Construction World

As construction projects become bigger and harder to fund, given rate pressures and market challenges, many insurers are exiting the engineering market. Regulatory scrutiny and socio-political uncertainties threaten investments and project delays impinge on contractors’ expenditures. Add to the mix the strain of new technologies and growing cyber threats, and it’s tempting to sound “retreat”. But there are rewards for staying the course, explains Allianz Global Corporate & Specialty (AGCS) Africa Head of Property and Engineering, Seelan Naidoo.

    AGCS Africa Head of Property and Engineering, Seelan Naidoo.

Global and African trends

Many insurers are exiting the construction sector or somewhat scaling back their offerings. The past year saw many losses from fires, mechanical failures and natural catastrophes, including the Hidroituango dam collapse in Colombia which is estimated to be more than $1.2bn[1] may prove to be the largest construction loss in history. The sector’s problems are years in the making: growing portfolio volatility; years of declining rates; and widening coverages over many years. Construction is a long tail business. Today’s premium is from projects written several years ago. Insurers realize current market practices in certain segments are unsustainable – this year we should finally see insurers “cleaning-up” portfolios and bringing focused risk management and risk-adequate pricing to underperforming segments. The situation is more severe in Africa with a number of construction companies facing challenging market conditions and extreme financial pressure due to deferment of projects. Some companies have applied for business rescue while others have been liquated.

The state of global and African construction

Construction projects are far more global than in the past as sizeable infrastructure projects are moving more to international companies. Equipment is being sourced internationally and construction site risk management is improving – a positive development from both a cost perspective and from the standpoint of a continuous process improvement, knowledge-sharing strategy among contractors. But there are downsides: contractors operating in new territories must comply with new regulatory environments, building codes, etc. which can lead to delays, pressuring schedules and creating overruns. Brexit, Eurozone issues and global tensions between major trading countries cause uncertainty, which can result in project delays and even cancellations. Projects will doubtless continue, since developing countries need continuing infrastructure investment and developed countries need to replace aging infrastructure. Uncertainty is the enemy of investment, however, so we’d like to see a more stable socio-political environment. We have a number of countries going through elections in Africa in 2019. This could lead to increased instability, which tends to deter the financial closure on major projects. However, we do expect to see acceleration in new and existing projects such as the out of renewable energy, after elections in South Africa.

Delay in start-up (DSU) trends

Business interruption (BI), contingent BI, supply chain risks – each has had significant insurance coverage in property markets for years. Construction DSU insurance take-up has increased as customers see the need to protect completed project revenues – often driven by lenders – while, at the same time, coverages and the insured parties have broadened. A recent trend in Africa is the delays incurred in projects reaching completion. BI losses can be substantial, but construction risks are volatile because there is greater uncertainty regarding rebuild-times and the project completion. DSU exposures are much more difficult to assess. In case of large EAR projects on the African continent, critical plant and equipment often entail long lead times from the original equipment supplier – in the event of losses during the construction period, delays can run into many months or in some cases up to two years. Thankfully, DSU losses are rare, but they can be significant. In 2018, AGCS had enough DSU losses to erode several years of DSU premium. Engineering portfolios for many carriers are much smaller than property books, so these covers bring a level of portfolio volatility to support losses and, since projects are non-recurring, there’s no chance to recoup losses at renewal.

The impact of technology on projects

The construction sector is slow to adopt to innovative technologies, but we’ve seen them start to gain traction. For example, building information modeling (BIM) – 3D model-based technology that allows for more efficient planning, design, construction and management –is replacing traditional 2D design methods and may change how projects are designed and delivered. However adequacy of loss mitigation measures needs to be readdressed to align with the innovative technologies. On the other hand, increased reliance on technology increases cyber threats – an exposure much less focused on in this sector than in others. We help customers become aware of new technologies, but simultaneously educate them about new cyber threats and the importance of adding cyber risk management to their risk registers. Businesses need to widen business continuity planning to aptly deal with these newer exposures. Cyber awareness is key in today’s world and we offer a variety of coverages in the event of a cyber incident.

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