2011 Aon Industry Risk Report - Construction

Aon Risk Solutions

2011 Industry Report:
Construction

Table of Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Executive Summary . . . . . . . . . . . . . . . . . . . . .4
Risk Insights . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Top 10 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Preparedness for the Top 10 Risks . . . . . . . . . . . . . . . . . . . 7
Losses Associated With Top 10 Risks . . . . . . . . . . . . . . . . . . . . . 8
Identification and Assessment of Major Risks . . . . . . . . . . . . . . 9
External Drivers Strengthening Risk Management . . . . . . . . . 10

Client Insights . . . . . . . . . . . . . . . . . . . . . . . .11
Priorities in Choice of Insurer . . . . . . . . . . . . . . . . . . . . . . . . . 11
Desired Market Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Risk Management Department . . . . . . . . . . . . . . . . . . . . . . . . 13
Retentions/Deductibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Global Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Use of Captives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Market Insights . . . . . . . . . . . . . . . . . . . . . . . .19
Coverage Terms and Conditions . . . . . . . . . . . . . . . . . . . . . . . 20
Premium Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Economic Insights . . . . . . . . . . . . . . . . . . . . .22
Industry Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Methodology, Notes and Disclaimers . . . . . . .24
Aon at a Glance . . . . . . . . . . . . . . . . . . . . . . .25
Key Contacts . . . . . . . . . . . . . . . . . . . . . . . . .26

Construction Industry Report - 2011 1

Foreword
Aon is pleased to present you the 2011 Construction Industry Report . Over the past
few years the construction sector has faced many risks and challenges, which have
changed the way companies view and prioritize their resources in response to risk . In
this report, we would like to highlight a few key findings and observations to guide
you through the risk management facts and figures .

„ There is an undeniable interdependence among many of the top risks and
economies around the globe . It is more important than ever for organizations to
embrace an enterprise-wide approach to managing risk, and optimize their strategy
on a global basis .

„ Economic slowdown remains a top risk for the construction sector as respondents
are still concerned over the slow pace of economic recovery and increasing public
sector deficits in developed countries .

„ In the list of top risks, threat of increasing competition has jumped from sixth place
in the 2009 survey to second place in 2011 . This concern is fueled by high supply
and limited demand, as well as highly aggressive bidding – sometimes at or below
cost .

„ Damage to reputation/brand has risen significantly in ranking from 11th in 2009 to
third in 2011 . This change is likely to be caused by the challenges that the industry
is facing in maintaining a client base in an increasingly competitive environment .
Where construction firms are working hard to replace diminished backlogs, the
temptation to bid work at or below cost increases . With these practices, the risk
of completing the job on time and on budget also rises . This can have a negative
impact on reputation . This is not indicative of the entire sector, but the pressures on
margin and the ability to remain viable as the economy continues to falter will have
a negative impact .

„ Regulatory/legislative changes also has jumped up from 10 th to fifth in ranking,
reflecting the increasing pressure and cost while complying with changes stemming
from new and pending legislation on issues, such as minimum wages, pending 3
percent withholding on federal, state and local agency sponsored projects, health
care reform and increasing limitations to indemnification agreements . The lack
of progress on infrastructure funding has also impacted the sector in a negative
fashion .

„ Meanwhile, capital availability/credit risk has dropped in ranking from second
overall in 2009 to 10th in 2011 . While still a key concern for the industry, the drop is
reflective of the recovery of the credit market from the height of the financial crisis .

„ Third-party liability continues to be a key issue for construction companies,
most likely caused by concerns over construction defect claims and the court
interpretations of insurance coverage available to pay these claims .

„ While ranked at 11th on the list of top risks, political risk/uncertainties, we believe,
will grow as this sector expands into developing countries . The recent political
uprisings in the Middle East provide a good example .

History provides only a partial understanding of risk for the future . In an industry

2 Construction Industry Report - 2011

expected to grow by 67 percent, from USD 7 .2 trillion today to USD 12 trillion in 20201,
organizations will be challenged by an ever evolving risk profile . To effectively manage
risk, organizations must assess the likelihood and potential impact of all viable risk
events in order to be prepared for the next catastrophe and maximize future growth
opportunities .

If you have any comments or questions about the survey, or wish to discuss the
findings further, please contact your Aon account executive .

Best regards,

Kevin White
Chief Executive Officer
Aon Risk Solutions
Construction Services Group
kevin .white@aon .com

1
Global Construction 2020 Report” by Global Construction Perspectives and Oxford Economics


Executive Summary
Organizational sustainability in the construction industry demands proactive
understanding and management of risk . In the current and evolving economic,
legal and regulatory landscape, the risk profiles of construction companies can
change quickly . Recent challenges such as extensive regulatory and compliance
changes, and a large number of global weather and geotechnical related
catastrophes in 2011 remind us that threats to organizations increasingly come
from all directions and in many different forms, and the ability to manage these
risks is key to survival and success .

