To manage risk, companies can draw on two key risk management areas. The first is the use of risk controls or those solutions that prevent and mitigate risk. The second is the use of risk finance solutions which provide capital in the event certain risks manifest and cause damage (financial loss) to organizations. These two risk management areas feed each other. Those solutions that are utilized to prevent and mitigate risk (the risk controls) reduce the likelihood and severity of claims against the risk finance solutions.

From a risk finance perspective, the claims made against the risk finance products are a rich source of data which can be utilized to create new and improved risk controls. The interplay between risk controls and risk finance is a virtuous cycle of risk management, and organizations involved in the construction sector may benefit by ensuring these two risk management areas are closely linked to improve the risk management platform their organizations and for projects they are part of.

In recent years there have been several trends within the global construction market that have created a deterioration of risk control implementation. The industry is now seeing signs that the market for risk finance is beginning to firm. Risk finance products like professional liability, property insurance, casualty insurance and subcontractor default insurance are all showing signs of price firming in most global regions. Firming represents the beginning of what could be a hard insurance market—a term used by the insurance sector which denotes the capacity for risk finance is shrinking and thus the cost of risk financing is going up or the coverage under the risk finance solutions is being limited.

Stakeholders within the construction sector can expect to see some firming in the areas mentioned above, or in the least, they can expect to be asked for more information from their brokers (on behalf of their insurers) to better asses the risk and avoid price increases or coverage limitations. All stakeholders should do their best to understand not only which insurance product lines will be firming (and where), but they should also be asking their broker and insurance partners what is causing this firming of risk finance terms? It is only through understanding the causes of price firming can the industry put in place the appropriate risk controls to bring the market back to a softer position.

It should be noted that there are factors outside of the construction sector also driving market firming—for instance, the significant losses suffered from natural catastrophe events like wild fires and flooding. Outside factors aside, the following are some of the high-level factors from within the construction sector that appear to be driving market firming:

• Low margins. The global construction market is experiencing margin deterioration on a global scale. Several factors are contributing to lower margins but the key point is that risk increases in a lower margin environment.
• Labor shortages. Both the design and construction sectors are experiencing a deterioration in the quality of their workforce. Several of the most experienced members of their workforces are retiring and the supply of experienced labor isn’t there to replace these workers at the pace they are retiring. Less experience leads to greater risk.
• Interaction between design and construction. The global construction market has been flooded with several new construction delivery models and most are creating communication disruptions between the design community (the plan) and the construction community (the execution of the plan). More collaboration and improved communication between these two communities is required to improve losses being suffered by insurers.
• Lack of technology adoption. There are several new technologies coming to the market that can significantly reduce risk;, however, construction stakeholders are slow to adopt these solutions. The industry is trying to adopt more of these technologies, but it appears that there are so many technology choices in the market that may be hampering adoption, as too many options leads to paralysis of decision. In addition, lower margins within the industry have not helped with innovation adoption.
• Owner engagement. Construction experience within the owner community is also contributing to increased frequency and severity of insurance losses. Owners need to find ways to accelerate their employees' knowledge around construction risk and construction procurement models. In addition, owners need to look at models that improve communication and collaboration amongst all parts of the construction value chain.

As the insurance sector is beginning to firm, organizations should be prepared and ensure they understand how their firm or project can be addressing these factors through the use of strong risk controls that prevent and mitigate risk. Access more detail in the Construction and Infrastructure 2018 Market Review and Market Outlook for 2019.