Construction risk enters ‘new age’ just as building boom collides with supply chain crisis, warns AGCS

The construction sector faces “accelerated risks” from new building technologies and the transition to more sustainable projects, at a time of a stressed supply chains causing both material and labour shortages amid a boom in activity, warns a new report from Allianz Global Corporate & Specialty (AGCS). AGCS says in its construction report that the sector is set to boom post-Covid and amid growing investments in alternative energy. On top of this, the environment for construction firms has “changed fundamentally”, it adds. Buildings will be expected to be both more sustainable and more resilient to cyber risk, flooding and more frequent extreme weather events, the insurer says. AGCS says the sudden surge in demand within the construction sector could put supply chains and resources under additional pressure at the same time that costs are being closely monitored, which can impact quality and increase susceptibility to error. Its analysis shows that during the past five years, design defects and poor workmanship accounted for 20% of construction and engineering claims by value, second only to fire and explosion as the leading cause of claims (26%) and on par with natural hazards. “The enhanced sustainability and net-zero focus will strongly influence the traditional risk landscape in the construction sector,” AGCS says. New materials and building methods will bring increased risk of defects or unexpected safety consequences, it adds. Pressure on costs could drive a rise in prefabricated designs and modularisation, as well as new construction materials such as geotextiles, AGCS continues. This could impact risks and claims by increasing the threat of serial loss from a single defective product used in multiple modules. Ronan Gallagher, global practice group leader for industry at AGCS, said insurers need to navigate the impact of these developments and the potential risks posed by the construction industry’s drive to cut costs and shore up Covid-impaired margins. Longer term, AGCS says substantial investments in green energy production will increase construction risk. “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,” commented Olivier Daussin, construction underwriting lead in AGCS’s global energy and construction team. Constructing new energy projects brings its own set of risks, including higher repair costs for offshore wind projects as they expand in size and move further into deeper waters. AGCS says it has also seen large claims from faulty foundations in solar parks and complex repairs to underwater cables that can take more than a year. It warns that a fire or explosion involving an offshore converter can result in total loss for insurers. “We know that new technology can create large losses,” said Daussin. “You can’t grow in the renewable sector without close cooperation between claims, underwriters and risk engineering.” Yann Dreyer, global practice group leader for construction in the global energy and construction team at AGCS, said Covid-19 has brought about a “new age” for the construction industry. “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,” added Dreyer.

Construction risk enters ‘new age’ just as building boom collides with supply chain crisis, warns AGCS

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