Staying abreast of the latest trends relative to risk is essential to remaining
competitive and relevant in the increasingly global market . We provide this
report to assist in the understanding of emerging issues and help you learn
what your peers are doing to manage risk, overcome challenges and capture
opportunities . The report is comprised of four main components:

● Risk insights include top 10 risks faced; reported readiness; losses related to risks; how
organizations are identifying and assessing risks; and external drivers affecting risk management .

● Client insights include priorities in choice of insurer; desired market changes; risk management
departments; retentions; limits; global programs; and use of captives .

● Market insights include discussion of coverage terms and conditions; and changes in premium
rates over the past year .

● Economic insights include insight into market environment for the construction sector .


„ Retentions/deductibles – Overall, the majority of surveyed
Key Findings
construction companies have not changed their retentions
Risk Insights
compared to their prior policy period .
„ Greatest risks – The two greatest risks indicated by
respondents to Aon’s 2011 Global Risk Management Survey „ Umbrella/Excess liability limits – The average limit
are economic slowdown and increasing competition . purchased by construction companies stands at USD 96
million . The highest limit purchased is USD 450 million,
„ Risk preparedness for the top 10 risks – The construction while the lowest limit purchased is USD 1 million .
industry’s overall preparedness for the top 10 risks has
increased from 60 percent in 2009 to 67 percent in 2011 . „ Global programs – Construction respondents with
Respondents rate regulatory/legislative changes, with only operations in more than one country are asked how they
39 percent, as the least prepared risk . purchase/control their insurance programs; 52 percent
indicate their corporate headquarters controls procurement
„ Losses associated with top risks – For the construction of all of their global and local insurance programs while
industry, economic slowdown tops the list of risks with the 41 percent say their corporate headquarters purchase
most losses in the past 12 months at 75 percent . some lines and leaves local offices to handle other lines .
Among the global policies that organizations purchase,
„ Identification and assessment of major risks – Survey the most common types indicated in the survey are related
respondents cite senior management’s intuition and to general liability including public/product liability,
experience as the primary method to identify and assess directors' and officers' liability (D&O), and property
major risks facing their organizations . In practice, respondents damage/business interruption .
typically utilize a combination of risk registers, a structured
enterprise-wide approach and senior management's intuition „ Use of captives – Thirty-three percent of construction
and experience . companies surveyed report the utilization of a captive or
Protected Cell Company (PCC) with 18 percent saying they
„ External drivers strengthening risk management – will initiate a plan to create a new or additional captive or
Economic volatility and pressure from customers remain PCC in the next three years . The most common coverages
the most important external drivers strengthening risk currently underwritten are general/third-party liability, auto
management for the construction industry . liability, employers’ liability/workers compensation and
property .
Client Insights
„ Priorities in choice of insurer – Value for money/price is Market Insights
ranked the highest priority among construction respondents „ Coverage terms and conditions – Overall, the majority
in selecting an insurer, followed by claims service and of construction respondents have indicated that the terms
financial stability/rating . and conditions for all surveyed lines of coverage remain
unchanged in comparison with those in prior years . The
„ Desired market changes – Construction respondents coverage line that experienced the most change in coverage
are looking for increased ability to recognize internal risk terms is general liability/third-party liability . This coverage
management through lower premiums, more flexibility has both the highest percentage of improvements (25
and broader coverage/better terms and conditions for the percent) and experienced the most restrictions (15 percent) .
insurance market .
„ Premium rates – Despite the challenges presented by
„ Risk management department – Among construction unprecedented global catastrophic losses in 2011, the
respondents, 60 percent indicate that they have a formal risk amount of insurance capacity remains abundant thereby
management department . Among those, 54 percent say their keeping insurance premiums competitive . There are signs
risk management department reports to the CFO . In the case of corrections being addressed in specific lines of insurance,
where no formal risk management department exists, 44 but the anticipated hard market correction remains elusive .
percent also indicate that their CFO handles risk management .


Risk Insights
General Introduction
In today’s global environment, construction companies are facing increasingly complex challenges: volatile
political liabilities, extensive regulatory and compliance changes, economic interdependence, rising litigation,
technology failures that could potentially disrupt businesses, and mega-mergers . The stakes for organizations
are high . It has never been more critical for businesses to access accurate and the most up-to-date information in
order to proactively address business risks at every level of the organization . In this section, we provide industry
specific insights into:

● Top 10 Risks

● Risk Preparedness for the Top 10 Risks

● Losses Associated with Top 10 Risks

● Identification and Assessment of Major Risks

● External Drivers Strengthening Risk Management

Top 10 Risks
Respondents are provided a list of 49 risks and are asked to select the 10 they believe to be the top risks that their organizations
face . Economic slowdown remains the number one risk for the construction sector as respondents are still concerned over the slow
pace of economic recovery and increasing public sector budget deficits in developed countries . Increasing competition has jumped
from sixth in 2009 to second in 2011, which is likely to be fueled by high supply and limited demand compounded by an aggressive
bidding environment – sometimes at or below cost . Damage to reputation/brand has experienced a significant hike in ranking, from
11th in 2009 to third overall in 2011 .

