Construction companies experience solid growth but face new risks in post-Covid

However, the erection of more sustainable buildings and infrastructure, the rise of clean energy and the adoption of modern construction methods are leading to radical changes in design, materials and processes, which will transform the risk landscape. . These challenges will come on top of tensions on supply chains, material and labor shortages and rising costs, in a context characterized by narrow margins for several years. In its recent Construction risk after Covid report, Allianz Global Corporate & Specialty (AGCS) precisely studies short and long term risk trends in construction.

"The Covid-19 has brought the construction sector into a new era, explains Yann Dreyer, Practice Group World leader for construction in the global Energy and Construction team of AGCS. Projects continued during the pandemic and growth is on the cards, but the general environment has changed dramatically. The sector is facing unprecedented challenges linked to the volatility of the supply chain, soaring material prices, the shortage of skilled labor and the strengthening of sustainable development goals. In addition, the accelerated deployment of cost reduction strategies and the adoption of new technologies and designs could increase risks for construction companies and insurers. Ongoing risk monitoring and management controls will be essential going forward. Along with our clients, we will help manage these risks. AGCS is mobilized in this regard and construction is a key sector in its growth projects. "

The sector's strong growth prospects can be explained by several factors. These include in particular the increase in population in emerging markets, as well as significant investments in new energies (wind, solar and hydrogen) and systems for the storage and transport of electricity. The transition to the electric vehicle requires investments in new production, battery manufacturing and charging sites.

Buildings should not only improve their carbon footprint. They also need to be equipped with maritime and river flood protection, as well as drainage and drainage systems, in the many disaster-prone regions. These measures are necessary to respond to increasingly frequent extreme weather events.

At the same time, the governments of many countries are preparing major investments in infrastructure to stimulate the economy after the pandemic and support the transition to carbon neutrality. In the United States, an infrastructure plan of more than trillion dollars targets bridges and roads, but also the country's broadband, water and electricity networks. At the same time, the government announced its intention to invest in several large infrastructure projects around the world in 2022. It thus responds to the ambitious Chinese initiative of the New Silk Road to connect Asia with the 'East to Europe. In the next decade, China, India, the United States and Indonesia are expected to account for nearly 60% of global construction growth.

The challenges created by the construction boom

This expected boom comes with both specific advantages and challenges. In the medium term, the sharp increase in demand could put additional strain on supply chains. It could also lead to shortages of materials and skilled labor, leading to time and cost overruns.

In addition, many players in the sector will have to speed up the implementation of rationalization and cost control measures, if the Covid-19 crisis has impacted their profit margins. Indeed, this could often lead to a drop in quality and maintenance, and thus increase the risk of error.

AGCS analysis shows that design and manufacturing defects are one of the main causes of construction and technical risk insurance claims, i.e. around 20% of the amount of some 30.000 industrial claims studied between 2016 and the end of 2020.

The reinforcement of the objectives of sustainable development and carbon neutrality will profoundly modify the traditional landscape of risks in the sector. According to the United Nations Environment Program, building construction accounts for 38% of global energy-related carbon dioxide emissions. To reduce carbon emissions, existing buildings will need to be renovated and rehabilitated. In addition, new construction materials and methods will have to be introduced to the market in relatively short time. This development will lead to an increase in the risk of default and could have unintended effects in terms of safety, the environment and health. Thus, the use of wood in construction, as a sustainable and profitable material, has increased in recent years. However, this trend has consequences for the risk of fire and water damage. AGCS analysis reveals that fires and explosions already represent more than a quarter (26%) of the amount of construction and technical risk insurance claims over the last five years. It is the most costly cause of loss.

Risks associated with renewable energies

The development of renewable energies also entails new risks. Offshore wind projects are gaining momentum, moving away from the coast and entering deeper waters. The costs associated with delays and repairs are therefore higher. Offshore wind farms, as well as onshore wind and solar farms, can also be exposed to serial disasters. For example, a design or manufacturing defect in a turbine can have repercussions on several programs. Construction faults on the foundations of solar parks and farms have also given rise to significant compensation claims. Repairs to submarine cables, which weigh thousands of tonnes and whose installation requires special vessels, can take more than a year. A single offshore converter station can cost up to $ 1,5 billion, or as much as an oil rig. A fire or an explosion in a converter can, as recently happened in China, cause a total loss.

“Huge investments in green energy will translate into higher risk values. At the same time, the rapid adoption of technologies, methods and materials as prototypes will require close cooperation between internal underwriting, indemnification and risk management teams, as well as between insurers and their clients ”, emphasizes Olivier Daussin, Head of Construction underwriting in the AGCS Global Energy and Construction team.

The two sides of modular construction

Finally, modern construction and production methods can radically transform construction, shifting more risk off-site and incorporating greater use of technology. Modular construction, in particular, brings many advantages. These include factory-controlled quality management, reduction of construction waste, halving construction times compared to traditional techniques, and less disturbance to the surrounding environment. But it also raises concerns about repetitive claims.

“Modular and prefabricated construction methods present an increased risk of series losses. Indeed, the same part can be used in several projects before a fault is detected ”, explains Olivier Daussin.

The shortage of skilled labor in the construction industry is expected to foster the trend towards off-site manufacturing and automation. At the same time, the digitization of construction creates cyber exposures, against which engineering and construction companies need to strengthen their protection. Today, the many actors involved in a project are interconnected by shared platforms, which increases their vulnerability. Cyber ​​risks can range from malicious attempts to access sensitive data to entry into the site's control system and theft. These attacks can disrupt the supply chain and corrupt a project's design data, leading to delays and therefore reputational risk for the parties involved.

Better protection of construction sites against natural disasters and water damage

The need to reduce greenhouse gas emissions will encourage a more sustainable approach to residential and commercial buildings, as well as infrastructure. It could also accelerate the trend towards efficiency gains and waste reduction. Companies must also better study the mitigation of the impacts on their sites of climatic events such as forest fires, flash floods and landslides. AGCS analysis indicates that natural disasters are already the second most costly cause of loss, after fires and explosions. They represent 20% of the amount of compensation claims over the last five years.

To conclude, water damage continues to be the major cause of claims during construction. AGCS noted several disasters of an exceptional magnitude. Originally, water leaks from pressurized lines or firefighting systems were either not detected or occurred outside of office hours, on weekends or during periods of work. 'stop. Water leak detection and monitoring systems can help reduce the frequency and severity of water damage, reducing repair costs and project delays.

You can download the full report here