Engineering insurance is a highly specialized class of insurance that covers the world’s largest construction projects, including airports, high speed rail links, power plants and manufacturing complexes. Such projects are typically very high value – the largest are in the tens of billions of dollars – and can run for many years, even decades.
Allianz Global Corporate & Specialty (AGCS) identifies eight emerging developments around engineering and construction risks.
Given the busy nature of construction sites, claims are frequent. But when that site is a hydroelectric plant or an oil and gas facility, claims can be extremely expensive and complex. Flooding of the Hidroituango hydropower dam in Colombia in 2018 during construction is currently projected to cost insurers almost US$1.4bn, [1] making it one of the largest engineering claims in history.
Large engineering and construction projects have changed beyond recognition in recent decades, leading to much higher values and increased complexity. Such projects are typically very high value – the largest are in the tens of billions of dollars – and can run for many years, even decades.
The expansion of Al Maktoum International Airport in Dubai, for example, will not complete until 2030 and is expected to cost $36bn. London’s Crossrail project, currently Europe’s largest infrastructure project, will take over 10 years to build at a cost of over £17bn ($21bn).
“Construction sites today are much larger than in the past. Whether it is a power plant, refinery or car manufacturing plant, projects are now typically much larger and higher value. And with more and more technology and sophisticated machinery in factories and offices, values per square meter have also increased significantly,” says Raymond Hogendoorn, Global Head of Property and Engineering Claims at AGCS.
As a result, sums insured are now much larger – an engineering or construction project with an insured value of $5bn to $10bn is not unusual. “Whatever the cause, construction claims today are typically in the tens of millions of dollars, where before a loss of $10mn would have been an exception. Any loss is therefore much more likely to have a bigger impact,” says Hogendoorn.
Fire is the biggest cause of loss for engineering claims, accounting for over a quarter (27%) of losses by value, but just 7% by volume based on analysis of more than 13,000 claims worth almost €8bn or $8.8bn (see graphic). Fire has caused in excess of €2.1bn of insurance losses over a five year period.
“Fire and explosion claims remain the biggest cause of loss due to the high values associated with engineering and construction projects today. There hasn’t been a change in the frequency of fire claims, but when they happen, the impact is much higher,” says Hogendoorn.
Natural catastrophes are another source of large engineering claims. For example, storm damage is the second single biggest cause of loss by number, accounting for one in 10 claims. Natural catastrophes are also ranked the top concern for engineering and construction firms in the Allianz Risk Barometer 2019, which surveys more than 2,400 global risk experts about their major worries for the year ahead.
Large construction projects today are far more complex, with many more contractors and longer supply chains. In the past, an airport or a power plant would most likely have been built in the US or Europe by a national contractor using local suppliers. Today, it is more likely to involve multiple parties with machinery, equipment and other components sourced and transported from around the world, explains Eckel.
“We are seeing much higher levels of organizational and supply chain complexity, and this is feeding through to the cost of claims. With so many parties involved, and with growing cost pressures, quality assurance today is not always as good as it once was,” says Eckel.
Longer supply chains and more specialist machinery also affect the size of engineering claims. For example, an oil and gas installation being built in Europe or the US would most likely require hundreds of modules to be manufactured in China, Korea and Thailand, transported to the site and then assembled. This introduces additional risks, explains Eckel.
Many projects today are too large for a single contractor, but by increasing the number of parties involved in a project, project management and quality assurance is becoming a bigger challenge. Extended supply chains also create exposures – boilers, turbines and other machinery now has to be transported greater distances, increasing the risk of damage or delay, explains Eckel.
“With higher values and more complexity we are seeing some very large claims. Technology is becoming more sophisticated and specialized, which can increase the costs to repair or replace machinery and equipment. If a turbine coming from China is damaged in transport, it might take as long as 18 months for a repair,” says Eckel.
Business interruption (BI) claims have also emerged as an important driver for engineering claims as customers have sought to protect revenues and as insurance coverage has broadened. Construction and engineering firms ranked BI as the second most concerning risk behind natural catastrophes in the Allianz Risk Barometer 2019.
Growing awareness of BI exposures has seen an increase in construction and engineering firms buying BI covers, in particular delay in start-up (DSU) insurance, which covers delays to construction or engineering projects following physical damage. DSU claims are usually expensive – indemnity for delay in start-up has increased from around $200,000 per day to up to $500,000 per day over time.
“We see more large delay in start-up claims as demand for DSU cover and limits have increased as projects have grown larger and as operational values have increased. As the stakes have gotten higher, DSU limits have increased, and so have claims. At the more extreme end, DSU claims can now be as high as $2bn,” says Hogendoorn.
BI is also influencing engineering claims through higher repair costs, according to Eckel: “Brokers have sought to build-in cover to speed up repairs, which can drive up the cost of engineering claims. In a bid to mitigate BI, construction and engineering firms are seeking to speed up repairs for property damage, but this can double the cost of a property claim.”
The fast growing renewable energy market is an exciting yet challenging area for the engineering sector and its insurers. As the demand for green energy has increased solar and wind projects have become larger, the locations more remote and wind turbines much bigger.
Renewable energy produced in the EU increased by two thirds between 2007 and 2017, and is expected to reach 20% by 2020. [3] Wind power was, for the first time, the second most important contributor to the renewable energy mix, accounting for 13.8% of total renewables.
As large engineering and construction projects have become more complex, involving many contractors and suppliers, risks and subsequently claims can become much more difficult to assess and establish the ultimate cause of loss. However, insurers have an increasing array of new technology at their disposal that can increase certainty for engineering risk and claims assessment, as well as improving overall service.
For example, AGCS recently used drones, laser scanning and computer modeling to carry out root cause analysis of a machinery explosion. The site, inaccessible to loss adjusters, was first explored by a drone, while a 3D laser scanner and computer modeling then simulated the explosion to establish the cause of the loss.
Drones and satellite imagery also helped to assess engineering claims after recent natural catastrophes, such as wildfires in California and Hurricane Florence in 2018. This enabled loss adjusters to get a quick overview of damage, as well as assess claims in hazardous or inaccessible areas.
Together with the geodata factory of engineering firm IABG, AGCS has also developed a new kind of flood risk survey based on topographic data from drones in order to model flood and drainage behavior on construction sites. Preparation work on construction sites can change site elevations and often disrupt natural water courses and drainage, creating obstacles such as the build-up of water during heavy rainfall meaning flood exposures can change throughout the course of construction activities. By coupling 3D topographical data with hydrogeological modelling software and rainfall simulation data it is possible to assess water flow across a construction site and predict flash flooding risk.
At the same time, satellite technology is proving particularly useful for engineering claims, offering high resolution images of a site within 24 hours of a loss. It can give adjusters information on engineering risks in remote or hazardous locations, as well as provide data to tackle exaggerated or fraudulent claims. For example, AGCS used satellite imagery to remotely monitor the construction of a hydro dam which then reported an incident. Adjusters were not able to visit the dam, but satellite data showed damage to the dam was not as extensive as claimed.
Technology will create more certainty for engineering claims, according to Hogendoorn: “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.”