Regulatory/legislative changes has jumped from 10th to fifth in ranking, reflecting the increasing pressure and cost construction
companies are facing while complying with changes stemming from new and pending legislation on issues, such as minimum
wages, pending 3 percent withholding on federal, state and local agency sponsored projects, health care reform and increasing
limitations to indemnification agreements . The lack of progress on infrastructure funding has also impacted the sector .

Third-party liability remains a key issue for construction companies, which is most likely fueled by concerns over construction
defect claims and the courts’ interpretation of insurance coverage available to pay these claims . Coverage certainty will continue
to be a challenge for contractors as more construction defect claims are resolved in court .

Conversely, capital availability/credit risk has dropped in ranking from second overall to 10 th in 2011 . The drop indicates that the
credit market is recovering from the height of the financial crisis .

When we look at the top 10 risks as a whole, there is an undeniable interdependence among many of these risks as well as among
economies around the globe . Therefore, it is important for organizations to embrace an enterprise-wide approach to managing
risk and optimizing their strategy on a global basis


Top 10 Risks - Construction

Rank Construction 2011 Top 10 Risks
1 Economic slowdown
2 Increasing competition
3 Damage to reputation/brand
4 Failure to attract or retain top talent
5 Regulatory/legislative changes
5 Third party liability
7 Injury to workers
7 Cash flow/liquidity risk
7 Commodity price risk
10 Capital availability/credit risk

Data Source: 2011 Global Risk Management Survey
Where ranking numbers are duplicated that indicates a tie

Risk Preparedness for the Top 10 Risks
Preparedness for risk means having a plan in place to address a specific risk or having undertaken a formal review of that risk .
Compared to the 2009 survey, overall preparedness for the top 10 risks has improved from 60 percent to 67 percent .

Top 10 Risks Reported Readiness - Construction

61%
Economic slowdown 50%
71%
Increasing competition 64%
58%
Damage to reputation/brand 50%
63%
Failure to attract or retain top talent 47%
39%
Regulatory/legislative changes 15%
89%
Third party liability 94%
88%
Injury to workers 88%
91%
Cash ﬂow/liquidity risk 57%
59%
Commodity price risk
57%
48%
Capital availability/credit risk 75%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2011 2009



From 2009 to 2011, cash flow/liquidity risk and capital availability/credit risk needs have experienced the greatest change in risk
preparedness among the top 10 risks – cash flow/liquidity risk preparedness has improved by 34 percent while capital availability/
credit risk has dropped by 27 percent . Among the top ten risks, regulatory/legislative changes are cited by respondents as the
least prepared, at 39 percent . In the past, regulatory and legislative changes normally took shape in a gradual process, allowing
companies some time to formulate responses or coping strategies . This is not always the case now .

With the growing interest in risk identification from regulatory bodies, risk management has become more embedded in an
organization’s culture, and as the economic recovery is underway, we expect an upward trend in risk preparedness over the next
two years .

Losses Associated with Top 10 Risks
For the construction industry, economic slowdown ranks at the top of the list with the most losses in the past 12 months at
75 percent . On an aggregated basis, the average percentage reported by this industry for losses related to the top 10 risks
has decreased from 40 percent in 2009 to 37 percent in 2011 . Comparing to the 2009 results, six out of the 10 top risks have
experienced more losses in the past 12 months . Increasing competition and economic slowdown have the greatest increases in
associated losses, at 31 percent and 25 percent respectively .

Losses From Top 10 Risks - Construction

75%
Economic slowdown 50%
74%
Increasing competition
43%
6%
Damage to reputation/brand
0%
27%
Failure to attract or retain top talent 7%
21%
Regulatory/legislative changes 23%
43%
Third party liability 44%
42%
Injury to workers 47%
35%
Cash ﬂow/liquidity risk 57%
32%
Commodity price risk 64%
19%
Capital availability/credit risk 25%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2011 2009



Identification and Assessment of Major Risks
Survey respondents cite senior management’s intuition and experience as the primary method to identify and assess major risks
facing their organizations . In practice, respondents are probably using a combination of risk registers, a structured enterprise-wide
approach and senior management intuition and experience .

Should organizations relying predominantly or exclusively on management experience and intuition for their major risk decisions
be concerned?

