Unlocking Capacity and Capital in a Challenging Construction Risk Market

Unlocking Capacity and Capital in a Challenging Construction Risk Market
February 27, 2024 19 mins

Unlocking Capacity and Capital in a Challenging Construction Risk Market

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Complex market dynamics in the construction industry are pushing organizations to proactively explore alternative risk transfer solutions, including parametric insurance and captives.

Key Takeaways
  1. The construction industry is facing heightened competition for capital amid evolving risks impacting insurability and rates.
  2. Parametric and captive solutions are gaining traction, particularly for natural catastrophe-exposed risks.
  3. Early engagement, education and strategic project planning are imperative to navigate the evolving market.

The traditional insurance market has hardened in recent years, with greatly reduced capacity and increased rates, particularly in natural catastrophe-prone regions. Brokers, recognizing the limitations of conventional insurance, are exploring alternative risk transfer solutions for their construction clients, including parametric insurance and captives. Implementing enhanced risk management strategies aligned with growth and profitability goals will help construction businesses to navigate a complex and fast-moving risk landscape.

Complex Market Developments

A challenging macro environment has impacted insurers’ confidence and strategies. Economic inflation, slow supply chain recovery, rising labor costs and natural disasters have pressured property loss costs and extended recovery periods. Simultaneously, social inflation, nuclear verdicts and litigation funding have driven up liability losses.

As a result, key insurance markets that impact construction businesses have evolved.

  • Property
    • Insurers sought profitable portfolio growth through pricing adequacy, targeted appetite and disciplined underwriting.
    • Modest-to-moderate rate increases continued for most risks. Heavy industry and natural catastrophe exposures experienced a more challenging pricing environment.
    • Detailed underwriting information — including comprehensive details on project risk management and construction methodologies — and early engagement remained key to achieving superior placement outcomes.1
  • Casualty/Liability
    • Challenging risk profiles, risks with adverse loss experiences, and umbrella and excess programs with lower primary attachment points experienced moderately hard market conditions, such as rate increases, underwriting scrutiny and capacity limitations.
    • Well-performing, in-appetite risks experienced a more growth-focused environment, including some downward price movement.2
  • Surety
    • The U.S. surety market grew in 2023 due to several factors, such as ongoing GDP growth, increased infrastructure investment and construction activity and inflation.
    • 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.3
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The fight for capital and limited capacity, and the convergence into a sellers' market are shaping the construction industry. Underwriters are becoming more demanding, necessitating alternative solutions like parametric options and captives.

James MacNeal
Global Industry Specialty Leader, Construction & Infrastructure

Risks Facing Construction Companies

According to Aon’s Global Risk Management Survey, the construction industry’s top-ranked current and future risk is economic slowdown or slow recovery. Higher interest rates make it more expensive for governments, real estate developers and other project sponsors to obtain new project financing. When development activity slows, construction demand follows suit.

Top Five Current Risks in Construction
  1. Economic Slowdown/Slow Recovery
  2. Commodity Price Risk/Scarcity of Materials
  3. Failure to Attract or Retain Top Talent
  4. Workforce Shortage
  5. Cash Flow/Liquidity Risk

Evolving risk transfer strategies can help to mitigate the industry’s exposure to the following interconnected and intensified risks.

  • Energy Volatility

    Businesses are ramping up production post-pandemic, intensifying energy demands. Amid fluctuating energy prices, leaders in heavy industry organizations are reassessing their approach to risk.

  • Natural Catastrophes

    Construction projects in development in natural catastrophe-exposed areas are vulnerable to hurricanes, earthquakes and floods, which can lead to property damage, project delays and increased costs.

    This wide-ranging and growing risk can be managed by creating redundancies in supply chains, using innovative techniques and materials and designing more resilient structures.

  • Energy Transition

    As climate change escalates and extreme weather events grow in both frequency and severity, stakeholders are increasingly embracing energy transition projects. Worldwide, leaders are stepping up efforts to meet net-zero targets by outlining climate action plans and emissions goals.

