Agcs 10 Trends Construction Industry
Agcs 10 Trends Construction Industry
Agcs 10 Trends Construction Industry
of construction risk
10 trends to watch as the
sector builds back better
About
AGCS
Allianz Global Corporate & Specialty
(AGCS) is a leading global corporate
Overview
insurance carrier and a key business
unit of Allianz Group. We provide The global construction market is
risk consultancy, Property‑Casualty set for a sustained period of strong
insurance solutions and alternative
risk transfer for a wide spectrum of growth, driven by an expected
commercial, corporate and specialty surge in government spending on
risks across 10 dedicated lines
of business.
infrastructure and the transition to net
zero. However, the switch to sustainable
Our customers are as diverse as energy and the adoption of modern
business can be, ranging from Fortune
Global 500 companies to small building methods will transform
businesses, and private individuals. the risk landscape, with radical
Among them are not only the world’s
largest consumer brands, tech
changes in design, materials and
companies and the global aviation construction processes.
and shipping industry, but also
satellite operators or Hollywood film
productions. They all look to AGCS The global construction industry is about to embark on
for smart answers to their largest a sustained period of growth, driven by the needs of a
and most complex risks in a dynamic, growing world population and the transition to a more
multinational business environment sustainable world. According to a recent report from
and trust us to deliver an outstanding Marsh and Oxford Economics1 , the global construction
claims experience. industry is forecast to grow 42% to $15trn by 2030. The
construction industry is expected to be a major driver of
Worldwide, AGCS operates with its economic growth in the coming decade, outperforming
own teams in more than 30 countries manufacturing and services.
and through the Allianz Group
network and partners in over 200 The positive growth outlook is based on a number
countries and territories, employing of factors. Rising populations in emerging markets,
around 4,400 people. As one of the urbanization and a growing working age population are
largest Property‑ Casualty units of expected to drive the need for homebuilding, infrastructure
Allianz Group, we are backed by and workplace construction. The transition to a low carbon
strong and stable financial ratings. or net zero economy will require significant investment
In 2020, AGCS generated a total of in alternative forms of energy, such as wind, solar and
€9.3bn gross premium globally. hydrogen, as well as power storage, transmission and
supporting services. According to the International Energy
www.agcs.allianz.com Agency (IEA 2), pursuing net zero would create a market
for wind turbines, solar panels, lithium-ion batteries,
electrolyzers and fuel cells of well over $1trn a year by
2050, comparable in size to the current oil market.
2 1 Marsh & Guy Carpenter, Oxford Economics, Future of Construction, September 2021
2 International Energy Agency, World Energy Outlook, October 13, 2021
MANAGING THE NEW AGE OF CONSTRUCTION RISK
$15trn
The shift to electric transport will also require investment
in new plants and battery manufacturing facilities, as
well as charging infrastructure and power generation.
Ford alone has committed to an $11bn3 investment in new
plants. Huge investment is also required to make buildings
more sustainable and lower greenhouse gas emissions.
According to the International Finance Corporation4 (IFC), Forecasted global construction output in 2030
green building in emerging markets represents a $24.7trn
investment opportunity by 2030.
Infrastructure is forecast to be the fastest growth sector
Climate change adaption and mitigation will also give for construction with annual average growth of 5.1% 5
rise to opportunities for the construction sector. Rising globally during the period from 2020 to 2025, driven
sea levels and increased risk of flooding will require by unprecedented levels of government stimulus. The
new coastal and flood defenses, as well as sewage and US has passed a $1.2trn infrastructure bill while the EU
drainage systems. Commercial buildings and plants may has agreed a €723bn Recovery and Resilience Facility.
need upgrading to protect assets from storms and floods, However, given government borrowing during the
while ageing infrastructure will need to be upgraded to pandemic, public sector and infrastructure investment
cope with more extreme weather events. is likely to see an increasing need for Public Private
Partnerships (PPPs).
Covid-19 is also likely to give a boost to construction
and engineering. The pandemic exposed shortcomings This boom in global construction will, however, present
in public services like health and social care, which challenges for the construction and engineering sector,
could translate to increased spending on hospitals. The and their insurers. In the medium term, sudden surges in
pandemic also demonstrated the need for more resilient growth could put supply chains under additional pressure
supply chains, which could stimulate construction as and exacerbate the existing shortage of skilled labor.
manufacturing plants and warehouses are brought Longer-term, huge investments in green energy will mean
closer to home. Digitalization, which accelerated during larger values at risk, while the rapid adoption of unproven
lockdowns, is also likely to fuel construction activity, technology, building methods and materials will require
requiring telecommunications infrastructure, data centers, close co-operation between underwriting, claims and risk
logistics and e-retailing hubs. engineering, as well between insurers and their clients.
