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Survey Report

Construction Marketplace Realities 2019 – Global Construction Marketplace Update

Insurance Consulting and Technology

March 29, 2019

Risk financing has become more globally integrated creating opportunities for innovation and new ideas to manage construction risks not widely used in the past.

Key takeaway

Risk financing has become more globally integrated creating opportunities for innovation and new ideas to manage construction risks not widely used in the past.

Risk financing has become globally integrated over the last few years. Insurance companies are continuing to consolidate (AXA/XL for example) as they seek scale and market balance to offer true global solutions for the biggest companies. At the same time, the commoditization of core insurance products is driving innovation and new ideas for both traditional and non-traditional risks. This offers brokers and buyers the opportunity to look at risks differently and think of ways to finance risks that have not been widely used in the past.

Examples of where this global footprint is driving discussions of new ideas include:

  • Wider use of parametric solutions: These products are based on financing events which can be measured as opposed to focusing on more traditional hazard-based coverage triggers. These include weather insurance triggered by rainfall amounts rather than provable delay or damage to a project.
  • Inherent defect insurance: IDI addresses construction defects for up to 10 years after project completion and grew out of decennial liability coverage in France, which is mandated by law. Not surprisingly, IDI insurers are concentrated in Western Europe and particularly in France.
  • Impact of capacity for mega jobs for builder’s risk: Builder’s risk is truly a global market; capacity remains very high in most markets, including Western Europe (Swiss Re, Allianz, Mapfre and others), Bermuda with major reinsurers who remain quite flexible even as other markets pull back from capacity and of course London. Builder’s risk and CAR facilities often follow global contractors wherever they have jobs and as a result it is not uncommon to have a non-U.S. market take the lead on a U.S.-based project. These global programs routinely have broad terms, including Leg 3 and broader design cover than U.S. lead placements, but that gap is naring as the U.S. market responds to be more competitive on terms. As this is being written, the impact of Brexit and major losses in the London market continue to create market uncertainty, but we expect that this will normalize over the next year.
  • Integrated casualty excess: These programs have multiple lines of coverage (often general liability, auto, professional, environmental and employers liability as starting points) continue to be sought by large construction firms but are not widely put in place. There are active markets both domestically in the U.S. and globally that can offer terms for these types of programs, but there are few programs that are put in place. The positives are obvious with catastrophic protection across multiple policy lines, which should reduce coverage gaps and litigation across policies. In addition, there is the promise of efficiency of purchasing to drive down costs. On the other hand, the process of integrating the coverages can be cumbersome and expensive, so adoption of these programs is still not widespread.
  • Alternative covers for delay: The global market tends to be more flexible in areas previously thought of as force majeure events. Recent examples of offerings include cover for cost increases and delays due to protests of certain types of jobs, inability to obtain permits and labor unrest. These remain fairly rare in the construction industry due to cost concerns but continue to attract attention from owners and contractors.
  • Efficacy and performance coverage: These types of coverage have gn particularly in the energy space with the growth of renewable energy projects such as solar and windfarms. The coverage addresses the output of the project if it falls short of promised performance due to weather conditions as well as power demand. These have not been widely accessible for the commercial market or infrastructure to date but questions arise routinely about the availability of the products, so we expect more interest in the future.

Summarizing global market conditions, there continues to be significant capacity for most areas of insurance with many carriers pushing this capacity into local markets from the traditional centers of London or New York. This trend has accelerated with the recent uncertainty in the London market and offers alternatives which we expect will encourage innovation and a competitive environment long term.

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