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


Insurers Take to the Skies

This year’s hurricane season sees the use of drones and other aerial intelligence gathering systems as insurers seek to estimate claims costs.
By: | November 1, 2017 • 6 min read

For Southern communities, current recovery efforts in the wake of Hurricane Harvey will recall the painful devastation of 2005, when Katrina and Wilma struck. But those who look skyward will notice one conspicuous difference this time around: drones.


Much has changed since Katrina and Wilma, both economically and technologically. The insurance industry evolved as well. Drones and other visual intelligence systems (VIS) are set to play an increasing role in loss assessment, claims handling and underwriting.

Farmers Insurance, which announced in August it launched a fleet of drones to enhance weather-related property damage claim assessment, confirmed it deployed its fleet in the aftermath of Harvey.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now,” said George Mathew, CEO of Kespry, Farmers’ drone and aerial intelligence platform provider partner.

“The current wind and hail damage season that we are entering is when many of the insurance carriers are switching from proof of concept work to full production rollout.”

 According to Mathew, Farmers’ fleet focused on wind damage in and around Corpus Christi, Texas, at the time of this writing. “Additional work is already underway in the greater Houston area and will expand in the coming weeks and months,” he added.

No doubt other carriers have fleets in the air. AIG, for example, occupied the forefront of VIS since winning its drone operation license in 2015. It deployed drones to inspections sites in the U.S. and abroad, including stadiums, hotels, office buildings, private homes, construction sites and energy plants.

Claims Response

At present, insurers are primarily using VIS for CAT loss assessment. After a catastrophe, access is often prohibited or impossible. Drones allow access for assessing damage over potentially vast areas in a more cost-effective and time-sensitive manner than sending human inspectors with clipboards and cameras.

“Drones improve risk analysis by providing a more efficient alternative to capturing aerial photos from a sky-view. They allow insurers to rapidly assess the scope of damages and provide access that may not otherwise be available,” explained Chris Luck, national practice leader of Advocacy at JLT Specialty USA.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now.” — George Mathew, CEO, Kespry

“In our experience, competitive advantage is gained mostly by claims departments and third-party administrators. Having the capability to provide exact measurements and details from photos taken by drones allows insurers to expedite the claim processing time,” he added.

Indeed, as tech becomes more disruptive, insurers will increasingly seek to take advantage of VIS technologies to help them provide faster, more accurate and more efficient insurance solutions.

Duncan Ellis, U.S. property practice leader, Marsh

One way Farmers is differentiating its drone program is by employing its own FAA-licensed drone operators, who are also Farmers-trained claim representatives.

Keith Daly, E.V.P. and chief claims officer for Farmers Insurance, said when launching the program that this sets Farmers apart from most carriers, who typically engage third-party drone pilots to conduct evaluations.

“In the end, it’s all about the experience for the policyholder who has their claim adjudicated in the most expeditious manner possible,” said Mathew.

“The technology should simply work and just melt away into the background. That’s why we don’t just focus on building an industrial-grade drone, but a complete aerial intelligence platform for — in this case — claims management.”

Insurance Applications

Duncan Ellis, U.S. property practice leader at Marsh, believes that, while currently employed primarily to assess catastrophic damage, VIS will increasingly be employed to inspect standard property damage claims.

However, he admitted that at this stage they are better at identifying binary factors such as the area affected by a peril rather than complex assessments, since VIS cannot look inside structures nor assess their structural integrity.

“If a chemical plant suffers an explosion, it might be difficult to say whether the plant is fully or partially out of operation, for example, which would affect a business interruption claim dramatically.


“But for simpler assessments, such as identifying how many houses or industrial units have been destroyed by a tornado, or how many rental cars in a lot have suffered hail damage from a storm, a VIS drone could do this easily, and the insurer can calculate its estimated losses from there,” he said.

In addition,VIS possess powerful applications for pre-loss risk assessment and underwriting. The high-end drones used by insurers can capture not just visual images, but mapping heat, moisture or 3D topography, among other variables.

This has clear applications in the assessment and completion of claims, but also in potentially mitigating risk before an event happens, and pricing insurance accordingly.

“VIS and drones will play an increasing underwriting support role as they can help underwriters get a better idea of the risk — a picture tells a thousand words and is so much better than a report,” said Ellis.

VIS images allow underwriters to see risks in real time, and to visually spot risk factors that could get overlooked using traditional checks or even mature visual technologies like satellites. For example, VIS could map thermal hotspots that could signal danger or poor maintenance at a chemical plant.

Chris Luck, national practice leader of Advocacy, JLT Specialty USA

“Risk and underwriting are very natural adjacencies, especially when high risk/high value policies are being underwritten,” said Mathew.

“We are in a transformational moment in insurance where claims processing, risk management and underwriting can be reimagined with entirely new sources of data. The drone just happens to be one of most compelling of those sources.”

Ellis added that drones also could be employed to monitor supplies in the marine, agriculture or oil sectors, for example, to ensure shipments, inventories and supply chains are running uninterrupted.

“However, we’re still mainly seeing insurers using VIS drones for loss assessment and estimates, and it’s not even clear how extensively they are using drones for that purpose at this point,” he noted.

“Insurers are experimenting with this technology, but given that some of the laws around drone use are still developing and restrictions are often placed on using drones [after] a CAT event, the extent to which VIS is being used is not made overly public.”

Drone inspections could raise liability risks of their own, particularly if undertaken in busy spaces in which they could cause human injury.

Privacy issues also are a potential stumbling block, so insurers are dipping their toes into the water carefully.

Risk Improvement

There is no doubt, however, that VIS use will increase among insurers.


“Although our clients do not have tremendous experience utilizing drones, this technology is beneficial in many ways, from providing security monitoring of their perimeter to loss control inspections of areas that would otherwise require more costly inspections using heavy equipment or climbers,” said Luck.

In other words, drones could help insurance buyers spot weaknesses, mitigate risk and ultimately win more favorable coverage from their insurers.

“Some risks will see pricing and coverage improvements because the information and data provided by drones will put underwriters at ease and reduce uncertainty,” said Ellis.

The flip-side, he noted, is that there will be fewer places to hide for companies with poor risk management that may have been benefiting from underwriters not being able to access the full picture.

Either way, drones will increasingly help insurers differentiate good risks from bad. In time, they may also help insurance buyers differentiate between carriers, too. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]