Engineering and construction projects around the world have experienced significant growth spurts in recent years. Project sites are now much larger, more expensive and much more complex, meaning more is at stake if things go wrong. According to Allianz Global Corporate & Specialty (AGCS), there are several major trends driving large losses in engineering and construction projects worldwide.
Projects boom in size
The first trend is that higher values bring larger loss impact. According to the insurer, as engineering and construction projects grow in size and longevity, the sums insured are also inflating massively. As Raymond Hogendoorn, global head of property and engineering claims at AGCS, pointed out: “Projects with values of $5 billion to $10 billion are not unusual, meaning claims can be in the tens of millions of dollars.” In a recent report into ‘Engineering and Construction Claims and Insurance Trends,’ AGCS gave the example of flooding during construction at the Hidroituango hydropower dam in Colombia in 2018. That event is estimated to have cost insurers around US$1.4 billion, making it one of the largest engineering claims ever recorded.
“Construction sites today are much larger than in the past. Whether it’s a power plant, refinery or a car manufacturing plant, projects are now typically much larger and higher in value,” commented Robert Maurer, head of engineering underwriting for Central and Eastern Europe at AGCS. “And with more and more technology and sophisticated machinery in factories, values per square meter have also increased significantly. This leads to higher exposures for businesses and requires more insurance capacity. Therefore, the insurance broker needs to convince more insurance companies to participate in the project policy and more effort is required in providing the proper risk information.”
Fire/explosion tops cause of losses
The insurer’s analysis of more than 13,000 engineering and construction insurance claims worldwide and over the last five years showed that fire/explosion is the biggest cause of loss for the sector. Of the claims scrutinized, fire accounted for over a quarter (27%) of losses by value, worth almost US$8.8 billion. While fire is a constant challenge for engineering and construction firms because of the nature of their work, there are risk mitigation best practices firms can use to reduce their exposure.
Stephen Clark, global technical and expertise manager, property, at Allianz Risk Consulting, AGCS, explained that there are three types of fire mitigation: preventative measures before the blaze, methods to extinguish the fire once it has started, and contingency planning to ensure the business can recover as quickly and as smoothly as possible.
He told Insurance Business: “Each of these steps can be fairly simple in what they require from site managers and the business; however, the key to their effectiveness is not complexity, but in their regular practice and inclusion in the day-to-day running of the business. You can always tell which clients have experienced a serious fire loss before from those who haven’t. Diligence and repetition are key in preventing and reducing the impact of a fire. In particular, business continuity plans should not be viewed as one-time documents that just ‘sit on the shelf’. Typically, these plans are developed with risk consultants after a thorough analysis of the key processes of the business so that, in the event of a fire, they can minimize its impact and help the company return to business-as-usual status as quickly as possible.”
Natural catastrophe losses
The past few years have been stormy, fiery and shaky to say the least. As such, it’s no surprise that natural catastrophes have been another large source of engineering and construction claims. According to AGCS’s analysis, storm damage is the second largest cause of loss by number, accounting for one in 10 claims.
Quality control, supply chain losses and business interruption
Another significant cause of claims in the engineering and construction sectors is defective product. According to AGCS, defective products are the single largest source of engineering claims by frequency. This, in turn, can lead to supply chain issues and business interruption claims – two other factors driving losses for engineering and construction firms. As supply chains grow in complexity, and companies behind large projects source machinery, equipment and other components from vendors all around the world, the potential for supply chain delays and project disruption continues to grow.
Impact of technology
Technology has come to play a key role in the engineering and construction spaces, both in terms of how they work and also how insurance companies assess risks and claims. Chris van Gend, global head of engineering insurance at AGCS, explained: “Use of innovative technologies in the construction sector is starting to gain traction. For example, building information modelling – 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. Meanwhile, as the AGCS report notes, for insurers operating in this sector, new technologies such as drones, satellites, lasers and computer modelling, are increasingly being used to speed up claims and mitigate risks.
“However, 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 key registers. Cyber awareness is key in today’s world and we offer a variety of coverages in the event of a cyber incident.”