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Construction Risk Summit 2023 snapshot: 5 top takeaways

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Over the past three years, Australia’s construction leaders proved their extraordinary resilience in the face of disruption, triggered initially by COVID and compounded by flood events, supply chain interference and worker shortages.

The fallout of these crises is still being felt, as are longer-term market and global conditions. Preparedness is top of mind as the industry moves into a fresh year, along with a drive to innovate solutions, mitigate risk and leverage its strengths.

It was on this backdrop that Marsh’s Construction Summit explored the key issues likely to shape the industry’s approach to resilience and positive growth for the next 12 months and further ahead.

Here is a digest of key learnings from the event.

1. Despite past challenges, there are compelling opportunities on the horizon

Media headlines paint a picture of a beleaguered construction industry. Post COVID, supply chain issues persist as do disruptions to manufacturing, capacity, and now inflation.

While it is true that the industry has seen better days, there is certainly significant potential for continued growth across all streams of construction, especially in Australia.

The renewed focus on driving a low carbon future spells opportunity for construction to play a leading role in the pivot towards more sustainable buildings, materials and practices.

And it won’t just be new projects that will drive this growth. A large portion of it will come from the need to retrofit existing buildings in order to bring them up to code.

Globally, it is estimated that US $4.4 trillion a year[1] needs to be spent by 2030 in order to drive the world’s transition to net zero by 2050. This equates to almost US $84 billion a week, and a significant proportion of this spend is predicted to be funnelled through construction.

There is also a positive outlook for Australia’s economy, thanks in large part to China’s economic acceleration and an improved relationship between the two.

2. Climate change is real, and we need to prepare for it

Preparing for net zero is an immense worldwide undertaking, but it’s what matters most to customers, investors, suppliers and regulators, and the construction industry must be ready to evolve and embrace a new era of sustainable practices and forging a legacy for future generations.

Currently, construction insurance is out of scope of the UN’s insurance alliance for industry net zero, due to challenges in quantification.

Nevertheless, the conversation around climate change has shifted; the debate is no longer whether climate change exists, but rather how we are going to plan for it.

The latest Global Risks Report confirms that while cost of living is currently the key preoccupation for business and government leaders in the short term (0-2 years), climate remains the primary concern for the long term (over 10 years).[2]

Climate activism is beginning to have an effect on the insurance market – think back to the protests at Lloyds of London in 2022. As a result, underwriters are beginning to decarbonise their portfolios, and push back when it comes to writing certain types of industry or risk, such as timber.

The UN-convened Net-Zero Insurance Alliance, which consists of 30 leading insurers, has set a target of having net zero carbon in underwriting portfolios by 2050.[3] This will soon extend to the construction industry, ushering in a new era of innovation toward environment-supporting practices.

3. Data is key to resilience

From a construction risk-management and project approval perspective, data is crucial.

Construction risk is dynamic; changing according to the different perils a project is exposed to in addition to timing and different phases of construction. This means that older, more generic data-gathering methods for assessing catastrophe risk are often inadequate.

Data resolves pivotal concerns for construction companies, including:

  • Not having a clear view of their risk, with low quality and incomplete data leading to higher uncertainty around a project
  • Inadequate data and modelling to navigate risk in zones prone to climate events and natural catastrophes
  • Some insurance markets won’t consider construction projects without a depth of data.

Companies must now employ increasingly thorough approaches to yield more granular data.

Construction companies have a wealth of resources at their disposal with which to do so. Many have teams of engineers with geospatial capabilities which can be leveraged to capture a more detailed and accurate picture of risk, including risk drivers, highest risk exposures, and where risk mitigation strategies will result in greater benefit.

Explaining what can be achieved with quality data, Marsh Advisory’s ESG and Climate Change, Natural Catastrophe Leader Sophie Griffin says: “Once we have the data we need, we can then run modelling for tens of thousands of events to demonstrate what loss could look like for different scenarios.

“From this we can advise you on your risk management approach and evaluate how much protection you need, your tolerance for risk, whether your current insurance program is sufficient, and how to restructure your program to deliver maximum insurance efficiency. This entire process could mean the difference between securing the capital for a project, or not.”

4. Industry-empowering alternatives can complement traditional insurance

Amid a difficult insurance market insurers are tightening their terms and conditions, and traditional insurance is becoming more difficult to obtain. This is driven by factors such as limited coverage, a volatile climate and increases in natural perils, capacity constraints and pricing pressures.

In some cases, alternative risk transfer methods may prove more practical and viable, such as parametric insurance cover.

Parametric solutions provide a predefined insurance policy that is triggered by an event when it meets a specific condition, such as a certain measure of wind speed. Parametric insurance requires parties to fully understand what the likely impact is prior to an event. It is a viable regulator-approved option that may work alongside or instead of traditional insurance.

Data and modelling are the backbone of parametric solutions.

They can be expensive, but can play a critical role in getting a project approved and through to fruition, and complement existing forms of traditional insurance in challenging risk situations. Consider, for example, an infrastructure project in northern Australia, which has a high risk rating in terms of natural catastrophe due to tropical cyclones and flood risk. It would currently be difficult to find an insurer prepared to take on all the risk due to the hardened market conditions. Parametric insurance can provide additional cover to top-up anything that traditional contracts do not cover.

A key differentiator of parametric insurance is that contractors do not have to experience loss, injury or damage in an extreme weather event for insurance to pay out. Once an agreed weather-condition metric is triggered, such as rainfall level, even without any loss or damage, the policy pays. This can assist construction companies with delays caused to projects due to extreme weather.

5. Early alignment is key to de-risking a construction project

Early engagement and forward-thinking are critical when it comes to successfully navigating the intricacies of construction risk management, and seeing a job through to completion. The more – and the earlier – that all parties can work together to plan for risk, the better the collective outcomes.

There is a lot of advocacy for early contractor engagement as a procurement methodology amongst project stakeholders, as it allows sufficient time to work through profiling and contractual obligations associated with allocating and sharing risk between different parties in the fairest way.

Throughout COVID we saw the construction industry come together to work through challenges and get through a difficult period to drive better capacity across the industry. This shift towards alignment is also a valuable approach to maintain into the future as stakeholders continue to tackle existing as well as emerging challenges.

REPORT

Global Construction Market Update

Marsh’s Construction Practice has published its latest Global Market Update summary. The report provides the latest market details at both a global and region-by-region basis and contains expert and informed opinions on what trends may occur throughout the year.

Our people

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Maarten van Haaps

Head of Construction, Marsh Specialty

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Brad  Day

National BDM – Corporate Construction, Marsh Specialty

[1] IEA,2021, Net Zero by 2050: A Roadmap for the Global Energy Sectorhttps://www.iea.org/reports/net-zero-by-2050

[2] Global Risks Report 2023

[3] Net-Zero Insurance Alliance – United Nations Environment – Finance Initiative (unepfi.org)

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