    As a result, more structures — new and retrofitted — to support climate solutions will be needed.

  • Infrastructure Spending

    A wave of infrastructure spending presents both opportunities and challenges for contractors. Inflation, supply chain disruption, labor shortages and elevated raw material prices pose significant risks.

    In response, contractors are looking to make better decisions to expedite efficiency and mitigate risks, including employing technology and fostering better collaboration with project owners.

  • Complex Megaprojects

    Megaprojects face unique challenges in terms of coordination, resource allocation and unforeseen complications.

    Effective risk management for megaprojects can include meticulous planning, risk-sharing strategies and the flexibility to address new challenges as they arise.

  • Project Delivery Structures

    Construction companies must carefully assess the implications of different delivery models, such as integrated project delivery, public-private partnerships and design-build.

    Variations in contractual obligations, responsibilities and risk allocation have to be aligned with risk tolerance, project goals and the collaborative nature of the chosen structure.

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Construction leaders are making decisions about an increasing number of volatile issues. On top of an increased focus on risk and who takes it on, more attention is being placed on environmental, social and governance strategies.

Brenna Mann
Head of Strategy & Account Executive Practice Leader, U.S. Construction & Infrastructure

Seeking Alternative Risk Transfer Solutions

A typical construction project involves multiple stakeholders, each with varying risk tolerance. Finding a comprehensive risk solution that aligns with all stakeholders' objectives can be challenging. However, several alternative risk transfer solutions are available.

Parametric Insurance

Parametric insurance has emerged as a compelling and unique solution for construction projects in locations where extreme weather events can bring a project to a grinding halt, causing delays and financial losses.

Parametric solutions can also dovetail traditional insurance solutions and lower the total cost of risk by allowing a construction client to increase its program retention and fund a portion of a parametric solution with the associated premium savings.

Captives

As traditional insurance costs remain challenging, turning to captives or protected cell companies can help businesses to fund non-insurable risks, retain more risk through a formal mechanism, stabilize risk financing costs over time and navigate insurance market volatility. Through this alternative risk financing option, businesses can also gain direct access to the reinsurance market and create a strong governance environment that promotes better risk management behaviors.

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We expect to see interest from organizations for parametric solutions continuing to grow to provide quick liquidity after a disruptive event, address gaps in traditional insurance cover and cover non-traditional risks.

Donais Deetz
Director, EMEA Construction & Infrastructure

Five Strategies to Navigate Capital and Capacity Challenges

Construction firms are looking at ways to make better decisions about the way they improve efficiency and manage their risks.

To navigate this environment, organizations may want to consider:

  1. Working with experienced brokers early in the renewal and placement process who understand the quality of information underwriters need
  2. Encouraging all involved to engage early to jointly evaluate reasonable and available risk transfer solutions
  3. Engaging project stakeholders to influence project delivery, geography and scope for viable risk transfer options
  4. Exploring alternative capital solutions
  5. Looking at captives to lower the total cost of risk and gain control over claims management

Accessing risk capital and capacity through a variety of channels, including those in the mainstream insurance market and alternative risk transfer market, will continue to be a top-of-mind concern for the construction industry in 2024 and beyond.

Learn how your organization can benefit from construction and infrastructure insurance and risk management in this market.

Aon’s Thought Leaders
  • Donais Deetz
    Director, EMEA Construction & Infrastructure
  • Rhonda Jenn
    Strategy & Execution Leader, Global Broking
  • James MacNeal
    Global Industry Specialty Leader, Construction & Infrastructure
  • Brenna Mann
    Head of Strategy & Account Executive Practice Leader, U.S. Construction & Infrastructure
  • Peter Rudd
    Executive Director, International Construction and Chief Broking Officer, Construction & Infrastructure

1 Aon’s Q4 2023 Global Insurance Market Insights Report.
2 Aon’s Q4 2023 Global Insurance Market Insights Report.
3 Aon’s Reinsurance Market Dynamics, January 2024.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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