Building on New Risks: Construction in the Age of Greening

Construction risks abound, exacerbated by inflation, supply chain, labor, climate and other factors.
By Blanca Berruguete
January 31, 2023

Fire and explosions remain the No. 1 cause of construction and engineering insurance claims, accounting for 27% of the value of insurance claims over the last five years, according to industry claims data analysis conducted by global commercial insurer AGCS.

Natural catastrophes, such as hurricanes or floods, account for almost a fifth of claims by value (19%), followed by defective products (10%). Faulty workmanship or maintenance (8%) and machinery breakdown (7%) round out the top five causes of construction and engineering losses, according to the value of claims.

The risks and benefits of greening

The analysis was conducted on 22,705 insurance claims made worldwide between January 2017 and December 2021. The claims were worth approximately $13.9 billion in value and include the share of other insurers as well as AGCS. But if there is an impression that the risks remain in stasis, that is not the case.

AGCS expects the global construction market to experience sustained growth over the next decade, driven by a surge in government spending on infrastructure, such as last year’s $1-trillion, bipartisan infrastructure bill in the United States, factors such as rising populations in emerging markets, urbanization, a growing working age population, and the transition to a low-carbon or net-zero economy.

The transition to a low carbon or net zero economy brings numerous opportunities, requiring significant investment in alternative forms of 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, electrolyzers and fuel cells of well over $1 trillion a year by 20502, comparable in size to the current oil market. Huge investment is also required to make buildings more sustainable and lower greenhouse gas emissions. Green building in emerging markets represents a $24.7-trillion investment opportunity by 2030, according to the International Finance Corporation (IFC). Climate change adaption and mitigation will also give rise to further opportunities for the construction sector.

However, this global construction boom will also bring challenges as well as opportunities. The rapid adoption of prototype technology and the utilization of new building methods and materials will require close co-operation between underwriting, claims and risk engineering, as well as between insurers and their clients as new technologies can significantly alter the risk landscape, especially when mass deployed.

New grids on the block

New risk challenges lie ahead for the construction industry as the world decarbonizes. For example, while timber is being used more frequently in construction because of its lesser environmental impact, it presents challenges due to several unknown variables when it is damaged by either water or fire. The unknown exposures of newer construction materials used as part of sustainability and net zero strategies could also limit coverage capacity and hinder or delay projects.

The same questions that apply to individual building elements, such as concrete, also apply more widely. Green hydrogen–produced by splitting water into hydrogen and oxygen using renewable electricity–could be critical in a successful energy transition. Yet, while the technology to produce green hydrogen is established, scaling up requires the construction of electrolysis plants, pipelines, and storage and export infrastructure, such as port terminals and shipping. An associated risk is that hydrogen is highly flammable and combusts at low concentrations. Leaks are hard to identify without dedicated detectors as hydrogen is colorless and odorless, and conventional fire systems are not designed to handle leaks.

Approaches to constructing the technology to produce green hydrogen in massive quantities, such as large electrolyzers, and then incorporating them into existing renewable energy infrastructure, is still in its infancy. Companies operating in this space may face new risks because of the need to use prototype technologies and the risk that implementation involves possible infrastructure challenges.

The decade of infrastructure

Despite the boom in construction, some conditions could prevent firms from taking full advantage of the opportunities if they are not well managed. These include materials supply (exacerbated by the impact of rising inflation), labor shortages, and the increasing risk of cyber incidents as the industry embraces connected equipment and tools, sensors and cloud-based platforms.

Although construction is not traditionally exposed to cyber-attacks, the shared IT platforms being introduced on construction sites, for example, increase the vulnerability to cyber incidences and their potential consequences. These can include delays and reputation damage due to malicious hacks of critical project data.

Labor shortages are readily evident in many countries as construction firms have ramped up activity after COVID-19 lockdowns. Surges in growth could exacerbate the existing lack of skilled labor. The introduction of new construction designs, materials and techniques also introduces significant risks and constraints because not all staff are trained to work with them, which could result in repetitive loss scenarios.

COVID-19 demonstrated how industries can be dramatically disrupted. The pandemic caused the global market for raw materials to slow, resulting in long lead times for construction firms, adding to the existing demand for locally distributed products. The increase in demand has resulted in high prices for materials and delayed or canceled projects.

This is leading to one of the most dramatic ways the risk landscape in construction is changing–the rocketing costs of claims, again exacerbated by surging inflation. Claims create two issues: the expense of replacing damaged material and the time it takes to replace that material. Both are affected by current supply chain issues and labor shortages.

by Blanca Berruguete

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