Concrete solutions for present building woes

A global pandemic, supply chain disruptions, an inflationary environment and a war on top of it all: how do we even start to build a better world under these circumstances? The construction sector has given it a try, but unfortunately, despite experiencing a growing demand the sector has been struggling with the severe scarcity of building materials as well as an ongoing labor shortage.

Construction costs are going through the roof, as a result. In the U.S., price inflation for new, non-residential building construction reached 17% in March (general inflation had reached around 8.6% in the U.S. economy in May) and according to the UK's Department for Business, Energy and Industrial Strategy, UK building materials inflation was 25% in April year-on-year, as compared to a 7.8% CPI.

How builders address these challenges could have considerable repercussions for the insurance industry. Faced with the skyrocketing cost of raw materials, some may cut corners, opting to use fewer or lower-quality materials, potentially resulting in issues like reduced fireproofing or building integrity. Meanwhile, those unwilling or unable to pay to secure qualified labor might settle for cheaper, unqualified workers. Both situations could lead to increased risks during the construction phase and long term inherent defect insurance cover after building completion, in addition to more and higher claims in personal liability, and property and professional indemnity over the life of the building.

And these aren’t the only potential risks faced by insurers who cover construction projects: spiraling construction expenses lead to higher valuations of real estate investments, which in turn lead to increased replacement costs. Price increases can lead to unexpectedly severe claims, particularly in long-tail business, multi-year policies and non-proportional contract features. In some countries and lines of business, contract mechanisms have been developed to mitigate and prevent extreme impacts of inflation, like premium adjustments based on final contract value and the right to renegotiate terms and conditions if the contract value exceeds certain thresholds.

Reinsurance has a role to play in helping cedents to define the scope and quality selection of Technical Inspection Companies (TIS) who are on site to ensure that the highest quality of construction is achieved. It can also help cedents analyse more deeply the consequence of inflation or supply chain on Engineering policies and how to mitigate those risks.

Swiss Re’s Engineering Digital platform helps insurers minimize their risk amid these challenges. It is an eco-system that provides costing guidance across a range of products from construction to machinery breakdown, design and distribution of solar products, and all with dynamic NatCat risk assessment plus advanced analytics and portfolio management. It allows underwriters within the same organization in different locations to store, retrieve, copy, access and share quotes within their company, for consistent steering of a portfolio. The platform can be implemented as a simple-to-use cloud-based app, or customized and integrated into a client's operating landscape.

Insurers must not let the tail effects of the pandemic or geopolitical tensions curtail their interest in the construction sector. Getting ready for what's next, insurers just need to better assess and minimize their exposures, so they can continue riding the construction boom wave.