Construction All Risks

In this chapter of our Annual Insurance Review 2023, we look at the main developments in 2022 and expected issues in 2023 for construction all risks.

Key developments in 2022 

In 2022, the construction industry experienced strong growth despite facing challenging issues that impacted the global economy. 

The world (with the exception of China) tentatively moved on from COVID-19, and public health measures such as mandatory site shutdowns and social distancing, which had caused severe delays to projects in 2020 and 2021, were far less prevalent in 2022. However, supply chains, already disrupted by COVID-19, were constrained further and many projects suffered significant material shortages, with procurement times increasing dramatically. 

The war in Ukraine and economic sanctions against Russia impacted markets and supply chains for raw materials and machinery (and caused energy prices to rocket), increasing project costs. Critical delays have been felt across construction sites globally due to supply chain issues, leading to a large volume of extension requests to insurers.

Labour shortages also continued to affect the construction industry. The significant skills gap in the market shows little sign of abating, with the industry struggling to attract and retain workers. Without the appropriate levels of manpower on site, projects experienced further delays and higher costs, including as a result of wage inflation. Insurers have often been the ones picking up the bill, with significant concerns arising around claims inflation.

The construction industry has not been able to escape the impact of inflation and higher interest rates in 2022, experienced in varying degrees across the world. Coupled with shortages in materials and labour, project costs including raw materials and freight have soared and remain volatile. Insurers have found claims rising in parallel, with the costs of rectifying damage increasing significantly against original construction costs. Quite often, the premium and terms of cover agreed have not been sufficient for the conditions experienced in 2022.

Hard market conditions persisted throughout 2022 although with rate increases moderating. Underwriting discipline has been the name of the game (following significant losses in the sector in recent years), with insurers insisting on stricter terms and higher deductibles (and a more restrictive approach to automatic extensions of cover).

What to look out for in 2023 

Despite the challenges seen in 2022, the outlook for the construction industry broadly remains strong. We expect growth to be driven by large demand for infrastructure projects, particularly from governmental investment in many countries (for example Biden's Infrastructure Investment and Jobs Act) which is likely to be further spurred by a widening global recession. Negative global economic headwinds do however mean that construction in the residential sector is likely to experience a downturn (as is already being witnessed in China). 

Inflation is starting to show signs of slowing and lead times for materials are decreasing. However, the increased demand in the infrastructure space is likely to mean that material and labour shortages will continue to be felt in 2023. Prices for raw materials, labour, and fuel will likely remain above pre-pandemic levels for the foreseeable future. Project delays will continue as contractors fight to clear backlogs. Rates may continue to harden (albeit with increases moderated) and with a continued focus by insurers on improving terms.

Positively, as the world takes ever-increasing steps to tackle climate change, there will be opportunities in the renewables and green energy space, with significant wind farms, power storage and solar farm projects in the pipeline (as well as facilities for innovative technologies such as green hydrogen). The nature of power and energy risks is changing, along with construction methodologies and materials. Contractors will not be immune to the digital transformation impacting all areas of our lives. Insurers will need to consider these changes and play their part in bringing about net-zero. We therefore expect closer collaboration between insurers and contractors as both parties improve their learning in this space, appropriate terms of cover are agreed, and more capacity in the market opens up. 

Written by Helena Payne.

Download our full Annual Insurance Review 2023 for more insights.