Underwriting performance in global engineering insurance has deteriorated over recent years – on declining premiums and rising claims in some construction sectors due to poor quality control, according to Swiss Re in its latest sigma study.
“Some engineering insurers’ profit margins may already have been squeezed close to or below levels that are sustainable over the long term,” said Mike Mitchell, head of Property & Specialty Underwriting at Swiss Re, in a summary of report, which is titled “Constructing the future: recent developments in engineering insurance.”
However, the sigma report indicated, there are some reasons to be optimistic about the future of the sector. Not only will the global economic upswing promote construction investment – and insurance demand – but there are other positive factors at play. These include: urbanization, the replacement of aging infrastructure and development of renewable energy sources, the report explained
Further, the adoption of new technologies in construction also could fundamentally improve the risk landscape for engineering insurance, leading to significant improvement in efficiency and safety, including enhanced monitoring, mitigation and management of engineering-related risks, which could improve claims experience, the report said.
However, the report cautioned, such a digital transformation in construction is likely to happen only gradually and new technologies also bring new risks such as cyber.
As a result, insurers could see rising severity of claims “even if the frequency of accidents continues to fall,” Mitchell continued.
“In a digitally connected world, insurance may come to play more of a risk avoidance/mitigation role,” which may require a “radical reconfiguration of engineering insurers’ business models,” the report went on to say.
Economic Growth Drives Premium Growth
Beyond technological innovation, the outlook for the engineering insurance sector is heavily influenced by world economic growth, and plays a key role in supporting economic activity, the report said.
“The ongoing cyclical economic upswing in advanced and developing markets in the near term should stimulate construction activity and insurance demand,” the report said. “Also, structural adjustments such as urbanization, the replacement of aging infrastructure and the development of renewable energy sources should promote spending on construction.”
The sigma report said that a number of market commentators predict an extended period of strong construction growth. “According to Oxford Economics, global gross construction output is forecast to grow, on average, by over 7 percent per annum over the next 10 years, up from 3.5 percent over the previous decade,” the report said, noting that most of that growth will likely come from activity in developing economies.
Further, the report explained, engineering insurance premiums are likely to rise between 4.8 and 6.5 percent annually between 2018 and 2027.
Other findings in the sigma report include:
- Global engineering insurance premiums for 2017 were approximately US$21 billion, which is roughly 3 percent of total commercial insurance premiums (around US$730 billion in 2017).
- Around half of the engineering insurance market is from project insurance, which protects against risks incurred during construction or installation of plant, buildings and infrastructure.
- London is still preferred for complex risks, but regional hubs (Singapore, Dubai and Miami) have emerged. Given the scale and complexity of potential exposures, risk-absorbing capacity for large engineering covers is distributed across international wholesale insurance markets, typically via brokers. This decentralization of capacity as well as consolidation among incumbent brokers has enabled intermediaries to reinforce their influence in wholesale insurance markets.
- The EMEA region generates the largest share of global engineering premiums, mostly due to the popularity of operational covers such as machine breakdown and construction insurance
- Among the emerging economies, Brazil, Mexico and Colombia account for 70 percent of engineering premiums in Latin America while China currently contributes around a third of Asia-Pacific (APAC) premiums.
- International insurers with local footprints have a strong presence in engineering insurance. With operations in multiple countries and sizable balance sheets, these insurers have the ability to diversify risks geographically and better manage the losses.
- The adoption of enhanced building standards, new construction techniques and improved site security has led to lower claims. However, poor workmanship remains a challenge for project owners and contractors, and ultimately their insurers, with claims due to lower quality control rising in some construction sectors. The report attributed this to the increased number of parties in the supply chain, i.e., sub-contractors, or sub-contractors of sub-contractors.
Source: Swiss Re
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