Business interruption crisis looms warns insurer

Insurer Allianz Global Corporate & Specialty (AGCS)  has warned property damage and business interruption losses are set to exceed pre-COVID levels as supply chain issues and rising material costs continues to impact the construction sector.

The insurer issued its Allianz Risk Barometer  for the sector which found business interruption/supply chain disruption and natural catastrophes rank as the top risks for the construction and engineering businesses, followed by the energy crisis as a new entrant at  number 3. Following the Allianz Risk Barometer 2023 in January, it has now published its Global Industry Solutions Construction Outlook, one of several risk trend briefings for specific industry sectors.

Fires and natural disasters are the top contributors to construction and engineering losses according to AGCS’ analysis of 22,000 insurance claims worth €12.8bn over five years from 2017 to end of 2021. Fire is the most expensive cause of loss, accounting for 27% of the value of claims analysed. Natural catastrophes account for almost a fifth of claims by value (19%) and are also the most frequent cause.

Blanca Berruguete, global industry solutions director for construction at AGCS, explained: “Larger values are at risk for companies. Construction costs are soaring because of the higher prices for energy and raw materials. Replacement is costing more and taking longer. Materials can also often be unavailable due to logistics, shipping and supply-chain bottlenecks. The result is that any property damage and business interruption losses are now likely to be significantly higher than before Covid-19.”

“The construction industry is facing a number of challenges such as the prospect of recession, the shortage, and rising cost, of energy, key equipment and materials given recent high inflation, a spike in procurement costs, ongoing shortage of skilled labour, longer lead times, schedules, and cost overruns, compromised supply chains, ever-changing workplace protocols, and increased competition,” he added.

While the energy crisis, in combination with other factors, has contributed to rising costs given construction is an energy-intensive economic activity, in the mid- to long-term, it could also act as a catalyst for the sector to fast forward its green transformation, adopting more sustainable approaches given it is a key contributor to greenhouse gas emissions.

The drive to net zero will help deliver strong future growth for the construction industry but new technologies, innovative delivery methods and greener, leaner practices will also bring new risk scenarios such as potential defects and repetitive loss scenarios or unexpected safety or environmental consequences, in addition to benefits.

“The switch to sustainable energy and the adoption of modern building methods will transform the risk landscape, with radical changes in design, materials and construction processes,” said Berruguete. “In order to meet carbon reduction targets, rapid adoption will likely be required meaning close co-operation between insurers, brokers and clients, to share data and experiences to help underwrite what can be prototypical risks.”

The report said construction sites need to give more consideration to the impact of extreme events, such as wildfires, flash flooding and landslides in their risk assessments. With climate change increasing the frequency and severity of these events, the costs of property damage and business interruption are expected to escalate.

Fires and natural disasters are the top contributors to construction and engineering losses according to AGCS’ analysis of 22,000 insurance claims worth €12.8bn over five years from 2017 to end of 2021.

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