AGCS reveals 7 trends driving big construction insurance claims

An analysis of more than 13,000 engineering insurance claims in the past five years has revealed seven trends that are driving some of the largest losses ever, according to global corporate insurance carrier Allianz Global Corporate & Specialty (AGCS).

1. Sites are getting bigger
The research by AGCS shows that construction sites are much larger than they were in the past, with projects potentially running for many years.

Raymond Hogendoorn, global head of property and engineering claims at AGCS, said: “As a result, sums insured are now much larger – projects with values of $5 billion to $10 billion are not unusual, meaning claims can be in the tens of millions of dollars.”

For example, the expansion of the Al Maktoum International Airport in Dubai will not be finished until 2030 and is expected to cost around $36 billion.

And when a landslide blocked an outflow tunnel at the Hidroituango hydropower dam in Colombia in 2018, a controlled water release was conducted to release the pressure on the structure. However, the resulting damage is estimated to have cost insurers around $1.4 billion.

2. Fire and nat cats
More than a quarter (27 percent) of engineering losses by value are a result of fire, researchers found. The AGCS report said that fire had caused in excess of €2.1 billion ($2.35 billion) of insurance losses in five years. Natural catastrophes are another source of large claims, with storm damage highlighted as the second biggest cause of loss by volume, accounting for one in 10 claims. Natural catastrophes were also the top concern for construction firms in the Allianz Risk Barometer 2019.

3. Defective products and poor quality control
When it comes to frequency of claims, defective products and inadequate quality control are the main culprits as well as being the second largest by severity. AGCS found that there were almost three times as many defective products claims as storm claims, the next largest cause of claims by frequency.

Martin Eckel, senior general adjuster at AGCS, explained: “We are seeing an increase in claims related to defects and quality control across the board.” Defective welding was identified as the cause of two major power generation claims, which both cost $200 million, the report said.

4. Supply chain complexity
Researchers said that in the past, an airport or a power plant would have been built by a national contractor using local suppliers. But things have changed and today, a large project is more likely to involve multiple parties with machinery, equipment and other components sourced and transported from around the world.

Eckel said that as technology becomes more sophisticated and specialised, the cost of repairing or replacing machinery and equipment has increased.
If a turbine being transported from China is damaged in transit, “it might take as long as 18 months for a repair”, he said.

5. Business interruption and delayed start-ups
The Allianz Risk Barometer 2019 showed that construction and engineering firms ranked business interruption (BI) as the second most concerning risk. Increased awareness of the issue has encouraged greater take up of BI insurance. AGCS found a particular increase in demand for ‘delay in start-up’ (DSU) insurance, which covers delays to construction or engineering projects following physical damage. While DSU claims are usually expensive, the report said that indemnity for delay in start-up has increased over time from around $200,000 per day to up to $500,000 per day.

6. Political risk and sanctions
Large projects take between five and 10 years to complete and can employ contractors and suppliers from around the globe. This makes them vulnerable to sanctions and trade disputes. A recent example is the potential for sudden and large increases in US import tariffs, which could add millions of dollars to claims for plant equipment and machinery imported from countries such as China.

7. Renewable energy growth
Solar and wind energy projects have grown in size in response to public demand for green power. Another effect of this is that the locations for such projects have become more remote and wind turbines much bigger – with some blades as long as a football pitch. In 2018, there were 409 new offshore wind turbines across 18 projects in the EU. Offshore wind can be a particularly challenging area for claims, as turbines can be difficult to access.

How technology can accelerate claims and reduce risk
The report also looked at how drones, satellites, lasers and computer modeling, are increasingly being used to process claims faster and mitigate risks.

Large, complex engineering and construction projects have made risk and claim assessment, not to mention establishing the cause of loss, much more difficult.

Technology is one way to deal with this. AGCS recently used drones, laser scanning, and computer modeling to find the root cause of a machinery explosion at an inaccessible site. Drones and satellite imagery were also used to assess engineering claims after record wildfires in California and Hurricane Florence in 2018.

By coupling 3D topographical data from drones with hydrogeological modeling software and rainfall simulation data, AGCS is also working to predict flash flooding risk on construction sites. The insurer said that high resolution images of a site can be available within 24 hours of a loss via satellite technology. This is particularly useful for remote or hazardous locations. It can also be used to deal with exaggerated or fraudulent claims.

Hogendoorn said: “Technology will create more certainty for engineering claims. There are so many parties on a site at one time, and so many activities happening simultaneously, it can be extremely difficult to understand the sequence of a loss event. However, we can increasingly use technology to access data and information to better understand the root cause of loss and speed up the claims process.”

Download the full report here.

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