In today’s fast evolving business environment, where the past may not always be the best predicator of the future, exclusive
reliance on senior management’s intuition and experience to identify and assess risks could result in a significant loss to an
organization . Some of the reasons include:

„ Risk identification based on experience tends to miss emerging or new risk .

„ Risk identification based on intuition may not be consistent and may not be given credence by others .

„ There may be a tendency toward risk aversion by managers with the view “better safe than sorry .”

On the contrary, the use of risk registers, quantitative analysis and an enterprise-wide approach to identifying and assessing risk
is desirable, adding consistency to the process and enabling the organization to more effectively assess the potential impact of an
identified risk on the organization so it can deploy appropriate resources for treatment .

As risks increase in complexity, construction companies must integrate intuition and experience with sophisticated analytics to
make the most informed objective and predictive decisions .

Identification of Major Risks Assessment of Major Risks

Other
0% Board level discussion Other Board level quantitative
Structured enterprise-wide and analysis 1% analysis
approach 10% 8%
Structured enterprise-wide
11%
approach
10%
External service
provider/advisor
3%
Consult with external
service provider/advisor
5%

Business unit risk
registers or key risk
indicator worksheets Business unit Senior management
Senior management
26% quantitative analysis intuition and experience
intuition and experience
26% 50%
50%



External Drivers Strengthening Risk Management (past two years)
Economic volatility and pressure from customers remain the most important external drivers strengthening risk management for
the construction industry . Following the financial crisis, construction companies are having a greater awareness of the need to
protect assets and the balance sheet from unexpected loss . When dealing with increased pressures from customers to complete
projects at lower costs, they have to assure full compliance with both new and existing regulations and disclosure practices .

External Drivers Strengthening Risk Management (past two years)

64%
Economic volatility
50%

Pressure from customers 34%
18%
26%
Large third party liability losses/litigation
19%
25%
Increased focus from regulators 38%
21%
Demand from investors for greater
22%
disclosure and accountability
15%
Workforce issues
13%
13%
Other 14%
10%
Political uncertainty
11%
8%
Pressure from suppliers/vendors
6%
8%
Natural weather events
14%

0% 10% 20% 30% 40% 50% 60%

Construction All Industries



Client Insights
The right knowledge at the right time can assist organizations in their risk strategies and positively impact the total cost of risk . The
construction industry has capitalized on timely information available to consumers and enterprises for some time . Aon empowers
our clients with relevant risk insights that can help them make not just fast decisions, but also the right ones to achieve their goals .
In this section, we provide industry-specific insight into:

● Priorities in Choice of Insurer

● Desired Market Changes

● Risk Management Department

● Retentions/Deductibles

● Limits

● Global Programs

● Use of Captives

Priorities in Choice of Insurer
Value for money/price is ranked the highest priority among construction respondents, followed by claims service and financial
stability/rating . In the 2011 survey, value for money tops the rankings by construction respondents, jumping up from the fourth
place in 2009 . This increase reflects the current business environment in which construction companies have been operating
from an unprecedented global financial crisis to a period of unstable and slow recovery . We expect value for money/pricing will
continue to be an important factor in the foreseeable future and especially during the economic recovery, when organizations
seek to increase profit margins in an extremely competitive environment .

Priorities in Choice of Insurer

Priorities in choice of insurer 2011 Construction 2009 Construction
Value for money/price 1 4
Claims service 2 3
Financial stability/rating 3 1
Industry experience 4 2
Flexibility/innovation/creativity 5 8
Prompt settlement of large claims 6 6
Long-term relationship 7 7
Capacity 8 5
Speed and quality of documentation 9 10
Ability to deliver a global program 10 9



Desired Market Changes
When asked what changes construction organizations would most like to see in the insurance market, the majority of
respondents desire:

„ Recognition of investments in internal risk management efforts through lower premiums

„ More flexiblility

„ Better quality of service and broader coverage/better terms and conditions

The nature of the construction industry often requires immediate attention by an insurance carrier to address project-specific
requests such as bid requests, contract review, and appropriate endorsements . Companies may be looking for their insurers to
provide a higher quality of service and be more flexible responding to these requests .

Construction companies have invested and committed significant resources to risk control/safety practices to help lower the
frequency and severity of loss, and according to the survey, they would like to see recognition of this investment by carriers in the
form of lower premiums .

Desired Market Changes

Recognition of investments in 59%
internal risk management
e orts through lower premiums 58%

55%
More ﬂexibility
52%

Better quality of service 52%
42%

Broader coverage/better terms and 52%
conditions 63%

More product innovation 31%
32%

More sophisticated information 29%
technology (IT) systems 28%

14%
Increased capacity
18%

10%
Other
7%

0% 10% 20% 30% 40% 50% 60% 70%

Construction All Industries



Risk Management Department
Among construction respondents, 60 percent say they have a formal risk management department . Among those, 54 percent
indicate that their risk management department report to the CFO . In the case where no formal risk management department
exists, 44 percent say their CFO handles risk management . Those with an in-house risk management department typically maintain
a staff of one to five people .