3 BBC, Ford announces $11.4bn investment in electric vehicle plants, September 28, 2021 3
4 International Finance Corporation, Green Buildings: A Financial and Policy Blueprint for Emerging Markets
5 Marsh & Guy Carpenter, Oxford Economics, Future of Construction, September 2021
MANAGING THE NEW AGE OF CONSTRUCTION RISK
1. Construction
trends in the
new age of
risk
The Covid-19 pandemic has brought Despite a strong recovery the industry These challenges come against the
about a new age of risk for all is still faced with both short- and backdrop of years-long tight margins
industries and sectors of the economy long-term challenges in overcoming in the industry. The Turner & Townsend
that will continue to dominate the shortage of key equipment and report indicates the lowest are in
business risk mitigation strategies and materials, the spike in procurement the UK (3.9%), followed by Australia
controls for the foreseeable future. costs, longer lead times, schedule and New Zealand at 4.5%, North
and cost overruns, compromised America at 4.6% and Europe 6.1%.
The construction industry rebounded supply chains, skilled labor shortages, Such limited profit margins in the
after the initial shockwave of ever-changing workplace protocols, Covid-19-economy will inevitably lead
shutdowns, project cancellations and and increased competition for to a renewed drive to cut costs to
deferrals as it was largely permitted limited work. Consultant Turner & secure project execution and delivery
to continue in key markets over the Townsend reported in its International outcomes.
second half of 2020. The UK based Construction Market Survey 20212
consultant GlobalData1 has further that “steel rates have shot up in
projected the industry to expand by some EU countries by up to 50% due
over 5% in 2021. to a combination of iron ore price
rises, restricted supply and increased
shipping costs.” The report estimates
the surging costs will not start to ease
until mid-2022.
4 1 Global construction industry set to grow by 5.2% in 2021, according to GlobalData, April 9, 2021
2 Turner & Townsend, International construction market survey 2021
MANAGING THE NEW AGE OF CONSTRUCTION RISK
8. United Kingdom 3%
7. Germany 3%
9. France 1.8%
4. Japan 4%
3. India 7%
6. Australia 3%
Other 34%
Global top 10 construction markets see continued shift to emerging markets, with China and US clear
leaders in 2030.
These 10 markets are expected to represent two-thirds of global output in 2030.
Source: Oxford Economics/Haver Analytics, Future of Construction, Marsh & Guy Carpenter.
Graphic: Allianz Global Corporate & Specialty
The industry will therefore need to “Insurers need to navigate the Analysis by AGCS shows that design
accelerate the implementation of impact of these developments and defects and poor workmanship
efficiency and cost control measures. the potential risks posed by the are one of the leading causes of
The Deloitte US 2021 engineering industry’s drive to cut costs and shore construction and engineering claims,
and construction industry outlook 3 up Covid-impaired margins,” says accounting for around 20% of the
indicates long-term cost and Ronan Gallagher, Global Practice value of engineering insurance
margin issues can be addressed by Group Leader for Industry at AGCS. losses over the past five years. Faulty
modularization and prefabricated “The accelerated deployment of cost- workmanship/maintenance is also
designs and the use of advanced cutting strategies and implementation a major driver of claims frequency,
construction materials with examples of competitive technologies and accounting for more than a quarter of
including high-strength concrete, designs may well result in accelerated such claims that AGCS has received
geotextiles and self-healing materials. risks for the construction industry to date in 2021 (as of September
It also suggests enterprise level and insurers alike. Continued risk 30) – the most frequent cause of loss
technology investments can have monitoring and management controls reported this year.
benefits of up to 30% saving on will be key, especially for new designs,
engineering hours, 10% reduction in advanced construction materials
build costs, and up to 20% reduction in and innovative technologies. Design
operating costs. reviews and on-site quality controls
are essential to safeguard cost-
effective project execution and
delivery outcomes.”
strategy
can be implemented within relatively
short time frames: the focus being
primarily on ‘shovel-ready’ projects
with the requisite planning and
environmental approvals.
