Construction Insurance Navigates Shifting Risks: Rising Costs, Labor Shortages, and Cyber Threats
The global construction sector is experiencing significant changes, driven by technological advancements and the rising demand for data centers. A new report from WTW sheds light on these trends and the impact on construction insurance.
However, this growth is accompanied by considerable challenges. The report highlights labor shortages and escalating material costs as major concerns. In North America, the labor shortage is particularly acute, potentially requiring an additional 500,000 workers to meet current and future demands. Europe and Latin America are facing similar difficulties, while Asia is also reporting a scarcity of skilled labor. As a result, many contractors and developers are relying on less experienced workers, which may influence build quality and safety compliance. Insurers are adapting by carefully evaluating project timelines and cost projections when assessing risk and setting premiums.
2024 Construction Sector Trends
In 2024, the construction insurance sector saw notable developments influenced by economic conditions, market dynamics, and emerging risks. Persistent supply chain disruptions led to higher material costs and project delays, which directly impacted insurance claims. Simultaneously, the industry grappled with a significant shortage of skilled labor, which resulted in delayed projects and increased labor costs. Severe weather events also led to a record £585 million in weather-related insurance claims for homes and possessions, highlighting the growing impact of climate change.
Construction Insurance Pricing – What’s Affecting It?
Rising construction material costs are significantly affecting insurance pricing. Because premiums are often tied to project values, the increase in material prices has contributed to higher insurance rates. Tariffs, particularly those affecting the cross-border movement of construction materials, are expected to further strain cost structures. Outside the United States, regional economic conditions are key factors. In Asia, growth is supported by public and private investment, particularly in energy and infrastructure. Australia’s construction market is expected to grow modestly, driven by residential development linked to affordable housing policies. In Europe, the focus remains on the sustainable energy transition, though labor shortages persist as a concern.
The report also examines regional developments in the construction insurance market. While pricing remains mixed, some softening is visible in certain regions and lines of business. Quota-share arrangements are still widely used for larger risks. In Asia, the market is showing signs of recovery, with more favorable rates and terms for some risks. New legal developments are influencing policy wording, particularly around LEG3 coverage, and natural catastrophes remain a consistent underwriting concern.
Natural Catastrophes and Cyber Impact
Recent natural disasters are measurably impacting insurance dynamics. Wildfires in Los Angeles could lead to insured losses between $32 billion and $40 billion, affecting over 16,000 structures. These events could lead to an increase in insurance rates and reduced capacity for projects in California. Rebuilding efforts are anticipated to place more strain on labor and material markets, which could be exacerbated by trade tariffs, particularly if lumber supplies from Canada are affected. In the builders’ risk and construction all risks (CAR) market, capacity is slowly returning, and rate increases have stabilized in some areas. However, underwriting remains cautious, especially in response to heightened cyber risk. As construction becomes more reliant on digital technology and AI, insurers are tightening their cyber liability terms. Standard cyber policies frequently exclude bodily injury and property damage related to cyber incidents, although limited coverage may be available following detailed risk assessments.
Latin America is adapting its insurance offerings in response to long-standing exposures, such as natural disasters and political instability. Insurers continue to emphasize technical underwriting and require comprehensive risk data and clear descriptions of operations. The demand for data center construction globally remains high, driven by rapid digitalization and the infrastructure required to support AI. This has led to a parallel rise in energy sector investment as different power sources are explored to meet the growing needs. In some regions, this includes consideration of nuclear options, including Small Modular Reactors (SMRs). Renewable energy projects – such as wind, solar, and green hydrogen – also continue to attract capital, with insurers actively underwriting these evolving risks. The report underscores the importance of detailed underwriting and accurate risk information as insurers adapt to shifting demand in both construction and associated lines of cover, even as market conditions vary by geography and risk class.