Formal Risk Management Department Department Staffing

Over 12
19% 1-2
30%

No
40%

Yes
60%
6-11
21%

3-5
30%


Retentions/Deductibles
Overall, the majority of construction companies have not changed their retentions during their prior policy period . The driving
factors behind this include:

„ A continued soft market

„ A general sense of comfort with historical retention levels

„ Trade-offs in premium offered by carriers (either up or down) are not deemed to yield meaningful savings

Similar to the results in 2009 and 2010, we expect there will be little pressure on insureds to amend their current retentions/
deductibles in 2011 .


Changes in Deductibles/Retentions
3%
Professional Indemnity/Errors
88% 10%
and Omissions Liability

Property 7% 82% 11%

Directors’ and O cers’ Liability 5% 90% 5%
5%
Auto/Motor Vehicle Liability 9% 81% 11%

General Liability 9% 81% 11%

Workers Compensation 7% 79% 14%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Lower Same Higher


Limits
Umbrella/Excess Liability
When it comes to selecting the appropriate level of excess liability limits, organizations utilize many different methods . An
optimal program design, characterized by broad coverage and efficient use of insurance funds, is driven by a number of factors:
risk severity, risk mitigation measures already in place or under consideration, the regulatory environment in which companies
operate, historical trend of loss activities, the insurance marketplace and appetite for risk .

For umbrella/excess liability, the average limit purchased by surveyed construction companies is USD 96 million . The highest limit
purchased stands at USD 450 million, while the lowest limit purchased is USD 1 million .

The level of limits purchased by construction companies remains in direct proportion with their revenue size - a larger company
with a higher profile can represent a bigger target for legal actions .

Seventy-three percent of surveyed construction companies feel their umbrella/excess liability limits are adequate while 22 percent
believe they should be higher and four percent feel they should be lower .

Umbrella/Excess Liability Limits

Revenue Minimum 1st Quartile Average Mode Median 3rd Quartile Maximum
All $1,000,000 $23,250,000 $95,948,276 $100,000,000 $50,000,000 $100,000,000 $450,000,000
<$100M $1,000,000 $5,000,000 $11,000,000 $5,000,000 $5,000,000 $13,250,000 $30,000,000
$100M-$500M $5,000,000 $20,000,000 $39,625,000 $50,000,000 $27,500,000 $50,000,000 $100,000,000
$500M-$1B $35,000,000 $48,750,000 $77,000,000 $100,000,000 $88,500,000 $100,000,000 $100,000,000
$1B-$5B $25,000,000 $100,000,000 $168,181,818 $150,000,000 $150,000,000 $200,000,000 $450,000,000
Over $5B $200,000,000 $250,000,000 $289,285,714 $250,000,000 $300,000,000 $312,500,000 $400,000,000
Data Source: 2011 Global Risk Management Survey and other proprietary databases


Contractor’s Pollution Liability
Overall, contractor’s pollution liability limits purchased have remained static . However, the trend by carriers to exclude certain
exposures relating to building materials or construction defect (mold) from general liability policies may encourage contractors to
find coverage through the purchase of a contractor’s pollution policy .

Global Programs
With the prolonged economic downturn and increased globalization, the methods construction companies utilize to manage
the finance of risk has come under greater scrutiny . Many organizations with cross-border operations maintain a combination of
local and global insurance policies implemented without much central oversight . This has created overlapping policies which may
involve multiple brokers, consultants and insurance carriers (each with individual service fees) that are disconnected from the
overall global goals and program structure . In addition, the lack of visibility on international premiums, service fees or self-insured
loss costs has made achieving placement efficiency and effective administration a greater challenge .

Construction respondents with operations in more than one country are asked how they purchase/control their insurance programs;
52 percent indicate their corporate headquarters controls procurement of all of their global and local insurance programs while 41
percent say their corporate headquarters purchases some lines and leaves local offices to handle others . Only 7 percent of surveyed
companies allow each operation to buy their own insurance with no coordination from corporate headquarters .

Global Insurance Purchasing Habits

Category Construction All Industries

No, each operation buys its own insurance with no 7% 3%
coordination from corporate headquarters
Corporate headquarters controls some lines and leaves local 41% 38%
office to purchase other lines
Corporate headquarters controls procurement of ALL 52% 59%
insurance programs (global/local)

Among construction organizations that control procurement of insurance for cross-border operations from their corporate
headquarters, 51 percent indicate they have purchased programs which have global policies issued to parent companies and local
policies issued to local operations, and 36 percent say they use a combination of multiple methods .

