The U.S. construction market is currently in a sustained period of growth, driven by the onshoring of the manufacturing industry, the demand for data, the expected surge in government infrastructure spending and the transition to net zero.

Construction spending in the U.S. remains strong advancing 8.8% for the first seven months of 2024 year-on-year, according to the Commerce Department's Census Bureau. Activity has been bolstered by the $1.2 trillion Infrastructure Investment and Jobs Act as well as the $52 billion CHIPS and Science Act.

As a global insurer, Allianz Commercial has seen a record number of submissions and activity for construction projects this year. With this increased construction activity comes an evolving risk environment that insurers, brokers and their construction clients are closely monitoring.

According to the 2024 Allianz Risk Barometer, an annual business ranking incorporating the views of 3,069 risk management experts in 92 countries and territories, natural catastrophe, including extreme weather events, floods, wildfires and earthquakes, is the top risk for construction and engineering respondents worldwide. This was followed by fires, explosions, business interruption, macroeconomic developments and cyber incidents.

Continuing skilled labor shortage

Absent from the Risk Barometer’s top five construction risk rankings, but increasingly a major concern, is the industry’s continuing labor shortage. The lack of qualified talent can lead to significant project delays as well as faulty workmanship that can result in design defects.

We witnessed this firsthand in Canada during its construction boom in the last decade. Insurers saw a direct correlation between increased construction activity amid a scarcity of qualified talent and an increase in insurance claims around faulty workmanship and design defects.

Project costs escalate

The cost of construction projects is also escalating with most infrastructure projects exceeding $1 billion with more entering the tens of billions of dollars range. Building something that large, often in a very remote location, makes finding skilled labor even more of a challenge.

Construction costs are also soaring in many countries because of the higher prices for energy and raw materials. Replacement is costing more and taking longer.

Materials are not only significantly more expensive—the cost of cement, timber, steel, glass and paint have all increased over the last year, in some cases by around 50%, while construction inflation was in the range of 11% to 25% in countries such as the US, UK and Germany—but can often be simply unavailable due to logistics, shipping and supply-chain bottlenecks. The end result is that any property damage and business interruption losses are now likely to be significantly higher than they were before Covid-19.

Transition to the net zero economy 

The transition to the net zero economy will require significant investment in alternative forms of energy, as well as power storage, transmission and supporting services.

The International Energy Agency (IEA) says that pursuing net zero will create a market for wind turbines, solar panels, lithium-ion batteries, electrolyzers and fuel cells of well over $1trn a year by 2050, comparable in size to the current oil market.

The shift to electric transport will require investment in new plants and battery manufacturing facilities, as well as charging infrastructure and power generation. The electrical distribution grid throughout North America will require upgrades to support the additional demand for electricity.

Climate change adaptation and mitigation will also give rise to opportunities with new coastal and flood defenses required, as well as sewage and drainage systems. Commercial buildings and plants will need upgrading to protect assets from storms and floods. Ageing infrastructure will need to be upgraded to cope with more extreme weather events. 

Insurance claims analysis

Our analysis of construction and engineering insurance industry claims around the world shows that natural hazards are the second most expensive cause of loss, accounting for 20% of the value of claims in five years—second only to fire and explosion.

With climate change increasing the frequency and severity of extreme weather events such as hurricanes, floods, and wildfires, the costs of property damage and business interruption from these events are expected to escalate.

It is now much more expensive to repair or rebuild damaged property, and therefore it is important that businesses work with insurers to ensure they have accurate and up-to-date valuations of their assets to ensure they are fully reimbursed in the event of any loss.

Construction has reached a critical juncture. Between new technologies, innovative delivery methods and the explosion of greener practices, the industry is poised to benefit from more sustainable practices, however, industry challenges continue to evolve.

It is essential for companies to partner with an insurance broker and carrier who specializes in construction insurance to obtain accurate quotes based on the specific details of the construction company.

They can help assess the coverage needed, evaluate risk factors, and provide a range of insurance options, enabling the business to choose the most appropriate coverage for its needs. Additionally, maintaining a strong focus on safety practices and risk management can positively influence insurance costs by demonstrating a commitment to reducing potential exposures.

Darren Tasker is Regional Head of Construction, Americas at Allianz Commercial. Based in Toronto, Darren joined Allianz in 2010 and was previously Regional Head of Energy & Construction, North America.

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