Developments in engineering insurance: Swiss Re Sigma report

Engineering insurance is a specialty line of business that provides protection against losses from unforeseen circumstances during the construction and operation of plant, buildings and infrastructure.

With annual premiums of around $21 billion, engineering insurance represents only a small part (around 3%) of the overall commercial insurance market. However, without such cover many construction projects and the operation of vital machinery would prove prohibitively risky to undertake.

Between 2018 and 2027, engineering insurance premiums could rise to $34.5 billion, according to the latest sigma study from the Swiss Re Institute. Nevertheless, this specialty line has faced a number of challenges.

Premium rates declining, claims rising

Underwriting performance for engineering insurance has deteriorated recently, with premium rates declining and claims rising in some construction sectors. After rising rapidly through most of the 2000s as construction activity in a number of developing countries soared, global engineering premiums have stagnated in recent years.

Construction spending as a percent of GDP in many advanced markets remains below its pre-2008 financial crisis peak, while some key emerging markets are only slowly emerging from recent recessions.

Related: Piece by piece: The state of affairs in the construction industry

Increasingly engineering risks are being underwritten from the international hubs of Singapore, Dubai and Miami. Domestic brokers are especially active in arranging insurance for local construction projects, while international brokers play a key role for complex projects that require specialist expertise and/or those where foreign funding is involved.

Lower quality control

Loss ratios have been edging higher and claims rising in some construction sectors due to lower quality control. Reported loss ratios likely understate the recent deterioration in underwriting profits.

Soft underwriting market conditions have also depressed engineering insurance pricing. “Engineering premium rates have been declining for over a decade. Some engineering insurers’ profit margins may already have been squeezed close to or below levels that are sustainable over the long term,” according to Mike Mitchell, head of Property & Specialty Underwriting at Swiss Re.

Growing use of new technologies in construction

The construction sector is beginning to adopt digital technology and processes. While the use of digital technology could lead to significant improvements in efficiency including enhanced monitoring, mitigation and management of engineering-related risks, technology like autonomous machinery also affects the nature of existing risks and brings with it new risks such as cyber.

Related: New construction technology is an insurance game changer

Insurers could see the severity of claims increase even if the frequency of accidents continues to fall. ”Technology also affects the nature of existing risks and brings with it new risks, such as cyber. Insurers could see the severity of claims increase even if the frequency of accidents continues to fall,” Mitchell warns.

Product and process innovation could help insurers respond to the evolving risk and competitive landscape. In a digitally-connected world, insurance may come to play more of a risk avoidance/mitigation role, according the report.

World economy & insurance demand

Beyond technological innovation, the outlook for engineering insurance is heavily influenced by prospective growth in the world economy. The ongoing cyclical economic upswing in advanced and developing markets in the near term should stimulate construction activity and insurance demand.

Also, structural adjustments such as urbanization, the replacement of aging infrastructure and the development of renewable energy sources should promote spending on construction. However, there is still uncertainty about how far some of these factors will translate into a material pick-up in premium growth, according to the sigma report.

Related: Stalled infrastructure plan prevents additional strain on construction industry