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sigma No 2/2018: Constructing the future: recent developments in engineering insurance

Insurance plays a key role in spurring and enabling industries like construction. Many large construction and infrastructure projects would not be realised without appropriate insurance coverage and policies – operators need to protect themselves from the diverse types of losses that can arise from circumstances beyond their control, such as mechanical failure or boiler explosion.

Engineering insurance is set to grow

According to the Swiss Re Institute, global engineering insurance premiums for 2017 were approximately USD 21 billion. This represents roughly 3% of total commercial insurance premiums (around USD 730 billion in 2017). Around half of the market is accounted for by project insurance, which protects against risks incurred during construction or installation of plant, buildings and infrastructure. Between 2018 and 2027, engineering insurance premiums could rise to USD 34.5 billion.

Nevertheless, this specialty line has faced a number of challenges. After rising rapidly through most of the 2000s as construction activity in a number of developing countries soared, global engineering premiums have stagnated in recent years. Construction spending as a percent of GDP in many advanced markets remains below its pre-2008 financial crisis peak, while some key emerging markets are only slowly emerging from recent recessions.

On a brighter note, the expected cyclical acceleration in economic activity in advanced and developing markets in the near term should stimulate construction activity and insurance demand. Also, structural adjustments such as urbanisation, the replacement of ageing infrastructure and the development of renewable energy sources should promote spending on construction.

New insurance hubs are emerging around the globe

While London remains an important centre for engineering and construction-related insurance, especially for high-value projects that are technically demanding to underwrite, increasingly engineering risks are being underwritten from the international hubs of Singapore, Dubai and Miami. Domestic brokers are especially active in arranging insurance for local construction projects, while international brokers play a key role for complex projects that require specialist expertise and/or those where foreign funding is involved.

How new technologies are shaping the engineering insurance landscape

The construction sector is beginning to adopt digital technology and processes. While the use of digital technology could lead to significant improvements in efficiency including enhanced monitoring, mitigation and management of engineering-related risks, technology like autonomous machinery also affects the nature of existing risks and brings with it new risks such as cyber. Insurers could see the severity of claims increase even if the frequency of accidents continues to fall. Product and process innovation will help insurers respond to the evolving risk and competitive landscape. In a digitally-connected world, insurance may come to play more of a risk avoidance/mitigation role. This may ultimately require a more radical reconfiguration of engineering insurers' business models.

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