Safety

The Construction Industry’s Top Business Risks in 2021

For the construction, engineering and real estate sectors, top business risks in 2020 were business interruption, natural catastrophes and the pandemic outbreak.
By Michael Pignataro
March 17, 2021
Topics
Safety

Allianz’s 10th Risk Barometer highlights the most important corporate perils for the next 12 months and beyond, based on the insight of 2,769 risk management experts from 92 countries and territories.

Given the unprecedented disruption caused by the coronavirus outbreak, it is no surprise that business interruption and the pandemic top the 2021 Allianz Risk Barometer for global results across all industries. The pandemic is the biggest climber this year (up 15 positions), with cyber incidents ranking a close third. All three risks—and many of the others in this year’s top 10—are interlinked, demonstrating the growing vulnerabilities and uncertainty of a highly globalized and connected world, where actions in one place can spread rapidly to have global effects.

For the construction, engineering and real estate sectors, BI ranks the number one business risk in 2021 with 44% of responses, up from second position in 2020. BI bumped natural catastrophes from its top spot last year to second position in 2021 with 35% of responses. For the first time, not surprisingly, pandemic outbreak ranked as the number three business risk for the sector with 35% of responses. Pandemic outbreak includes health and workforce issues as well as restrictions on movement.

Business Interruption

COVID-19 has dominated the risk landscape over the past year, adding to already growing concerns for business interruption and cyber risk exposures among risk professionals, given the increasing reliance on technology and global supply chains. Prior to the pandemic, business interruption had already finished at the top of the Allianz Risk Barometer seven times over the past decade.

Individual companies, and even entire sectors, have suffered large business interruption events in the past, but the pandemic of 2020 is the first catastrophic event to hit a modern globalized and interconnected economy. The world has changed fundamentally over recent decades and this has led to accumulations of risks and new loss triggers. The pandemic has demonstrated just how vulnerable the world is to unpredictable and extreme events and has highlighted the downside of global production and supply chains.

The outbreak has also shown that business interruption is highly correlated with many of the risks of most concern to businesses today such as natural catastrophes and climate change, political risks and civil unrest, and even rapid changes in markets, in addition to cyber.

One of the big lessons learned from the pandemic is that systemic business interruption events are not just theoretical, but a real possibility. While a “known-risk,” the coronavirus pandemic was a surprise event of global magnitude, with many unexpected consequences.

The consequences of the pandemic are also likely to heighten business interruption risks in other areas in coming years. Even as the immediate health risks of the pandemic ebb with vaccinations, the accelerated push to digitalization will likely bring new risks, while the economic, societal and political repercussions of the pandemic could also bring sources of disruption for years to come.

Companies will have to reassess their business interruption exposures. Contingency plans, previously considered short-term solutions, e.g. remote workstations and temporary physical locations have been established as long-term operating models. Companies, following years of well-intended investment in independent mitigating or preventative redundancies, are now dependent and reliant on vulnerable public and personal power and internet infrastructures.

As companies prepare for future extreme business interruption events, they will need to consider a broader range of scenarios than they do at present. Identifying and understanding potential “Black Swan” events will be challenging, but the key to survival will be the ability for businesses to respond quickly.

Natural Catastrophes

Devastating wildfires in California and Australia and the record-breaking number of tropical storms in the Atlantic Ocean were among the natural catastrophes to dominate the headlines in 2020. No previous Atlantic hurricane season on record has produced as many named storms (30) of which 13 developed into hurricanes. Meanwhile, Australia suffered its worst-ever wildfire season, while five of California’s six largest fires occurred in 2020, including its first “gigafire,” the August Complex Fire which burned more than one million acres.

However, 2020 was also the third consecutive year without a single major natural catastrophe event causing significant (economic/ insured) damages, such as Hurricane Harvey in 2017. Despite the record-breaking hurricane season, most U.S. landfalls did not hit densely populated areas in 2020, resulting in relatively low insured losses of more than $20 billion. That said, aggregated losses from multiple small- to medium-sized events still led to widespread devastation and considerable overall insured losses. Natural catastrophes caused around $80 billion of global insured losses in 2020, up more than 40% from 2019,1 mostly from secondary peril events such as severe convective storms (thunderstorms with tornadoes, floods and hail) and wildfires, primarily in North America.

Nevertheless, natural catastrophic risks remain in the top three business risks in many regions, particularly across Asia—including South Korea, Hong Kong and Japan—which is frequently affected by meteorological, geophysical, climatological and hydrological events. Further secondary perils, such as severe floods in provinces along the Yangtze River in China from May, resulted in one of the biggest insured losses in Asia during 2020 ($2 billion).2

COVID-19 Outbreak

The rollout of coronavirus vaccines provides some hope that the worst effects of the pandemic will subside in 2021, although measures to contain the virus are expected to remain in place for some time yet. However, the economic, political and societal consequences of the pandemic are likely to be a source of heightened business interruption risk in the years ahead.

The global lockdowns and resulting shuttering of many engineering and construction sites are likely to lead to aggravated risk in a number of areas. The potential for losses from events such as fires, vandalism and theft and flooding not only remains when sites have been idle or largely unoccupied, it can even be exacerbated. In addition, Allianz Global Corporate & Specialty has a number of active claims where the replacement time of spare parts has been delayed because of COVID-19 plant stoppages and/or the inability to get repair crews into countries to carry out the repair work. Both instances are leading to increased claims costs.

At the same time, restarting projects after shutdowns can also result in an uptick in loss activity. Inadequate machinery or equipment maintenance or postponement of maintenance during a shutdown can cause further disruption at the worst possible time: when a project is finally able to restart. Testing and inspections should be a critical focus of loss prevention before reopening any project site.

The industry will be watching closely to see how quickly the construction and engineering industry resumes. Many governments are planning significant spend on infrastructure in their post COVID-19 economic recovery strategies. Construction spending is a good way to create both jobs and demand for local materials and equipment, so a number of countries have announced a refocus on infrastructure expenditure to help stimulate their economies. This presents significant opportunity for insurers with a continuing appetite for risk. However, the impending global economic downturn following COVID-19, alongside a number of macroeconomic factors, is affecting the landscape. Sustained low interest rates, oil price volatility, continued U.S.-China trade tensions and increased litigation make for challenging market conditions.

To learn more about this year’s findings, please visit Allianz Risk Barometer 2021.

by Michael Pignataro
Based in New York, Pignataro has been with AGCS since 2018. Pignataro specializes in construction property insurance, with a unique blend of U.S. and international underwriting experience within the oil, gas, chemical, heavy industrial and power generation industries. Previously, he held construction underwriting roles at AIG, Talbot and XL Catlin. He earned a BA in Market Research from Mount St. Mary’s University and an MBA in Insurance & Risk Management from St. John’s University.  

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