ROBERT TER MORSHUIZEN, head of energy and construction at Allianz Global Corporate and Speciality (AGCS)* in South Africa, explores how new building methods and materials are shaping construction’s changing risk landscape as we try to decarbonise.
In June 2022, a fire outbreak at a hospital construction in Istanbul, Turkey, destroyed most of the newly installed medical and security devices, injuring three people. A few days later, firefighters from West Fargo in North Dakota, USA, attended a flaming construction site. A month after that, a blaze broke out at a railway development in Stuttgart, Germany. Fire and explosions remain the number one cause of construction and engineering insurance claims, accounting for 27% of the value of these claims over the last five years, according to an AGCS industry claims data analysis between January 2017 and December 2021.
Natural catastrophes account for 19% of claims by value, followed by defective products (10%). Faulty workmanship or maintenance (8%) and machinery breakdown (7%) round out the top five causes of construction and engineering claims losses. Risks do not remain in stasis though. AGCS expects sustained growth in the global construction market over the next decade, driven by a surge in government spending on infrastructure (such as the US’s one trillion dollar bipartisan infrastructure bill in 2021), and factors like rising emerging market populations, urbanisation, a growing working age population, and the transition to a low-carbon or net-zero economy.
The latter brings many opportunities, requiring significant investment in alternative energy such as wind, solar, and hydrogen, as well as power storage, transmission, and supporting services. According to the International Energy Agency (IEA), pursuing net zero will create a market for wind turbines, solar panels, lithium-ion batteries, electrolysers, and fuel cells worth well over one trillion US dollars a year by 2050 – comparable to the current oil market.
Huge investment is also required to make buildings more sustainable and reduce greenhouse gas emissions: green building in emerging markets represents a US$24.7 trillion investment opportunity by 2030, according to the International Finance Corporation. Climate change adaption and mitigation will give rise to further construction opportunities. However, this global construction boom will also bring challenges. The rapid adoption of prototype technology and use of new building methods and materials will require close cooperation between underwriting, claims, and risk engineering, as well as between insurers and their clients; new technologies can significantly alter the risk landscape, especially when mass deployed.
Take offshore wind, which is at the cutting edge of renewables. The global offshore wind energy market is expected to increase from a revenue of US$33.5 billion in 2021 to US$89.8 billion by 2030, with a compound annual growth rate of 12.1%. This field is booming, particularly as offshore wind turbines are more efficient than onshore turbines due to consistent wind flow. But offshore wind farms are complex to build, especially as projects grow in size and move into deeper waters further from land.
Construction also involves high-value components and specialist equipment and vessels. Offshore wind farms are subject to harsher weather and typically use new technologies, which are often pushed to their limits. Repairing turbine blade damage or gearbox failure may cost two or three times more than on an onshore turbine. Underwater cables, connectors, and power converters, meanwhile, are expensive and time-consuming to repair.
Getting concrete about climate change
Concrete is the second most consumed material on Earth, after water. Three tonnes are used annually for every person on the planet. Unfortunately, cement – the key ingredient in concrete – contributes about 8% of the world’s carbon dioxide emissions.
Efforts are underway to develop “concrete 2.0”: new forms that use green and novel types of cement. But if these innovations prove commercially viable, underwriters and carriers will not have the luxury of years of rigorous testing and use to see how the product performs, or evaluate good vs. bad risk.
From an exposure perspective, AGCS views certain new building materials or construction methods as “prototypes”. For instance, in modular construction many design codes and standards do not yet have adequate guidance; this is relatively new to the market compared to more established codes and standards for conventional construction methods, which have been developed over decades. It is also difficult to assess the resilience of modular construction to extreme natural perils. Underwriters work closely with brokers and clients to learn about new construction methods and materials before insuring their attendant risks. There’s always this collaboration relating to exposure and innovation. The more information clients share with their insurers, the better the underwriters will understand what clients are doing.
* AGCS is a global business insurance provider.