While it is encouraging to see that construction companies are in control of their global and local programs, the key words are
“coordination and central oversight .” As companies increasingly rely on foreign resources, it is critical for them to take a holistic
view of their risk finance strategies, ensuring global optimization of program cost and structure while addressing evolving
compliance and regulatory concerns .

Global coordination and administration ensures consistency, transparency, security, and ultimately peace of mind . Organizations
with a centralized operating structure that can track and coordinate the procurement of all insurance programs (global/local)
achieve the following benefits:

„ Reducing total cost of risk

„ Identifying coverage gaps or unnecessary retentions

„ Maximizing local and global compliance

„ Avoiding redundant coverage


Global Insurance Buying Patterns


Buy global policies issued to the parent with no local policies 4% 8%
Buy “programs” which may include global policies issued to 57% 50%
parent and local policies issued to local operations
Buy local policies only 4% 4%
Combination of two or more of above 36% 37%

Among the global policies that organizations purchase, the most common types indicated in the survey are:

„ General liability including public/product liability (83 percent)

„ D&O liability (75 percent)

„ Property damage/business interruption (63 percent)

Traditionally, most companies simply consider general liability including public/product liability as well as property damage/
business interruption insurance for their global insurance purchase . However, in recent years, globally administered D&O
programs have gained popularity as local insurance and indemnification regulations and requirements evolve and carriers’ abilities
to administer these programs strengthen .

Types of Global Insurance Coverages Purchased


General Liability including Public/Product 83% 89%
Liability
Directors' and Officers' Liability 75% 68%
Property Damage/Business Interruption 63% 81%
Auto/Motor Vehicle Liability 33% 46%
Workers Compensation/Employers Liability 33% 45%
Crime 33% 38%
Other 8% 9%



Use of Captives
A pure captive is a special purpose insurance or reinsurance company formed primarily to (re)insure the risks of its owner and
related parties . In addition to pure captives, group and mutual captives with multiple owners and a range of cell company
structures minimize the barriers to entry into captives .

Thirty-three percent of construction companies surveyed reported having an active captive or PCC with 18 percent also indicating
a plan to create a new or additional captive or PCC in the next three years . Only nine percent of respondents say they have a
captive or PCC that is in run-off or dormant and seven percent indicate a plan to close a captive in the next three years .

Organizations with a Captive or PCC


Plan to create a new or additional captive or PCC in the next 3 years 18% 12%
Currently have an active captive or PCC 33% 26%
Have a captive that is dormant/run-off 9% 6%
Do you plan to close a captive in the next 3 years 7% 8%


Of the construction companies that report having a captive or PCC, the most common coverages currently underwritten are
general/third-party liability, auto liability, employers’ liability/workers compensation and property .

Construction respondents indicate having the greatest interest in expanding underwriting for the following risks over the next
five years:

„ Sub-contractor default insurance – 11 percent

„ Environmental/pollution – 11 percent

„ Owner controlled insurance program/contractor controlled insurance program – 11 percent

The above facts are interesting and tie in with a general trend – captive owners are seeking opportunities to create diversity across
their portfolios and maximize their captives’ strategic impact .


Current and Future Coverage Underwritten

2011 - Continue/plan to
2011 - Currently underwrite same/new risk in 2011 - Percentage of
Coverage underwritten next five years projected change

General/Third Party Liability 42% 29% -13%
Auto Liability 34% 18% -16%
Employers Liability/Workers Compensation 29% 24% -5%
Property 29% 16% -13%
Professional Indemnity/Errors and Omissions Liability 26% 26% 0%
Product Liability and Completed Operations 21% 16% -5%
Employee Benefits (Excluding Health/Medical and Life) 16% 13% -3%
Sub-contractor default insurance 16% 26% 11%
Catastrophe 13% 16% 3%
Directors' and Officers' Liability 13% 13% 0%
Credit/Trade Credit 11% 11% 0%
Environmental/Pollution 11% 21% 11%
Life 11% 5% -5%
Third-Party Business 11% 11% 0%
Owner Controlled Insurance Program/Contractor 11% 21% 11%
Controlled Insurance Program
Health/Medical 8% 16% 8%
Marine 8% 11% 3%
Crime/Fidelity 5% 5% 0%
Cyber Liability/Network Liability 5% 0% -5%
Other 5% 3% -3%
Aviation 3% 0% -3%
Employment Practices Liability 3% 8% 5%
Financial Products 3% 5% 3%
Warranty 3% 8% 5%
Terrorism 0% 3% 3%



Market Insights
Access to timely insights on policies, premiums and carriers allows construction clients to make quicker and
more accurate decisions while seeking to obtain the best coverage and rates . Aon has invested resources to
develop the industry-leading research and platforms and to ensure our clients have access to the data they
need, when they need it . Findings by line of coverage include:

● Coverage Terms and Conditions

● Premium Rates

Aon GRIP Dashboard


Coverage Terms and Conditions
Overall, the majority of construction respondents indicate that the terms and conditions for all surveyed lines of coverage
have remained unchanged in comparison with programs in prior years . The coverage line that has experienced the most change in
coverage terms is general liability/third-party liability . This coverage has both the highest percentage of improvements
(25 percent) and has experienced the most restrictions (15 percent) .

