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Digital EditionHow the Construction Industry Is Tackling 3 Emerging Risks
Jeff Kaufmann, executive vice president and head of marine for MSIG USA, remembers working with risk engineers and a construction insured on a $400 million manufacturing project.
The site owner was building an addition valued at another $400 million, which vastly changed the scope of the project and its risk profile. As a result, the fire pump, which could have covered the initial site, was now deemed inadequate for the new annex.
“Our risk engineers worked with the insured to find a solution,” Kaufmann said, “but had these discussions taken place earlier, the necessary changes would have been less costly to implement. This kind of collaboration in the construction phase also makes the finished product a better risk for the property market, potentially making that placement easier for the insured.”
This story underscores an important lesson for the construction industry: Obtaining builder’s risk and other insurance policies isn’t as easy as it used to be. In the past, construction companies may have completed their plans and tried to purchase policies that would enable them to start construction within weeks, if not days. Now, they need a longer lead time.
“Waiting until the last minute and expecting to secure coverage in just a couple of days is no longer feasible,” Kaufmann said.
Several emerging risks have made it increasingly challenging for insureds to procure the required policies. Fortunately, carriers, brokers and risk engineers are becoming more communicative in helping construction companies get the coverage they need.
Here’s a look at three emerging challenges the construction sector is facing.
1) Buildings Have More Technology
Jeff Kaufmann, executive vice president and head of marine, MSIG USA
Commercial buildings are a lot more complex than they used to be. Companies need all sorts of gadgets to manufacture the semiconductor chips that are in everything from automobiles to iPhones. The data centers that power our digital lives rely on advanced technology to do it.
“In the past, warehouses were simply four walls with minimal technology, perhaps some refrigeration equipment at most,” Kaufmann said. “Now, with the increase in automation, the values going into these facilities are substantial.”
“A significant portion of the project value now lies in the technology, racks and conveyor systems being installed, rather than just the construction of the building itself,” added Richard Pye, senior vice president, inland marine, MSIG USA.
Building technologies can be damaged during the installation process, resulting in insurance claims. Damaging these expensive tools can drive up project costs — often in ways that insureds don’t anticipate during the planning stages.
“Even if the initial construction models are accurate, the introduction of advanced equipment and technology can significantly alter the value and risk profile of the project,” Kaufmann said.
“The accumulation of these high-value components occurs more quickly, potentially exposing insurers to higher risks than initially anticipated.”
2) Supply Chain and Labor Shortages
Richard Pye, senior vice president, inland marine, MSIG USA
Since the beginning of the pandemic, construction companies have struggled to acquire the building materials they need.
“The availability of standard construction materials like steel and concrete has improved compared to the peak of the COVID-19 pandemic,” Pye said.
However, he’s quick to correct people who believe that building materials are the only cause of construction delays: “The most significant shortage we currently face is the lack of skilled personnel,” he said.
“The scarcity of trained workers, from high-rise specialists to high-tech equipment installers to artisans like plumbers and electricians, poses a greater challenge than material shortfalls.”
A lack of proficient workers can increase the likelihood of a claim. Water damage — a major cause of loss for high-rises and other commercial buildings — can be exacerbated if plumbing is poorly installed.
“Unskilled labor can lead to plumbing losses originating on upper floors that trickle down through the entire building,” Pye explained.
3) Rising Project Values
The factors referenced above contribute to one thing: rising construction project costs.
In 2019, constructing a single-story office building ran $160 to $170 per square foot. Now, the average cost is $313 per square foot.
“The scale of large builder’s risks has grown tremendously over the past 10 to 15 years. Projects easily exceed $1 billion to $2 billion in value, particularly for data centers and other large risks,” Pye said.
Estimating costs for replacing an existing building damaged by a natural catastrophe or other factors is already tricky; inaccurate property valuations have plagued insureds in recent years. Those challenges compound for buildings under construction. Unlike the commercial property space, construction as a sector has been slower in embracing models that help them predict the costs of natural catastrophe damage.
“In the construction industry, we are still a bit behind the curve,” Kaufmann said. “We haven’t seen one or two models emerge as the go-to solutions tailored for the construction insurance product. The build-up in values over the course of construction makes that kind of modeling difficult.”
Risk Engineering and Proactive Communication
Construction’s increasing complexity means that “even when lead markets are all-in on a risk, insureds still need to turn to second-tier markets for extra capacity,” Kaufmann said.
Lead carriers, secondary markets and reinsurers need to work together to help insureds find adequate coverage. That can be difficult, as “all communication must go through the broker,” Kaufmann said. “Carriers cannot directly call each other to discuss details.”
The good news: Carriers, brokers, insureds and risk engineers are becoming more open to sharing data despite these hurdles.
“The insurance community is relatively small, and we are familiar with each other’s reputations,” Pye said.
“I would say communication has improved between underwriters, brokers and lead markets. Underwriters are asking specific questions about who the lead market is, who has conducted risk engineering visits, and requesting to share risk engineering reports and policy terms and conditions.”
This process enables secondary carriers to detect issues the lead insurer might have missed in the risk engineering process, making everyone better prepared in the long run. Pye remembers a time when his team detected some risks in a large municipal airport project that the lead carrier had missed.
“Our risk engineering team had to quickly assess the risk, run models, ask pertinent questions and engage in back-and-forth communication,” Pye said. “The broker then had to go back to the lead with our findings, highlighting the importance of a thorough risk engineering approach.”
Though the construction industry is facing many challenges, stakeholders are finding ways to work together to create solutions that fit its needs so people can keep building.
“Early communication between the insured, their broker, lead underwriter and risk engineers during the planning stage is crucial,” Kaufmann said. “Collaboration allows for proactive risk management as the project comes together.” &
