Responsiveness to changes in the construction and engineering sector is key
Construction and engineering insurance remains a highly specialised class of insurance, which for example involves the underwriting of large and complex construction and infrastructure development-type risks. It is vital to any country’s national economic success story, and South Africa is no different. As we slowly return to pre-pandemic levels of economic activity, this sector will be a crucial bellwether for meaningful economic growth in South Africa.
At the same time, the risks and uncertainties are manifold, and have to be engaged with thoughtfully. Responsiveness is key! Kalim Rajab, Managing Director of New National Assurance Company (NNAC), and Anne-Marie Fourie, Managing Director of AC&E Engineering Underwriting Managers, which was recently awarded its 10th consecutive Diamond Arrow Award from PMR Africa, highlight the trends which the company has detected in the local market and what it believes insurance companies need to be focused on in the medium-term, to ensure their relevance for policyholders:
- An uptick in business is becoming apparent as the government stimulus package for the construction industry is released incrementally – but risks abound
As local industry slowly emerges from lockdown, we have noted the green shoots of construction work slowly beginning to return to pre-pandemic levels (though private investment remains at lower levels). The challenge, though, is that the risk landscape has significantly altered in the intervening time, especially relating to government contracts. Government contracts involve Contract Participation Goals (CPG) related to “on the job” training and the obligatory participation of emerging contractors are changing insurers’ risk for various reasons, such as:
- Resident Engineers are often not appointed on government contracts;
- Multiple contractors are often appointed on a single job, e.g. on a pipeline project there might be multiple contractors used for trench excavation, bedding, pipelaying and backfill, which is not ideal;
- Construction tasks are often done out of sequence, with little control regarding compliance with the construction program;
- Increasing proportions of work is done by sub-contractors with limited experience.
One example of a consequence: the work done is at risk of damage by overland water flowing across the site because the sub-contractor doing sub-soil drains and side drains is behind schedule, thus exposing the works to damage. Similarly building projects take longer with increased exposure to malicious damage.
The so-called “construction mafia” also known as “business forums” are demanding a share of the profits on many contracts, disrupting the works and increasing the risk of injury and death on site.
Interim payments are not attended to promptly, resulting in the work being suspended, resulting in the construction program sliding, with contracts not being completed as planned and the insurance policies requiring extensions.
Contract works sites and completed works are today more exposed to damage caused by changing weather patterns which result in catastrophic events, such as massive hails storms over November /December 21 period in Klerksdorp, North of Polokwane, Lydenburg and the Eastern Cape, and heavy rains storms in Gauteng and George resulting in flooding, while wind storms with a velocity exceeding 100km/hr lashed the southern Cape.
- Greater supply chain complexity increasing size and cost of claims
We have noticed that as supply chains become increasingly complex and multi-layered, this can have an impact on the technical nature – and quantum – of claims. Today, even fairly “small” or ringfenced projects are likely to involve multiple suppliers of machinery, equipment and other components sourced and transported from around the world. Even if they don’t, or are able to minimise this, the technology involved in these projects is becoming more sophisticated and specialised.
- After many false starts, the dawn of renewables may finally be here
We may finally be seeing the long-anticipated growth of renewable energy. Of course, South Africa has an added imperative – to liberate us from our pervasive energy shortfall, the IMF has long suggested that Eskom and the government “abandon its outdated business model…and compete on a level playing field with private participants, including with the producers of renewable energy”. This day may finally be within reach along with government’s realisation of the benefits of such an approach. While primarily focused on reforming the energy industry by opening up the country’s power grid to competition, it is hoped that amendments to the Electricity Regulation Act 4 of 2006 as amended will also explicitly allow for such competition to come in the form of renewable energy. Of course, from an insurance and risk management perspective, such a development would bring challenges along with the benefits, which would need to be managed.
For example, solar photovoltaic (PV) panels are subject to a wide range of natural hazards such as storm, flood and hail damage – but in South Africa, they would also be susceptible to greater levels of theft, considering their perceived high value. Cable theft is also definitely a national challenge, especially in the aftermath of the lockdown which damaged the economy and resulted in the highest unemployment rate in our history. There is also potential for fires in electrical modules and distribution equipment which will result in material damage claims and a loss in revenue. And though relatively less likely in South Africa, the possibilities of frost heave which can damage racking and modules.
Other forms of renewable energy involve more earthworks and civil construction, which has a greater exposure to storm damage and human error.
As underwriters, we have to be able to respond with comprehensive cover when the uptick in demand does arrive – we need to be considering global best practices, and the lessons learnt from other jurisdictions which adopted the technologies earlier than us.
The challenges mentioned above has also quickly increased the complexity of handling claim resolution for policyholders. Our response has been to focus on our internal skills sets, from engineering and construction assessors and specialists to claims technicians, to be able to handle such claims for our policyholders.