For construction risks, certainty and predictability of coverage under general liability policies has become more difficult to obtain .
Challenges are found in many areas which contractors expect protection by their policies, such as property damage, indemnity,
contractual risk transfer, priority of coverage and the basic premise of what constitutes an “occurrence” under the policy .

States are playing an increasingly aggressive role in determining coverage positions for construction defects and whether such
claims constitute an “occurrence," defined as an “accident” within the general liability policy . All but two states have addressed
this issue in recent years . In some cases, when the judiciary has rendered an opinion in favor of the insurance carriers’ (no
occurrence), state legislatures end up reversing it . This is a trend that is likely to continue .

Changes in Coverage

4%
Property 75% 21%

Professional Indemnity/ 9% 73% 18%
Errors and Omissions Liability

Directors’ & O cers’ Liability 5% 77% 18%
2%
5%
Auto/Motor Vehicle Liability 8% 84% 6%
2%
General Liability/Public Liability 13% 60% 25%
2%
Workers Compensation/
9% 89%
Employers Liability

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Signiﬁcant More Restricted Coverage Conditions Somewhat More Restricted Coverage Conditions

Unchanged Policy Coverage Conditions Improved Policy Coverage Conditions

Premium Rates
The construction insurance market is extremely competitive . Capacity in this sector has been steady over the past three to
four years and this has had a significant impact keeping rates low . Estimated global capacity within the international onshore
construction insurance is roughly USD 3 billion and USD 3 .5 billion on an Estimated Maximum Loss basis, with additional capacity
available globally from the onshore property markets . The volume of business placed into the global insurance market over the
past 36 to 48 months as a result of escalating contract values and the increase of global development has attracted new players to
provide capacity to large project risks .

Based on Aon’s 2011 Global Risk Management Survey, which surveyed rate changes into the fourth quarter of 2010, over 75
percent of respondents indicate a flat to decreasing rate environment for all reviewed lines . The two lines of coverage respondents
indicate to have exhibited the most reductions in rate levels are property (45 percent) and general liability/public liability (42
percent) . For those respondents that have purchased workers compensation/ employers liability, this line has the highest number
of respondents with an increase in rate (25 percent) .


Since the survey was conducted much has changed; some of the changes are expected, others are not .

„ Losses in 2011 from the earthquakes in New Zealand, flooding in Australia, the Great East Japan Earthquake as well as the
tornadoes and the hurricane-related flooding in the United States are greater than USD 50 billion .

„ Atlantic hurricane predictions are high for 2011 with nearly twice the average activity predicted .

„ Risk Management Solutions, Inc . released 11 .0 of its version U .S . hurricane model in February, 2011, with significantly higher
outputs expected for windstorm analyses - 25 to 30 percent overall increases expected . Texas, the Mid-Atlantic and New
England states and regions are expected to experience the most increase .

„ The deteriorating workers’ compensation market in the U .S . as a result of the rising medical cost inflation will affect pricing . For
the first time in over a decade, the National Council on Compensation Insurance has posted an increase in frequency of lost time
cases . This may be due to the fact that back to work programs are hindered by the lack of available work . The slow economic
rebound has been particularly hard on contractors - unemployment statistics are as many as 10 points worse than the national
average among the group .

Even in light of these changes we anticipate strong market capacity . Aggressive strategies by carriers to defend and expand their
market shares will continue to fuel a competitive market environment for most lines of coverage in the near future except for
workers compensation and general liability . Insurers are beginning to either become more selective in the risks they accept or
are increasing rates on deserving risks . We have not yet seen an attempt to achieve across-the-board rate increases . However,
carriers are selectively seeking to “right price” individual risks based upon experience . Workers compensation as a line of business
relating to construction risk is becoming increasingly problematic for carriers . Lack of robust investment income, the continued
deterioration of the exposure base and increased loss development from more robust years all serve to put pressure on the
profitability of this line .

Premium Rates

2% 4% 2%
2%
100%
6% 6% 7% 4%
6%
90% 10% 13%
16% 18%
18% 12%
80%

70%
42%
60%
35% 44% 56% 31%
50% 51%

40%
13%
30% 27%
12%
24%
20% 13%
21% 10% 18%
10% 10% 10%
13% 2% 7% 2%
6% 8% 13% 8%
0%
Workers General Auto/Motor Vehicle Directors' and Professional Property
Compensation/ Liability/ Liability O cers' Indemnity/Errors and
Employers Liability Public Liability Liability Omissions Liability

Over -10% -5% to -10% -0.1% to -4.9% No Change

0.1% to 4.9% 5% to 10% Over 10%



Economic Insights
Understanding current performance and perception of the future financial strength of a sector is important in any analysis . In this
section, we provide insight into market environment for the construction sector .