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
These additional demands on the “Construction insurers will need to Insurance market placements of
insurance industry coincide with a overcome a few recurrent and well- Covid-postponed projects that
transitional period in the construction identified underwriting challenges were otherwise tendered prior to
insurance sector. Major carriers such – such as extended project durations, the pandemic may be challenging
as AGCS have shown appetite and natural catastrophe exposures and for both clients and their respective
interest in providing coverage and delay in start-up covers – that are brokers. Aside from reduced market
capacity on such projects for many likely to restrict available capacity. capacity for projects located in high-
years and continue to do so – AGCS The market will also face new risk natural catastrophe zones, the
is the lead construction insurer on challenges of supply chain volatility allowance for insurance costs in pre-
the Oosterweel Link, a huge road and spiking material costs, risks Covid tender bids is unlikely to take
infrastructure project underway of skilled workforce shortages for account of the ongoing market rate
in Belgium’s second city, Antwerp, contractors and heightened focus increases that have occurred over the
which will bring many benefits for on Environmental, Social and last two years. The hardening market
international trade and local residents. Governance (ESG) issues, which have has additionally brought about a
an ongoing and accelerating impact number of policy wording restrictions
However, there has recently been a on the underwriting strategies of that may become problematic,
number of new entrants to the sector many carriers in the construction especially for Owner Controlled
who will have to accommodate sector,” says Yann Dreyer, Global Insurance Placements (OCIP) and
some new “market realities” to Practice Group Leader for placements involving Public Private
secure the benefits of such large- Construction at AGCS. Partnerships (PPP). In many cases
scale opportunities and their the policy wording was included in
successful outcomes. the tender documentation and is
therefore integral to the contract,
which invariably would not foresee
any amendments in the final policy
placement process.
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
3. Sustainability
As much will drive changes
as 50% of
the whole in risk profile
life carbon A global transition to a more If the industry is to reduce its carbon
emissions of a sustainable future, including efforts
to cut carbon emissions, will have
footprint it will need to adopt new
materials and construction processes.
building comes profound implications for construction
risk. As a significant contributor
As much as 50% of the whole life
carbon emissions of a building comes
from the to greenhouse gas emissions, the from the manufacturing of materials
8 1 Building sector emissions hit record high, but low-carbon pandemic recovery can help transform sector – UN report, December 16, 2020
2 WBCSD, Net-zero buildings: Where do we stand? July 8, 2021
3 Chatham House, Making Concrete Change: Innovation in Low-carbon Cement and Concrete, June 13, 2018
MANAGING THE NEW AGE OF CONSTRUCTION RISK
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
Offshore windfarms are exposed to harsh “Repairs to undersea cables, which weigh
weather conditions and typically make use thousands of tons and require special ships to lay,
of new technologies, which can be pushed to can take more than a year. An offshore converter
their limits. Construction involves high value station alone can cost as much as $1.5bn,
components and specialist equipment and comparable to an oil rig. A fire or explosion
vessels. Turbine blade damage or gearbox involving a converter – as seen recently in China –
failure can cost double or triple the amount for can result in a total loss for insurers.”
an onshore turbine, while underwater cables,
connectors and power converters are expensive Offshore wind farms, as well as onshore wind
and time-consuming to repair. and solar projects, can also be exposed to
serial losses. A design or manufacturing fault
“Offshore wind is a growing business, but it in a turbine or solar panel could impact one
is also complex,” says Martin Eckel, Senior or more projects. There have also been large
General Adjuster, Global Claims Key Case claims from faulty foundations in solar parks
Management at AGCS. “Each new project uses and farms.
new construction methods and sophisticated,
yet sometimes prototype, technology. Turbines “We know that new technology can create large
are huge, generating double digit megawatts losses,” says Olivier Daussin, Construction
of power, but their foundations can be exposed Underwriting Lead, Chief Underwriting
to defects in installation. We have also seen Office – Energy & Construction. “You can’t
a number of losses involving gearboxes and grow in the renewable sector without close
turbine blades, which are expensive to repair co-operation between claims, underwriters and
due to the need for specialist barges. risk engineering.”
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
Hydrogen is predicted to play a leading role in the energy transition with the “green oil of the 21st century”
increasingly promoted by governments worldwide. As an alternative to fossil fuels, it could be a valuable tool for
For example, a reliance on renewable energy In 2021, a power plant in South Africa was
will require large scale battery storage capacity severely damaged after hydrogen used in
tackling climate change in future, helping many industries to reduce their CO2 emissions. This risk bulletin from
Allianz Global Corporate & Specialty (AGCS) highlights some of the opportunities and challenges of a trend at the
forefront of the energy industry and also assesses the risk environment of technologies associated with the
production, storage and transportation of green hydrogen.
