While the long-term future outlook of the construction industry is positive, the industry is also facing a number of challenges such as the prospect of recession, the shortage and rising cost of materials, the shortage of skilled labor, a spike in procurement costs, compromised supply chains and more.

Every year, risk-management experts in the construction sector (and a host of other industries as well) rank their top risks for the year ahead as part of an annual Allianz risk barometer report. In 2023 business and supply chain disruptions and natural catastrophes ranked first and second respectively among top perils for the construction industry. Why are these two perils of greatest concern to industry professionals? Simply put, larger values are at risk for companies.

BUSINESS INTERRUPTIONS
Construction costs are soaring because of inflation as well as 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 end result is that any property damage and business interruption losses are now likely to be significantly higher than they were before COVID-19 began.

NATURAL CATASTOPHES
An AGCS analysis of construction insurance industry claims around the world over a five year period shows that natural hazards are already the second more expensive cause of loss for businesses, accounting for almost 20% of the value of claims (second only to fire and explosion at 27%) and are also the most frequent cause of losses. 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 kinds of events, the costs of property damage and business interruption are expected to escalate. Business continuity plans should be regularly updated and tested. It is also increasingly important that businesses work with insurers to ensure they have accurate and up-to-date valuations of their assets so they can be fully reimbursed in the event of any future loss.

DRIVE FOR NET ZERO
New technologies, innovative delivery methods and greener, leaner practices mean the construction industry is poised to embrace and benefit from more sustainable approaches. Such innovation is necessary in the face of mounting pressures; Not only are investors and consumers voicing louder concerns about environmental, social and governance (ESG) issues, but legislation, regulation and reporting requirements are also evolving quickly in many areas around the world.

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. 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. 

Deployment of new technologies can also bring new risk scenarios such as potential defects or unexpected safety or environmental consequences; but they can also bring benefits. For example, modular construction can mean less construction waste, shorter timelines and reduced disruption to the environment. However, it also raises concerns about potential repetitive loss scenarios. Continued risk monitoring and management controls will be key while design review and on-site quality controls are essential to safeguard cost-effective project execution and delivery outcomes.

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To transform successfully, sector players must be bold in traversing challenges, confidently overcoming uncertainty and laying the foundations for future success and sustainability. Collaboration is key when it comes to exposure and innovation, and insurers such as AGCS have the capacity, engineering expertise and underwriting experience to apply to transition activities, whether this is supporting green hydrogen facilities, sustainable construction projects, offshore wind farms, or something yet to be discovered.