Allianz: Construction companies to see robust growth and “new age” risks post-Covid

0
  • The Asia Pacific infrastructure market is expected to grow 7 – 8% a year over the next decade.
  • Current shortage of materials and skilled labor add to long-term challenges around new design, materials and building methods driven by sustainability and net zero strategies.
  • AGCS analysis of €11bn worth of construction and engineering claims over five years identifies top causes of loss by value: fire and explosion (26%), faulty design/poor workmanship (20%) and natural hazards (20%).
  • Construction companies need to improve cyber resilience and protect buildings sites against flash flooding and other extreme weather events driven by climate change. “Out of hours” water damage a major source of loss.


JOHANNESBURG/LONDON/MUNICH/NEW YORK/PARIS/SAO PAULO/SINGAPORE – Media OutReach – 30 November 2021 – The global construction market is set for a sustained period of strong growth post-Covid-19, driven by government spending on infrastructure and the transition to a net zero society. However, the switch to more sustainable buildings and infrastructure, the upscaling of clean energy facilities and the adoption of modern building methods will transform the risk landscape, with radical changes in design, materials and processes. These challenges add to currently-stressed supply chains, shortages in materials and labor and increased costs, which all come against the backdrop of years-long tight margins in the industry. A new report from Allianz Global Corporate & Specialty (AGCS), Construction risk after Covid, explores both acute and long-term risk trends for the construction sector.

 

“Covid-19 has brought about a new age for the construction industry,” says Yann Dreyer, Global Practice Group Leader for Construction in the global Energy & Construction team at AGCS. “While construction projects continued during the pandemic, and further growth is to come, the overall environment has changed fundamentally. 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. Together with our clients, we will help manage these challenges as AGCS is committed to the construction industry as a key target sector for our growth initiatives.”

 

The strong growth outlook for the sector is based on a number of factors, such as rising populations in emerging markets and significant investment in alternative forms of energy such as wind, solar and hydrogen, as well as power storage and transmission systems. The shift to electric transport will require investment in new plants and battery manufacturing facilities and charging infrastructure. Buildings are not only expected to improve their carbon footprint, but will also require improved coastal and flood defences and sewage and drainage systems in many catastrophe-exposed regions in response to more frequent extreme weather events. At the same time, governments in many countries are planning major public investments in large infrastructure projects to both stimulate economic activity after the pandemic crisis and drive the low carbon transition. In the US, a $1 trillion+ infrastructure package touches everything from bridges and roads to the nation’s broadband, water and energy systems. At the same time it has announced plans to invest in a number of large infrastructure projects around the world in 2022 in response to China’s ambitious Belt And Road Initiative, which could stretch from East Asia to Europe. Four countries – China, India, US and Indonesia are expected to account for almost 60% of global growth in construction over the next decade.


The Asia Pacific infrastructure market is expected to grow 7 – 8% a year over the next decade, reaching US$5.36 trillion a year by 2025.


Downsides of the construction boom


The expected boom brings specific challenges in addition to benefits. In the medium term, sudden surges in demand could put supply chains under additional pressure and exacerbate existing shortages of materials and skilled labor, causing schedule and cost overruns. In addition, many in the industry may need to accelerate the implementation of efficiency and cost-control measures if profit margins have been impacted in the Covid-19 economy, which can often impair quality and maintenance levels and increase susceptibility to errors. Analysis by AGCS shows that design defects and poor workmanship are one of the leading causes of construction and engineering losses, accounting for around 20% of the value of almost 30,000 industry claims examined between 2016 and the end of 2020.


The enhanced sustainability and net zero focus will strongly influence the traditional risk landscape in the construction sector. According to the UN Environment Programme, buildings and the construction industry account for 38% of all energy-related carbon dioxide emissions. In order to cut carbon emissions, existing buildings will need to be refurbished and repurposed. Additionally, new materials and construction methods will need to be introduced across the market in relatively short periods of time. This will bring an increased risk of defects or may have unexpected safety, environmental or health consequences. For example, as a sustainable and cost-efficient material, the use of timber in construction has increased in recent years. However, this has implications for fire and water damage risks. AGCS claims analysis shows that fire and explosion incidents already account for more than a quarter (26%) of the value of construction and engineering claims over the past five years – the most expensive cause of loss.