THE CASE FOR HYDROGEN petrochemical and cement industries to decarbonize and
Hydrogen (produced from low-carbon or even renewable reduce CO2 emissions while even buses, ships and trucks
energies) is of growing importance for the substitution of could also run on hydrogen in the future. Hydrogen has the
fossil fuels in the fields of energy, supply, mobility and potential to morph from a niche power source into big
to smooth out supply, while hydrogen gas is the generator cooling system exploded. The
industry. It is widely available with its main advantage being business, with countries committing billions to scale up their
that it only emits water when burned and it can be produced infrastructure and with projects being introduced around
without releasing CO2. Hydrogen can be stored, liquified the globe. Despite these successes, there are challenges to
and transported via pipelines, trucks or ships. Ultimately, it overcome for hydrogen to become a major part of the
could help several hard-to-abate sectors such as the steel, energy transition (see advantages/disadvantages box).
being touted as an alternative to natural gas. damage1 is expected to take years to repair and
Find out more about Green hydrogen – produced using renewable cost in the lower triple digit millions of dollars.
the management of
complex risks in the energy – could provide a solution for hard-to-
emerging hydrogen abate sectors such as the steel, petrochemical “Hydrogen is one of those sectors where we
industry Hydrogen
industry can help and cement industries, as well as be used to expect to see investment in coming years,” says
tackle climate power long distance transport. Martin Eckel, Senior General Adjuster, Global
change
Claims Key Case Management at AGCS. “The
The technology behind gas production is technology involved in producing hydrogen is
already established – albeit currently using not new and is already in use in other sectors.
fossil fuels in its production. The majority of But it will need to be scaled up.”
hydrogen today is produced on-site in industries
like ammonia production, oil refining and power “The future green hydrogen sector will need
generation. However, the widespread adoption to combine hydrogen electrolysis plants with
of green hydrogen would require large-scale green power sources like solar and wind,” adds
construction of electrolysis plants, pipelines, Olivier Daussin, Construction Underwriting
storage and export infrastructure, such as port Lead, Chief Underwriting Office – Energy &
terminals and shipping. Construction. “The hydrogen economy will
also need storage facilities, port facilities and
pipelines. We already insure many of these risks,
but the challenge will be to convert hydrogen
into a new industrial sector.”
12 1 IOL, Medupi explosion may cost up to R40bn - experts, August 11, 2021
MANAGING THE NEW AGE OF CONSTRUCTION RISK
6. Modular construction
is growing, but with
enhanced exposures
Recent crises, such as the Covid-19 pandemic, The size of the global modular construction
as well as the development of technology, market size is projected to grow from $82bn in
new materials, manufacturing machinery 2020 to $109bn by 2025, at a combined annual
and equipment, and increasing reliance on growth rate (CAGR) of 5.75%. In terms of value
digitalization, have facilitated the emergence of and volume, permanent modular construction
a number of new trends across the construction is estimated to dominate the market and steel
industry. One of the most important is modular is tipped to be the fastest-growing market
construction, which has developed over segment. The healthcare industry is projected to
decades, although its market penetration and be the fastest-growing end-use sector through
popularity has only increased in recent years. 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 America1 .
1 Markets and Markets, Modular Construction Market By Type (Permanent, Relocatable), Material (Steel, Concrete, Wood), Modules, End-Use 13
(Residential, Retail and Commercial, Education, Healthcare, Office, Hospitality), and Region – Global Forecast to 2025, July 2020
MANAGING THE NEW AGE OF CONSTRUCTION RISK
Modular construction is defined as the process Design codes and standards: Many design
in which a building is constructed offsite, under codes and standards do not have adequate
controlled factory conditions, using the same guidance for modular construction, as it is
materials and design and built to the same relatively new to the market compared to codes
codes and standards as conventionally-built and standards for conventional construction
facilities, but in about half the time. Buildings are methods which have developed over decades.
produced in “modules” which, when assembled It is also difficult to assess the resistance of
and connected onsite, reflect the identical design the construction when exposed to extreme
intent and specifications of a site-built facility. natural perils.
