As construction projects become bigger and harder to fund, given rate pressures and market challenges, many insurers are exiting or scaling back in the engineering market, says Allianz Global Corporate & Specialty (AGCS) Africa property and engineering head Seelan Naidoo.
He explains that the past year saw many losses from fires, mechanical failures and natural catastrophes globally, including the Hidrotuango dam collapse, in Colombia, which was estimated to have resulted in losses of more than $1.2-billion.
Naidoo notes that the sector’s problems were years in the making, with growing portfolio volatility, years of declining rates and widening coverages over many years.
Additionally, regulatory scrutiny and sociopolitical uncertainties threaten investments and project delays impinge on contractors’ expenditures. “Add to the mix the strain of new technologies and growing cyberthreats and it is tempting to sound retreat.”
Insurers are starting to realise current market practices in certain segments are unsustainable, and Naidoo predicts that this year may result in insurers cleaning up their portfolios and bringing focused risk management and risk-adequate pricing to underperforming segments.
He says the situation is more severe in Africa, with a number of construction companies facing extreme financial pressure and some entering business rescue or liquidation, owing to the deferment of projects.
Meanwhile, construction projects have a more global reach than in the past, as sizeable infrastructure projects are moving more to international companies. Naidoo avers that equipment is being sourced internationally and construction site risk management is improving from a cost perspective and from the standpoint of a continuous process improvement and knowledge-sharing strategy among contractors.
However, Naidoo highlights that there are downsides to this globalisation. For example, contractors operating in new territories must comply with new regulatory environment and build codes, which can lead to delays, pressuring schedules and creating overruns.
This while Brexit and trade tensions cause uncertainty, which can also result in project delays or even cancellations.
“Projects will, without a doubt, continue, since developing countries need continuing infrastructure investment and developed countries need to replace ageing infrastructure. Uncertainty is the enemy of investment and, on top of that, a number of countries in Africa have elections this year, which could lead to increased instability.
“Business interruption (BI), contingent BI, supply chain risks – each has had significant insurance coverage in property markets for years. Construction delays in startup (DSU) insurance take-up has increased as customers see the need to protect completed project revenues – often driven by lenders – while, simultaneously, 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,” says Naidoo.
He adds that, in the case of large Erection All Risks 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.”
Meanwhile, Naidoo points out that the construction sector is slow to adopt innovative technologies, but AGCS has seen them start to gain traction.
For example, building information modelling – three-dimensional model-based technology – that allows for more efficient planning, design, construction and management is replacing traditional two-dimensional 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 cyberthreats – an exposure much less focused on in this sector than in others.
“We help customers become aware of new technologies, while simultaneously educating them about new cyberthreats 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,” notes Naidoo.