Upscaling clean energy – renewable risks


Expanding clean energy brings new risks, too. Offshore wind projects are growing in size, moving further out to sea and into deeper waters, meaning the costs associated with any delays or repairs is increasing. Offshore wind farms, as well as onshore wind and solar projects, can also be exposed to serial losses. A design or manufacturing fault in a turbine, for example, can impact many projects. There have also been large claims from faulty foundations in solar parks and farms. Repairs to undersea cables, which weigh thousands of tons and require special ships to lay, can take more than a year. An offshore converter station alone can cost as much as $1.5bn, comparable to an oil rig. A fire or explosion involving a converter, as seen recently in China, can result in a total loss.


“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,” says Olivier Daussin, Construction Underwriting Lead in AGCS’s global Energy & Construction team.

Read Also:  Möller's Wins Superior Taste Award For Cod Liver Oil Supplements


The two sides of modular construction


The size of the global modular construction market size is projected to grow from $82bn in 2020 to $109bn by 2025, at a combined annual growth rate (CAGR) of 5.75%. In terms of value and volume, permanent modular construction is estimated to dominate the market and steel is tipped to be the fastest-growing market segment. The healthcare industry is projected to be the fastest-growing end-use sector through to 2025, with the Asia-Pacific region set to grow at the highest CAGR of any region during this period, followed by Europe and North America.


Ultimately, modern building and production methods have the potential to radically transform construction, transferring more risk offsite and incorporating greater use of technology. Modular construction in particular provides many benefits such as controlled factory-based quality management, less construction waste, a construction timeline cut in half compared to traditional methods, and reduced disruption to the surrounding environment. However, it also raises risk concerns about repetitive loss scenarios. “There is an increased risk of serial losses with modular and prefabricated methods as the same part could be used across several projects before a fault is discovered,” Daussin explains.


The shortage of skilled labor in the construction industry is likely to further the trend towards offsite manufacturing and automation. At the same time, digitalization of construction creates cyber exposures which engineering and building companies need to strengthen their defenses against. Today, the numerous parties involved on a construction site are interconnected through various shared IT platforms, which increases their vulnerability. Cyber risks can range from malicious attempts to gain access to sensitive data, to disruption of project site control and associated theft, to supply chain disruption, to potential corruption of project design data, resulting in delays and ultimately reputational risk for parties involved.


Better protection of building sites against natural hazards and water damage


The need to reduce greenhouse gas emissions will not only drive a more sustainable approach to residential and commercial buildings as well as infrastructure but may also hasten the trend as the industry looks to achieve efficiencies and minimize waste. Construction sites also need to give more consideration to mitigate the impact of climate-driven events, such as wildfires, flash flooding and landslides. AGCS claims analysis shows that natural hazards is already the second most expensive cause of construction losses, behind fire and explosion, accounting for 20% of the value of claims over the past five years.


Meanwhile, water damage continues to be a major source of loss during construction. AGCS has seen a number of surprisingly large losses from leaks from pressurized water or fire systems that go undetected or occur out of business hours, on weekends or during periods when site personnel are not present. Water leak detection and monitoring systems can help reduce the frequency and severity of water damage, mitigating expensive repairs and project delays.


About Allianz Global Corporate & Specialty

Allianz Global Corporate & Specialty (AGCS) is a leading global corporate insurance carrier and a key business unit of Allianz Group. We provide risk consultancy, Property-Casualty insurance solutions and alternative risk transfer for a wide spectrum of commercial, corporate and specialty risks across 10 dedicated lines of business.

Our customers are as diverse as business can be, ranging from Fortune Global 500 companies to small businesses, and private individuals. Among them are not only the world’s largest consumer brands, tech companies and the global aviation and shipping industry, but also wineries, satellite operators or Hollywood film productions. They all look to AGCS for smart answers to their largest and most complex risks in a dynamic, multinational business environment and trust us to deliver an outstanding claims experience.

Worldwide, AGCS operates with its own teams in 31 countries and through the Allianz Group network and partners in over 200 countries and territories, employing around 4,400 people. As one of the largest Property-Casualty units of Allianz Group, we are backed by strong and stable financial ratings. In 2020, AGCS generated a total of €9.3 billion gross premium globally.


For more information please visit http://www.agcs.allianz.com/ or follow us on Twitter @AGCS_Insurance and LinkedIn.


Cautionary Note Regarding Forward-Looking Statements

The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words “may”, “will”, “should”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” and similar expressions identify forward-looking statements.


Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz Group’s core business and core markets, (ii) performance of financial markets, including emerging markets, and including market volatility, liquidity and credit events, (iii) the frequency and severity of insured loss events, including from natural catastrophes and including the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rates including the Euro/U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures, and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences.


The matters discussed herein may also be affected by risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statement.


#Allianz