The global construction market is set for a sustained period of strong growth in future years, driven by factors such as a surge in government spending on infrastructure, rising populations, rapid urbanization in emerging markets and the global drive towards a more sustainable world. For example, Oxford Economics expects to see growth of US$4.2trn in construction over the 15-year period from 2022 to 2037 – representing growth of over 40% in the size of the global market. [1]

The transition to the net zero economy will require significant investment in alternative forms of energy, as well as power storage, transmission and supporting services. The International Energy Agency (IEA) says that pursuing net zero will create a market for wind turbines, solar panels, lithium-ion batteries, electrolyzers and fuel cells of well over $1trn a year by 2050, [2] comparable in size to the current oil market. The shift to electric transport will require investment in new plants and battery manufacturing facilities, as well as charging infrastructure and power generation. 

Climate change adaption and mitigation will also give rise to opportunities with new coastal and flood defenses required, as well as sewage and drainage systems. Commercial buildings and plants will need upgrading to protect assets from storms and floods. Ageing infrastructure will need to be upgraded to cope with more extreme weather events. 

The long-term future outlook is positive. Having said that, the industry is also facing a number of short- and long-term challenges such as the prospect of recession, the shortage, and rising cost, of key equipment and materials given recent high inflation, a spike in procurement costs, ongoing shortage of skilled labor, as well as longer lead times, schedules, and cost overruns, compromised supply chains, ever-changing workplace protocols, and increased competition.

Simply put, larger values are at risk for companies. Construction costs are soaring in many countries because of the higher prices for energy and raw materials. Replacement is costing more and taking longer. Materials are not only significantly more expensive – the cost of cement, timber, steel, glass and paint have all increased over the last year, in some cases by around 50%, while construction inflation was in the range of 11% to 25% in countries such as the US, UK and Germany – but can often be simply unavailable due to logistics, shipping and supply-chain bottlenecks. The end result is that any property damage and business interruption losses are now likely to be significantly higher than they were before Covid-19.

Our analysis of construction and engineering insurance industry claims around the world shows that natural hazards is already the second most expensive cause of loss, accounting for 20% of the value of claims in five years (see graphic) – second only to fire and explosion. With climate change increasing the frequency and severity of extreme weather events such as hurricanes, floods, and wildfires this means that the costs of property damage and business interruption from these events are expected to escalate. It is now much more expensive to repair or rebuild damaged property and therefore it is important that businesses work with insurers to ensure they have accurate and up-to-date valuations of their assets in order to ensure they are fully reimbursed in the event of any loss.

The construction sector has reached a critical juncture. Between new technologies, innovative delivery methods and the explosion of greener, leaner practices, the industry is poised to embrace and benefit from more sustainable approaches. Such innovation is necessary in the face of mounting pressures. Not only are investors and consumers voicing louder concerns about environmental, social, and governance (ESG) issues, but legislation, regulation and reporting requirements are also evolving quickly in many jurisdictions around the world.

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 and the introduction of innovative technologies. In order to meet carbon reduction targets, rapid adoption will likely be required meaning close co-operation between underwriting, claims and risk engineering, as well between insurers, brokers and clients, to share data and experiences to help underwrite what can be prototypical risks. In any industry, deployment of new technologies can also bring new risk scenarios such as potential defects or unexpected safety or environmental consequences, as well as benefits. For example, modular construction can mean less construction waste, shorter timelines and reduced disruption to the environment. However, it also raises risk concerns about repetitive loss scenarios.

From AGCS continued risk monitoring and management controls will be key. Design reviews and on-site quality controls are essential to safeguard cost-effective project execution and delivery outcomes.

To transform successfully, sector players must be bold in traversing challenges, confidently overcoming uncertainty and laying the foundations for future success and sustainability. AGCS is committed to supporting all clients who set out on the transformation journey and implement a clear plan to diversify their businesses away from hydrocarbons by 2050. Collaboration is key when it comes to exposure and innovation and we have capacity, engineering expertise and underwriting experience to apply to transition activities, whether this is supporting green hydrogen facilities, sustainable construction projects or offshore wind farms.

AGCS is a lead insurer on the construction of the UK’s Dogger Bank wind farm project, a joint venture partnership between SSE Renewables, the UK’s leading developer and operator of renewable energy, and Equinor, one of the world’s largest offshore operators, each with a 40% share, and the ENI Group, an Italian oil and gas multinational. It is the world’s largest multi-field offshore wind farm, which could provide up to 5% of the UK’s total energy needs by 2026.

Green hydrogen is another important component of the decarbonization strategy and AGCS recently deployed capacity for the construction of one of the world’s largest renewable energy hubs to produce, store, and deliver green hydrogen in the US.

Another increasingly important, and interesting area, that we are involved in is ‘floatovoltaics’ – solar photovoltaic (PV) panels that float on a body of water, usually unused, such as coal quarries, mineral extraction pits, or reservoirs. Their construction opens up opportunities for solar installation.

In Germany, renewable energy developer BayWa r.e. recently built the country’s largest floatovoltaic plant. AGCS was the lead insurer, and risk consultants worked closely with BayWa r.e. from an early stage to carry out risk analyses, identify potential areas of concern during construction, and collect data.