“Using such a methodology presents some Serial loss potential: Since modular units are
advantages compared to standard onsite manufactured using an assembly line process,
building construction methods. For example, there’s the potential risk of a repetitive loss
the opportunity to provide enhanced quality scenario. It’s possible that a defective product
control due to fabrication being completed at or component can be installed on numerous
a project site in a controlled environment,” says modules before the fault is discovered or sub-
Yann Dreyer, Global Practice Group Leader standard workmanship may have occurred on a
for Construction at AGCS. “Benefits include specific section of the assembly process.
less construction waste, a construction timeline
cut in half compared to traditional methods, “There is an increased risk of serial losses with
less coordination of individual materials onsite, modular and prefabricated methods as the
and reduced disruption to the surrounding same part is used across several projects,” says
environment, among others.” Olivier Daussin, Construction Underwriting
Lead, Chief Underwriting Office – Energy &
From a construction insurance perspective Construction. “We have seen in the renewable
– such as a construction-all-risks (CAR), or energy industry how problems with wind
builder’s risk, policy – this more sustainable turbines are replicated across multiple projects.”
method of materials production certainly results
in some exposure reduction, for example, with
regards to third-party liability risks. However,
enhanced exposures include:
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
“If there were to be a sudden surge in activity, some Some construction losses have been exacerbated by
contractors could become overloaded and we may see the unavailability of international expertise. “We had
future supply issues, such as shortages of skilled workers, an issue with a plant at a project in India where it took
plant and machinery, as well as critical materials like steel the Japanese engineer six months to get onsite due to
and cement. While manageable, potential shortages, in Covid-19,” says David Wilson, Global Head of Energy
particular in skilled labor, would need to be considered Claims at AGCS.
in underwriting.”
Travel restrictions and Covid-19 measures also affected the
The recovery from the pandemic has already caused ability of insurers’ claims teams to carry out onsite visits and
problems with the availability of construction materials as loss adjusting. AGCS was able to maintain service levels
well as skilled labor, driving up prices of basic materials through remote claims inspections using technology, which
such as timber. Travel restrictions have also meant that will remain a valuable resource going forward.
migrant labor has been restricted while skilled workers
have not been able to freely work in emerging markets. “Our business model and pre-existing personal relationships
Even before Covid-19, the construction industry was with clients enabled AGCS to service clients during the
experiencing a skilled labor shortage, which could be pandemic, carrying out remote claims inspections and
an issue longer-term as growth in construction gathers negotiations. But in-person site inspections will still have a
momentum with new projects. very important role to play in future,” says Eckel.
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
8. Time to build
in extreme
weather risks
Mquiaerum re soluptate nobit
volupta sum et quaes excep turibus.
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
1 Severe weather events drive global insured catastrophe losses of USD 42 billion in first half of 2021, Swiss Re Institute estimates, August 12, 2021 19
2 Climate change widespread, rapid, and intensifying – IPCC, August 9, 2021
3 Construction Dive,Texas contractors deal with ‘unprecedented‘ winter weather, power outages, February 17, 2021
MANAGING THE NEW AGE OF CONSTRUCTION RISK
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MANAGING THE NEW AGE OF CONSTRUCTION RISK
10. Digitalization of
construction creates
cyber exposures
Even onsite, the use of technology is Most construction projects are
increasing in the construction industry. not perceived to be exposed to
Robots are beginning to find more cyber-attacks as, traditionally, they
uses, such as carrying out specialist are largely offline. However, the
tasks like welding and bricklaying,
as well as automated plant like
construction industry is rapidly moving
towards digitalization, which likely will Today, the
excavators. Connected equipment
and tools, virtual reality, sensors,
trigger new risks. Today, the numerous
parties involved on a construction site numerous
wearable devices and cloud-based
platforms are also being introduced to
are interconnected through various
shared IT platforms, which increases
parties
manage supply chains, improve safety
and project management.
their vulnerability to cyber incidences
and their potential consequences.
involved on a
Cyber risks related to construction
construction
projects can encompass a broad site are
range of perils, ranging from
malicious attempts to gain access to interconnected
sensitive data, to disruption of project
site control and associated theft, to through
supply chain disruption to potential
corruption of project design data,
various shared
resulting in delays and ultimately
reputational risk for parties involved.
IT platforms
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Contacts
For more information contact your local Allianz Global Corporate & Specialty Communications team.
Ibero/LatAm Mediterranean/Africa
Camila Corsini Florence Claret
camila.corsini@allianz.com florence.claret@allianz.com
+55 11 3527 0235 +33 158 858863
Heidi Polke‑Markmann
heidi.polke@allianz.com
+49 89 3800 14303
www.agcs.allianz.com