A battle for capital and capacity – emerging risks in the construction sector | Insurance business America
“Underwriters are becoming more demanding”
Risk management news
By Kenneth Araullo
The construction industry faces unique challenges in today’s market, driving companies to seek innovative solutions to effectively manage risk.
James MacNeal, global industry specialist for construction and infrastructure at Aon, highlighted the evolving landscape of risk transfer in the construction sector and emphasized the importance of alternative strategies such as parametric insurance and captives amid a hardening traditional insurance market.
“The struggle for capital and limited capacity, as well as the convergence into a seller’s market, are shaping the construction industry,” said MacNeal. “Underwriters are becoming increasingly sophisticated and require alternative solutions such as parametric options and captives.”
The recent squeeze in the traditional insurance market, characterized by reduced capacity and rising rates, particularly in areas prone to natural disasters, has led brokers to seek new solutions for risk transfer.
According to MacNeal, these alternatives are critical for construction companies seeking to balance their risk management strategies with their growth and profitability objectives in an increasingly complex risk environment.
Economic inflation, slow recovery of supply chains, rising labor costs and the frequent occurrence of natural disasters have increased pressure on property damage costs and extended recovery times.
In addition, the phenomenon of social inflation, alongside nuclear verdicts and litigation funding, has contributed to increasing liability losses. These conditions have resulted in significant changes in key insurance markets relevant to the construction industry, impacting the property, casualty/liability and surety sectors differently.
Problems across the segment, but with room for growth
In the property insurance sector, insurers are pursuing growth through careful pricing, targeted appetite and disciplined underwriting. This results in moderate rate increases for most risks, but represents a more difficult environment for industries heavily impacted by natural disasters.
Casualty and liability insurance markets have also adjusted, with certain risk profiles facing rate increases and capacity constraints, while well-performing risks in favored sectors face more favorable conditions.
The U.S. surety bond market experienced growth driven by GDP growth, infrastructure investment and inflation. However, the severity of the claims has led some reinsurers to reduce capacity and put pressure on rates and retention levels during renewals.
“Nevertheless, claims of increasing severity impacted some reinsurance programs and resulted in capacity constraints during renewal, resulting in some rate firming and retention pressure,” Aon said.
The global brokerage’s risk survey identified an economic slowdown or recovery as the biggest risk currently facing the construction industry, as higher interest rates make it difficult to finance new projects.
MacNeal outlined the key current risks, including commodity price risks, talent retention, labor shortages and cash flow/liquidity risks, all of which are interconnected and exacerbated by factors such as energy volatility, natural disasters and the ongoing energy transition.
Infrastructure spending and the rise of complex megaprojects bring both opportunities and challenges as contractors look for ways to increase efficiency and mitigate risk through technology and improved collaboration. Aon emphasizes the importance of carefully evaluating project delivery structures to balance contractual obligations with risk tolerance and project objectives.
To address capital and capacity challenges, MacNeal suggested five strategies, including engaging with experienced brokers early, exploring alternative capital solutions and considering captives to reduce overall risk costs. These strategies aim to equip construction companies with the tools they need to proactively manage their risks in an ever-evolving market.
As the construction industry continues to evolve, access to venture capital and capacity through traditional and alternative risk transfer markets will remain a key concern.
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2024-03-11 18:32:58
www.insurancebusinessmag.com
