Point/Counterpoint

Is Construction Too Risky?

Have the construction slowdown and other issues increased exposures?
By: | November 1, 2013 • 4 min read

Point: Industry is Well Positioned to Manage Growth Safely

The construction industry is finally getting back to work.

Thanks to the recovery of the housing market, overall construction spending increased 2.2 percent in the second quarter of 2013, compared to the previous quarter, according to Carter Machinery’s Quarterly Construction Report. Total private residential construction spending increased 3.3 percent.

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Anne Freedman, Senior Editor, Risk & Insurance®

The report noted the construction market is projected to grow 8 percent in 2014, due to “rapid” residential and nonresidential construction.

That’s good for the economy, the industry and the workers, but it also means risks will be increasing in this high-hazard field.

The industry is one of the most dangerous fields to work in, accounting for the highest number of fatal work injuries in any industry sector in 2012, according to the U.S. Bureau of Labor Statistics. Fatal injuries increased 5 percent, while the total hours worked in the industry increased 1 percent last year.

We know from the performance of one of our 2013 Teddy Award winners that builders are looking at their workers in a much more progressive way, going so far in some cases as to refer to them as “industrial athletes.”

And more good news: Fatal construction injuries have decreased nearly 40 percent since 2006, which indicates risk managers and owners are more sophisticated, and workers are being better trained.

The contraction in the industry has given the owners and project managers time to review and revisit some exposures. One recent innovation is design/build, which puts designers and builders together from the very beginning of a project so there is much better coordination.

In addition, owner controlled “wrap-up” insurance, with one carrier is in greater use now on larger projects. That provides much easier administration and gives the owner more risk management control over subcontractors.

We know that builders are looking at their workers in a much more progressive way, providing them with stretching regimens to reduce injury.

Project owners and contractors are also retaining more risk than in the past, so they are much more sensitive to the need for safety and quality.

Many in the industry are also beginning to understand the need for safety training to be done in both English and Spanish. That has seen some results. Fatal work injuries declined 5 percent for Hispanic and Latino workers in 2012. The natural process of contraction and rebalancing has resulted in an industry that is well positioned to manage the anticipated growth.

Counterpoint: Construction Risk is Getting Harder to Manage

A superficial reading of the finance pages shows a domestic construction industry that is making a tentative comeback. But underneath those hopeful reports lurks a darker truth, the industry is not in a good position to manage risk as business activity increases.

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Dan Reynolds, Editor-in-Chief, Risk & Insurance®

To gain perspective, understand that the industry saw tens of billions of dollars of opportunity evaporate during the downturn. One major carrier told us that contractors that once needed to bid eight to 10 jobs to land one are now bidding 30 to 40 to get work.

Price cutting is rampant and contractors are working on much thinner margins. That inevitably means safety corners are being cut.

In addition, the burgeoning urban lifestyle developments in sunbelt states are being built using wood framing rather than metal infrastructure. Why? Because from a labor and materials perspective, wood framing is cheaper to build with than metal. That’s a readily apparent indication of the way the industry is cutting costs. What worries us are the cost-cutting initiatives that are not as visible.

Another factor adding to risk exposures is the loss of experienced talent from the construction industry when the bottom fell out of it in 2008. That means companies that used to pay three people to manage safety are now paying one person — a less experienced person — to do the same work. And the workers themselves are less experienced and have less ingrained knowledge of safe behaviors.

Proof of this shortcoming is showing up in the data. An August report detailed that fatalities in the industry are ticking back up, to as many as 775 reported construction fatalities in 2012.

From a safety perspective, the U.S. Bureau of Labor Statistics ranks construction laborer as the 10th riskiest job in the country. The risk management ranks of the industry were decimated by the economic downturn. Couple that with the fact that it is using cheaper labor to perform the same risky tasks. That is not a good combination.

In some areas of the country, particularly New York, standard market carriers have pulled back from construction risks in droves due to liberal interpretations of labor laws that are allowing workers to sue employers outside of workers’ compensation’s exclusive remedy.

That’s another visible indication that construction risks are getting harder to manage.

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Editor’s note: The opinions stated in the Zurich Point of Action are provided for informational purposes only and are solely those of Zurich in North America.
The Zurich Point of Action opinions are not legal advice and Zurich assumes no liability concerning the information above. The Point and Counterpoint opinions are those of Risk & Insurance® and are completely independent of Zurich.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

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“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

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Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

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]