Global expansion throws up new risks and insurance struggles for construction firms

As the old adage goes, when the going gets tough, the tough get going. That seems to be true of the construction sector, where companies have been looking far and wide to find business as times toughen up in their home markets. However, that has been throwing up some unique challenges for both the companies and their risk managers. Many European firms, for example, have taken on projects in South America, Africa and Asia. This trend is not confined to Europe. In 2017, more than 52% of projects were being completed by firms outside their home region. China has been leading the way in Africa, for example, ratcheting up competition between contractors and forcing project costs down. Costs between the regions vary enormously. For example, the cost of building in New York city is some four times the cost of building in Asia. As Robert Humphreys, Aon chief commercial officer – construction, explained, the cost of compliance and legal frameworks is higher too. Speaking at Commercial Risk Europe’s construction conference, Mr Humphreys said that while firms look for global diversity in terms of their projects, they still prefer to deal with one insurer and one insurance programme. However, he said it is not that simple because most countries have their own insurance rules and regulations. Different countries will have different rules, some demanding local coverage, while others, such as Brazil, even have their own policy forms that do not allow wording from other territories. Tax regimes will be different too, creating challenges in terms of premium collection and claims payments. “We need to look at the fine print very carefully,” said Mr Humphreys. In the US, for example, the rules around surety cover are very different to anywhere else, with unique compulsory elements. On top of that, some regions, such as the Middle East, will expect contractors to take on an increased level of responsibility compared to other regions. Contractors are agreeing to that in the name of winning business – something else their insurers have to factor in. “It is expensive to do business and to get up to speed in these regions,” said Paul Aird, risk manager at Bechtel. “There is a natural inclination to use global programmes, but there are local requirements,” he added. “It is not one size fits all, and how easy is it to use a local broker or insurer?” added Mr Aird. It is not just about insurance. Building regulations vary between regions and it is important that risk manager and insurers are on top on what is required to ensure policies reflect those rules. Gerald McDowell, construction COE manager UK at AIG, said nobody should think London is the only market available for this business. Increasingly, other insurance centres are emerging. However, London is still very much seen as the centre of excellence, with underwriters and brokers on tap to use their expertise. The panel of experts agreed that compromise is the way forward, combining the experience of the older markets with emerging local markets that have the local regulators on side. Aon’s Mr Humphreys is confident construction capacity will remain available for the foreseeable future, so he predicts competition between markets for business will continue. “There is an obvious issue around security and relationships. Global companies want to work with the same team, regardless of location, but that is not always possible,” he said. When they look at local markets, they have to consider whether they are able to maintain the same, required level of security on the paper and whether they have a trusted relationship, he added. “Our job,” said Mr Humphreys, “is to provide intelligence in instances where we can’t provide local coverage, and to provide confidence for global players that they are still receiving the necessary expertise.” The situation becomes even more complicated when the project is a joint venture. This may involve contractors from different regions, as well as a range of funding entities with a range of differing security requirements. Bringing them all together presents challenges, and is something the construction industry increasingly has to deal with. As Bechtel’s Mr Aird explained: “A lot of projects are joint ventures so you are forced to work with local brokers and insurers, and every joint venture will be a unique arrangement requiring unique solutions.”

Global expansion throws up new risks and insurance struggles for construction firms

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