwriting strategies.

AL: What new materials and technologies is the Asian construction market responding to and is the market producing adequate insurance solutions?

VB: New products and materials in construction are still at a relatively early stage in Asia compared to the rest of the world. For instance, we don’t see as many mass timber structures being developed as we do in places such as Europe or the United States.

However, this trend looks likely to change for mass timber over the next decade, especially in more developed markets such as Singapore, South Korea and Japan. There is an increasing awareness of the use of renewable and sustainable building materials in construction.

These types of structures are not just a benefit from an ESG perspective, they are also highly desirable buildings to live and work in due to the aesthetic nature of the product.

In countries like the US, where mass timber is deployed more widely, we are seeing tailor-made specific programmes created to provide insurance solutions for the product. As a marketplace in Asia, we need to support this trend, while being comfortable with the level of risk transfer.

Other new materials such as concretes or asphalts, where recyclable materials are incorporated within them, are increasingly being considered. However, they are not the normal method used in projects across Asia, so there is a large opportunity to explore and to implement them over time.

In Asia, there are certainly broader issues with plastic waste and disposal, so any reuse for them in roads or structures could have positive implications for the environment and sustainability. As with any prototypical product, it is important for the markets to understand them and see long-term performance results. This is one of the biggest challenges with these materials as there is little to no long-term loss data available.

“This article is for general information only with no warranty/guarantee to accuracy/adequacy/completeness/omissions/errors and we can accept no liability for loss incurred by any person who may rely on it. You should seek professional advice before relying on the contents of this article”.

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