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Business interruption/supply chain disruption ranks as the top risk facing the construction and engineering sector, which has been hit by soaring construction costs, supply chain disruptions and labor shortages, according to a report published by Allianz Global Corporate & Speciality (AGCS).
Ranked as the second highest risk for the sector is natural catastrophes, followed by the energy crisis as a new entrant at number three.
While the long-term outlook for the sector is positive, it faces a number of shorter-term challenges such as the prospect of recession; the shortage and rising cost of 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, said AGCS in a briefing on the construction sector report, Global Industry Solutions Outlook – Construction.
The AGCS construction briefing uses data from the Allianz Risk Barometer 2023, published in January and based on a survey of 2,712 risk management experts from 94 countries and territories. The construction briefing is based on a survey of 161 respondents from that sector.
Not only is the cost of building replacement higher and taking longer, but materials are also significantly more expensive, commented Blanca Berruguete, global industry solutions director for Construction at AGCS, who was quoted in the briefing.
“[T]he cost of cement, timber, steel, glass and paint have all increased over the last year, in some cases by around 50%, while construction inflation was in the range of 11% to 25% in countries such as the US, UK and Germany– but can often be simply unavailable due to logistics, shipping and supply-chain bottlenecks,” she continued.
The end result is that property damage and business interruption losses are now likely to be significantly higher than they were before the pandemic, the report said.
The Allianz survey revealed that the second highest risk worrying executives in the construction and engineering sector is natural catastrophes (which can lead to business interruption/supply chain disruption).
“Our analysis of construction and engineering insurance industry claims around the world shows that natural hazards is already the second most expensive cause of loss, accounting for 20% of the value of claims in five years — second only to fire and explosion,” Berruguete continued.
“With climate change increasing the frequency and severity of extreme weather events such as hurricanes, floods, and wildfires this means that the costs of property damage and business interruption from these events are expected to escalate,” she said.
Given the fact that it is now much more expensive to repair or rebuild damaged properties, Berruguete said, it is important that businesses work with insurers to ensure they have accurate and up-to-date valuations of assets so that they are fully reimbursed in the event of losses.
Ranked at number three on the list of risks for the construction and engineering section is the energy crisis, which in combination with other factors, has contributed to rising costs, given the fact that construction is an energy-intensive economic activity, the report said. In the mid- to long-term, however, the energy crisis could also act as a catalyst for the sector to fast-forward its green transformation, adopting more sustainable approaches, as it is a key contributor to greenhouse gas emissions.
Long-Term Outlook
The global construction market is set for a sustained period of strong growth in future years, driven by an expected surge in government spending on infrastructure, rising populations, rapid urbanization in emerging markets, and the global drive towards a more sustainable world, said the report. The construction sector is expected to see growth of US$4.2 trillion over the 15-year period from 2022 to 2037 — or growth of more than 40% in the size of the global market, said AGCS, quoting Oxford Economics.
Indeed, the drive to net zero will help deliver strong future growth for the construction industry. The report warned that 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.
“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 and the introduction of innovative technologies,” the report said.
“In order to meet carbon reduction targets, rapid adoption will likely be required, meaning close cooperation between insurers, brokers and clients, to share data and experiences to help underwrite what can be prototypical risks,” Berruguete said.
“In any industry, deployment of new technologies can also bring new risk scenarios such as potential defects or unexpected safety or environmental consequences, as well as benefits,” the report said, citing the example of modular construction, which can mean less construction waste, shorter timelines and reduced disruption to the environment but also raises risk concerns about repetitive loss scenarios.