Adapting to emerging risks in Construction

Construction markets adapt to emerging risks and new needs

Amid the uncertainty about how countries around the world will recover from COVID-19, many governments are looking to the construction industry to mitigate the economic impacts of the pandemic. As a contributor of jobs and critical infrastructure, the industry is vital to reopening and jumpstarting world economies. Recent research from the Swiss Re Institute forecasts that investment in infrastructure development will be a main contributor to sustainable grow in emerging markets after the pandemic – and that these markets will invest US$2.2 trillion in infrastructure each year over the next 20 years.

Still, the industry faces strong headwinds. COVID-19 is straining building design requirements, labour and supply chain management, subcontractor networks, project timelines and risk management protocols. While there is reason for optimism in a few areas, uncertainty abounds in a number of sectors and industry analysts expect key construction markets around the world to contract during the remainder of the year.

Nigel Cooper, Senior Underwriter for Global Construction at Travelers Europe, has been seeing a reduction in activity in sectors ranging from oil and gas to office space.

“The drop in oil and gas prices means we’ll see less major investment in that area,” he said. “Before the pandemic, most insurers and brokers would see multibillion-pound oil and gas projects coming through and I can’t see any happening this year, except in countries where their economies rely on them.”

Construction of shopping centres and office schemes appears to be declining as well – or at least plateauing as people hold off on making decisions while they wait to see what happens with COVID-19. In commercial spaces, many shopping centres around the world had been moving toward incorporating theatres and leisure activities to take the spaces occupied by department stores. Those spaces may need yet another revision due to COVID-19.

Office spaces – and the way companies think about getting work done – will also need an overhaul if the virus continues to be a threat. Businesses will have to adapt to having employees work from home long term – or redesign office space to somehow accommodate employees safely. In the meantime, projects are stalling as developers monitor the pandemic.

Where Cooper is seeing some activity is in student accommodation and residential developments. Such projects may not be complete for another two or three years, at which point the world may look different.

There is potential for infrastructure development too. A country’s ability to invest in infrastructure projects to accelerate economic recovery will most likely reflect how well its government has contained the virus to date – and if it is in a position to manage future outbreaks. In New Zealand, for instance, where COVID-19 infections have been hovering around zero recently, the government is reportedly fast-tracking consents for 11 infrastructure jobs. The projects, which include roads, cycling paths, rail upgrades, water storage and housing developments, could provide more than 1,250 jobs, according to The Construction Index.

Other countries may struggle to start such projects if government spending is needed to contain the pandemic and provide economic relief. A region’s pre-outbreak economic strength will affect the likelihood of investment, along with how well it kept business moving in the first half of the year despite lockdowns. While key markets in Asia, Europe and North America will be in a position to bring their economies back more quickly because people have been able to work from home in recent months, growth is less likely in South American regions like Brazil.

“We’re seeing more inquiries about infrastructure projects and there is a lot of potential there, but when governments are pumping money into furlough schemes, they may not have money to pump into construction projects,” Cooper said.

Indeed, a recent Fitch Solutions forecast indicated that while economic stimulus provided in the short term to protect jobs and businesses during lockdown could speed economic recovery, it may leave governments unable or unwilling to spend on infrastructure – at least in the short term.

In the meantime, the pandemic is challenging insurers to rework how they assess potential construction risks.

A new model for determining risk

Before the pandemic, onsite inspections and face-to-face meetings had been central to construction risk management. Now, tech-enabled modifications ranging from virtual surveys to web meetings are taking their place and may become more widespread in the coming months.

“Risk engineers are grappling with travel – especially international travel – and how to meet the demands of underwriters when they can’t easily get on a plane,” said Ashley Stewart. “Luckily, we have been able to use Zoom calls and webinars to talk to teams and deliver risk presentations. It’s not the same as being in the same room together but I can see people presenting risks to the market in this way more regularly going forward.”

Beyond the logistics of assessing construction projects, the pandemic has created a confluence of challenges that insurers must consider: Local suppliers may be operating at a reduced capacity or not at all. Key parts that would have taken six months to arrive from China under normal conditions may now take nine, due to distancing requirements in factories or virus flareups over a period of months. Transit interruptions may cause additional delays. Multinational firms will need pandemic plans for shutting down sites and starting them again.

All of these factors impact insurance cover. Projects stalled by the pandemic could generate delay-in-start up (DSU) claims and require extensions for additional premium. Smaller policy-wording changes are likely too: Even existing policies with cessation-of-work clauses may not necessarily consider the possibility of all sites needing to close at once. In more litigious countries, the culture on insurance claims may call for exclusions on policies.

An evolving industry

As the construction industry operates in this unstable environment, it will have to adapt to its new risks.

There will likely be changes in the size and design of future projects. Stewart says designers may develop projects on a more modular basis, constructing modules or pods in factories, then transporting them to a site where there is less labour needed to assemble the complete project. Office space design may shift away from open-concept designs toward spaces that allow for greater separation of employees.

Technology will continue to change how people collaborate and manage work and resources. The desire to build a project with less people and allow for social distancing might also drive an increase in automation for larger projects.

As construction businesses prepare to resume projects, insurers can help them weather the coming months and the economic and safety challenges they may bring.

“From the broker’s side, retail clients in the construction market need to understand their infectious disease cover and determine what’s going to happen with claims,” Cooper said. “The pandemic could be one of the biggest insurance losses ever. Long-term increased rate pricing could be one result of that, and policy wording is going to get tighter – we’re already seeing that.”

Risk management will also need to change as it becomes more difficult to have in-person contact. It will be all the more critical for brokers to better understand how a business is managing its exposures.

“It’s important to ask about business continuity plans,” Stewart said. “We need to ask customers, ‘What are your plans in the event of a COVID flareup in your factory? Have you got plans for your workforce? Do your suppliers have plans in place?’ At such a challenging time, having a clear strategy can provide an extra measure of protection.”