A fight for capital and capacity – emerging risks in the construction sector

The construction industry is facing a unique set of challenges in today’s market, leading firms to seek innovative solutions to manage risk effectively.

James MacNeal, global industry specialty leader, construction and infrastructure at Aon, highlighted the evolving landscape of risk transfer in the construction sector, emphasising the significance of alternative strategies like parametric insurance and captives amidst a hardening traditional insurance market.

“The fight for capital and limited capacity, and the convergence into a sellers’ market are shaping the construction industry,” MacNeal said. “Underwriters are becoming more demanding, necessitating alternative solutions like parametric options and captives.”

The recent tightening of the traditional insurance market, characterised by diminished capacity and rising rates, particularly in areas prone to natural catastrophes, has prompted brokers to explore novel risk transfer solutions.

These alternatives, according to MacNeal, are essential for construction companies aiming to align their risk management strategies with their growth and profitability objectives in an increasingly complex risk environment.

Economic inflation, the slow recovery of supply chains, escalating labour costs, and the frequent occurrence of natural disasters have compounded pressures on property loss costs and elongated recovery times.

Additionally, the phenomenon of social inflation, alongside nuclear verdicts and litigation funding, has contributed to mounting liability losses. These conditions have spurred significant changes in key insurance markets relevant to the construction industry, affecting property, casualty/liability, and surety sectors differently.

Issues across the segment, but with room for growth

In the property insurance sector, insurers are pursuing growth through careful pricing, targeted appetite, and disciplined underwriting, leading to moderate rate increases for most risks but presenting a more challenging environment for industries with heavy exposure to natural catastrophes.

Casualty and liability insurance markets have similarly adjusted, with certain risk profiles facing rate increases and capacity limitations, while well-performing risks in preferred sectors have seen more favourable conditions.

The US surety market has experienced growth, driven by GDP expansion, infrastructure investment, and inflation, though claims severity has prompted some reinsurers to tighten capacity and apply pressure on rates and retention levels during renewals.

“Nonetheless, claims with increased severity impacted some reinsurance programs and caused tightened capacity during renewal, with some firming of rates and pressure on retention levels,” Aon said.

The global broker’s risk survey identified economic slowdown or recovery as the top risk currently facing the construction industry, with higher interest rates complicating new project financing.

MacNeal outlined the top current risks, including commodity price risk, talent retention, workforce shortage, and cash flow/liquidity risks, all of which are interlinked and exacerbated by factors such as energy volatility, natural catastrophes, and the ongoing energy transition.

Infrastructure spending and the rise of complex megaprojects introduce both opportunities and challenges, with contractors seeking ways to enhance efficiency and mitigate risks through technology and improved collaboration. Aon highlights the importance of carefully assessing project delivery structures to align contractual obligations with risk tolerance and project goals.

To navigate the capital and capacity challenges, MacNeal suggested five strategies, including early engagement with experienced brokers, exploring alternative capital solutions, and considering captives to lower the total cost of risk. These strategies aim to equip construction firms with the tools they need to manage their risks proactively in a market that continues to evolve.

As the construction industry moves forward, accessing risk capital and capacity through traditional and alternative risk transfer markets will remain a critical concern.

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