Business Interruption, Natural Catastrophes Top Construction Sector Risks
Business interruption/supply chain disruption and natural catastrophes rank as the top risks for the construction and engineering sector, followed by the energy crisis as a new entrant at #3, according to Allianz Risk Barometer respondents for this industry.
After the launch of the top global business risks in the Allianz Risk Barometer 2023 in January, Allianz Global Corporate & Specialty (AGCS) has now published its Global Industry Solutions Construction Outlook, one of several risk trend briefings for specific industry sectors, including technology, media and telecommunications, and financial services.
Blanca Berruguete, Global Industry Solutions Director for Construction at AGCS, comments on the top risks: “Larger values are at risk for companies. Construction costs are soaring because of the higher prices for energy and raw materials. Replacement is costing more and taking longer. Materials can also often be unavailable due to logistics, shipping and supply-chain bottlenecks. The result is that any property damage and business interruption losses are now likely to be significantly higher than before Covid-19.”
Berruguete says: “The construction industry is facing a number of challenges such as the prospect of recession, the shortage, and rising cost, of energy, key equipment and materials given recent high inflation, a spike in procurement costs, ongoing shortage of skilled labor, longer lead times, schedules, and cost overruns, compromised supply chains, ever-changing workplace protocols, and increased competition.”
While the energy crisis, in combination with other factors, has contributed to rising costs given construction is an energy-intensive economic activity, in the mid- to long-term, it could also act as a catalyst for the sector to fast forward its green transformation, adopting more sustainable approaches given it is a key contributor to greenhouse gas emissions.
The drive to net zero will help deliver strong future growth for the construction industry but new technologies, innovative delivery methods and greener, leaner practices will also bring new risk scenarios such as potential defects and repetitive loss scenarios or unexpected safety or environmental consequences, in addition to benefits.
“The switch to sustainable energy and the adoption of modern building methods will transform the risk landscape, with radical changes in design, materials and construction processes,” explains Berruguete. “In order to meet carbon reduction targets, rapid adoption will likely be required meaning close co-operation between insurers, brokers and clients, to share data and experiences to help underwrite what can be prototypical risks.”
Fire and natural disasters top causes of claims
Regarding actual claims patterns, fires and natural disasters are the top contributors to construction and engineering losses according to AGCS analysis of 22,000 insurance claims worth €12.8bn over five years from 2017 to end of 2021 (link to graphic). Fire is the most expensive cause of loss, accounting for 27% of the value of claims analyzed. Natural catastrophes account for almost a fifth of claims by value (19%) and are also the most frequent cause.
Construction sites need to give more consideration to the impact of extreme events, such as wildfires, flash flooding and landslides in their risk assessments. With climate change increasing the frequency and severity of these events, the costs of property damage and business interruption are expected to escalate.
