Costliest engineering and construction risks revealed

Analysis of over 13,000 engineering insurance claims over the last five years highlights seven major trends in engineering and construction projects, driving some of the largest losses ever. Conducted by Allianz Global Corporate & Specialty, the study shows that fire and explosions are behind the costliest losses. Meanwhile, defective product and business interruption claims are rising, as are concerns around trade disputes.

Construction sites today are much larger than in the past and projects can run for many years. The expansion of the Al Maktoum International Airport in Dubai, for example, will not be completed until 2030 and is expected to cost around US$36bn.

“As a result, sums insured are now much larger – projects with values of US$5bn to US$10bn are not unusual, meaning claims can be in the tens of millions of dollars,” says global head of property and engineering claims at AGCS, Raymond Hogendoorn.

Flooding of the Hidroituango hydropower dam in Colombia in 2018 during construction is estimated to cost insurers around US$1.4bn, one of the largest engineering claims in history.

Innovative technology is increasingly deployed to combat rising risks and costs. AGCS recently used drones, laser scanning and computer modelling to determine the root cause of a machinery explosion at an inaccessible site. Drones and satellite imagery were also used to assess engineering claims after record wildfires in California and Hurricane Florence in 2018. The insurer also coupling 3D topographical data from drones with hydrogeological modelling software and rainfall simulation data to predict flash flooding risk on construction sites.


Costliest construction and engineering risks (Source: AGCS)

Fire/Explosion

Fire is the biggest cause of loss for engineering claims, accounting for over a quarter (27%) of losses by value, based on analysis of more than 13,000 claims around the world worth almost £7.3bn. Fire has caused in excess of £1.9bn of insurance losses in five years. Natural catastrophes are another source of large claims.

Defective product and quality control

Defective products are the single biggest source of engineering claims by frequency, and the second largest by severity. There are almost three times as many defective products claims as storm claims, the next largest cause of claims by frequency

Greater supply chain complexity

In the past, an airport or a power plant would most likely have been built 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

BI

Growing awareness of BI exposures has seen an increase in firms buying BI covers, in particular delay in start-up (DSU) insurance, which covers delays to construction or engineering projects following physical damage.

Political risk

Large construction projects can take as long as five to 10 years to complete and involve contractors and suppliers from around the world, making them vulnerable to sanctions and trade disputes.

Growth of renewable energy projects

As the demand for green energy has increased, solar and wind projects have become larger, the locations more remote and wind turbines much bigger – with blades as long as a football pitch. In 2018 alone, there were 409 new offshore wind turbines across 18 projects in the EU. Offshore wind can be a particularly challenging area for claims, as turbines can be difficult to access.

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