Risk Report: Construction

Boom Risk and Opportunity

An ongoing shortage of experienced labor threatens the construction industry on multiple fronts.
By: | November 1, 2017 • 6 min read

September, the City Council of New York voted unanimously to approve a bill requiring workers on most construction projects to participate in at least 40 hours of safety training.


A building boom in the nation’s largest city was accompanied by a rise in the number of fatalities: eight so far this year; 12 in each of the two previous years, but only eight total in 2014.

Across the country there are calls for large infrastructure projects. But builders, along with their brokers and underwriters, are worried about several troubling trends. Fewer young people are entering the building trades as the industry grays. Diversity also is a stubborn challenge.

The new law in New York is one large step — among many efforts across the country — to address the issues.

“We are glad these questions are being asked,” said Gary S. Kaplan, president of North America Construction at XL Catlin. “We have been asking these questions or years, and I am just starting to feel a little better about the answers, at least what we hear from the larger contractors. We are seeing fewer claims that are related to traditional safety issues.

“Kaplan has written extensively on demographics, recruiting, safety and training, including an essay on his firm’s website. Older workers, despite their expertise and safety training, face an increased likelihood of injury, he said.

“Ask any actuary,” Kaplan wrote. “Older workers are more prone to injury than younger ones. It’s just a biological fact. They’re especially susceptible to soft-tissue injury. Worse, the older the worker, the longer soft-tissue injuries can take to heal.”

The other risk is less obvious, but it’s every bit as debilitating for the industry, said Kaplan. It’s part of a massive shift in the demographics of the construction industry and the U.S. economy: retirement.

“While an injury might never happen — retirement will.”

According to the Social Security Administration and Pew Research, Baby Boomers are reaching retirement age at the rate of nearly 10,000 per day.

Construction occupations make up roughly 10 percent of the total labor force in the U.S. If representation is proportional, that means about 1,000 construction workers reach retirement age every day.

Benefits of Diversity

Diversity is part of the answer, said William B. Noonan, executive vice president and industry leader for North American construction at brokerage Willis Towers Watson.

“Diversity is tied to the talent shortage. The more diverse your recruiting, the better you are able to recruit from across the whole talent pool,” said Noonan.

Workforce management and talent optimization was one of the megatrend challenges identified in the white paper “Deconstructing Risk,” the Willis Towers Watson 2017 Construction Risk Index.


It also matters in winning contracts. “Before you can put people to work, you have to win work,” Noonan added.

“Proposals will only get you an interview with an owner to present your ideas and answer questions. You have to show up for those looking as diverse as the clients you hope to work for.”

The same is true in insurance. “For most lines of coverage, underwriters are going to be looking at your past performance,” said Noonan.

“They are going to look at your loss metrics, but you are going to have to tell your story in person. I was previously a chief risk officer and we would always look at our own losses, our own story, before going to the underwriters.”

“Diversity is tied to the talent shortage. The more diverse your recruiting, the better you are able to recruit from across the whole talent pool,” — William B. Noonan, EVP and industry leader for North American construction, Willis Towers Watson

Internally and externally it all comes down to how a company presents and represents itself. Better selected, more diversified workers are also easier to train, especially for highly skilled trades.

“One thing that worries me is that first-line supervisors are having to spend more time training than on supervising work,” Noonan lamented. “That directly affects construction defect claims. You can trace supervision to quality assurance and quality control.”

He also is concerned that the recent string of natural disasters, from earthquakes across Mexico to hurricanes along the U.S. Gulf Coast and in the Caribbean are “putting a very big strain on an already thin pool of construction workers.

“Where people go will be about who offers the best pay and conditions, and which workers are willing to travel.”

Much rebuilding to be done in many places at the same time will draw new workers, but that goes directly back to the challenges in training and supervision. “The more front-line supervisors are diverted from their primary purpose, the more QA/AC, project completion times and budgets are directly affected. It goes hand in hand,” said Noonan.

Stephen Buonpane, senior vice president of construction at Chubb, concurred.

Gary S. Kaplan, president, North America Construction, XL Catlin

“Construction companies facing a shortage of skilled labor need to know that a lack of proper training and experience could lead to an increased likelihood of worker injuries, resulting in higher workers’ compensation and potentially general liability losses,” said Buonpane.

Any increase in workers’ comp claims not only increases costs associated with the project but could also lead to reputational concerns and project delays, Buonpane added.

“However, increased workers’ comp claims are not the only liability associated with construction sites.

“For instance, if construction sites aren’t properly maintained and controlled — especially in densely-populated areas such as New York City where there has been a boom of construction activity over the past four years — construction companies are exposed to third-party liability if their [work] injures a person or property outside the construction area.”

Further, the shortage of skilled labor also can affect the quality of construction and increase the loss exposure on the project post-construction.

“Construction companies need to be aware that if there are construction defects due to poor building quality, there could be liability losses down the road. And depending upon what has been built, those losses could be in the tens of millions of dollars,” Buonpane cautioned.


Kaplan at XL Catlin said he sees signs of improvement. “I was traveling recently and there was a construction project next to my hotel. I saw a guy flying a drone with a laser sensor. There was another driving an automatic compactor by a remote joystick controller. There also are 3D surveys and digital monitoring for level, heat and water.”

The key is engagement at all levels, Kaplan stressed.

“Construction companies are making more of a career path, from supporting shop classes in high school, to return-to-work paths as part of the worker’s comp process.

It’s important to grasp that an injury doesn’t necessarily mean having a worker totally sidelined. Studies have shown that injured workers are more likely to experience better health outcomes when a return-to-work plan is in place, said Kaplan.

“You have to be proactive to move the needle,” he said.

“On workers’ comp, you don’t want people to practice retirement. They might get good at it.”

Similarly on diversity, it takes active effort. “Equal opportunity is not sufficient. You have to push. It’s more than just wanting it. The better companies are stepping forward, but there is a long way to go.

“In gender, for example, of 10.3 million construction workers in the country about only 9 percent are female. I think that is the lowest of any major industry group.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of gtnews.com. He can be reached at riskletters.com.