Industry Data
The global construction industry will be influenced by several economic factors for the foreseeable future . Unemployment and
underemployment are stubbornly static . The impact of the recession on the outlook for construction starts has taken a more
negative turn . Economists are still somewhat optimistic that the U .S . economy will avoid another recession even though forecasts
for robust recovery are not realistic in the near future .

Year-on-year change forecast from the U .S . Census Bureau and Reed Construction Data are as follows:

U.S. Total Construction Spending
(billions of U.S. current dollars – annual figures)
Actual Forecast
2008 2009 2010 2011 2012 2013
New Residential 237 .0 141 .2 136 .2 127 .2 122 .0 126 .6
(% change is year vs previous year) -33 .1% -40 .4% -3 .5% -6 .6% -4 .1% 3 .7%
Baseline Forecast YOY % Change -6 .0% 6 .8% 17 .7%
Residential Improvements* 120 .7 112 .7 112 .5 119 .1 114 .0 118 .9
-13 .5% -6 .6% -0 .2% 5 .9% -4 .3% 4 .3%
Baseline Forecast YOY % Change 1 .6% 8 .7% 10 .2%
Non-residential Building 437 .7 375 .7 288 .9 270 .1 272 .5 281 .6
8 .4% -14 .2% -23 .1% -6 .5% 0 .9% 3 .3%
Non-building (heavy engineering) 272 .1 273 .5 266 .0 259 .7 257 .3 260 .4
9 .7% 0 .5% -2 .8% -2 .4% -0 .9% 1 .2%
Total 1067 .6 903 .2 803 .6 776 .1 765 .8 787 .5
-7 .4% -15 .4% -11 .0% -3 .4% -1 .3% 2 .8%

*Residential Improvements include remodeling, renovation and replacement work .
Source: U .S . Census Bureau, Department of Commerce .
Forecasts and table: Reed Construction Data .

The well-being of the construction sector has a great impact on the global economy . Private construction was expected to rise by
nearly 5 percent by 2012, but instead, it is expected to fall . Consumer confidence, which is at an all time low, has also negatively
affected the industry . General builders are feeling the pinch as margins have diminished greatly due to increased competition over
the last couple of years . The stronger organizations are looking at growth either through acquisition or finding a way to fend off
being the acquired .


Heavy industrial as well as engineering, procurement and construction or EPC contractors still enjoy strong backlogs as industrial,
energy and infrastructure work can still be found . This sector is experiencing increased competition on a global basis (both U .S .
and non-U .S .) . Its ability to compete with new project delivery methods like public-private partnerships proves to be a challenge .
Many non-U .S . contractors are quite comfortable with this model and understand the value of bringing equity to the deal . This is a
trend that is expected to continue as public bodies lack resources to invest large sums into infrastructure .

These threats also bring opportunity to those who can weather the economic storm and find new methods to address the
challenges of the continued viability of the sector .


Methodology, Notes and Disclaimers
This report is based on data from Aon’s 2011 Global Risk Management Survey and other proprietary databases .

2011 Global Risk Management Survey construction data shown in this report is based on 62 global company responses . Breakdown
of respondent base is as follows:

Revenue Range % of Respondents

< USD 1B 66%

USD 1B – USD 4 .9B 19%

USD 5B – USD 9 .9B 5%

USD 10B – USD 14 .9B 2%

USD 15B – USD 24 .9B 5%

USD 25B+ 0%

Cannot disclose 3%

Along with the support of other Aon insurance and industry specialists, Aon Analytics has collected and tabulated results, provided
analysis and interpretation of findings, and prepared this report .

This report is furnished for informational purposes only . Do not distribute or copy . Aon has endeavored to confirm the correctness
of the data and opinions expressed in this report, however, neither Aon nor its employees make any representation or warranty as
to the accuracy or completeness of the data or opinions expressed herein . Aon has no liability to the recipient or any other party
resulting from the use of, or reliance upon, the contents of this report .

Copyright 2011 Aon Corporation .


Aon at a Glance
Aon Corporation (NYSE:AON) is the leading global provider insurance brokers based on commercial retail, wholesale,
of risk management services, insurance and reinsurance reinsurance and personal lines brokerage revenues in 2008
brokerage, and human capital solutions and outsourcing . and 2009 . A .M . Best deemed Aon the number one insurance
Through its more than 59,000 colleagues worldwide, Aon broker based on revenues in 2007, 2008 and 2009, and Aon
unites to deliver distinctive client value via innovative and was voted best insurance intermediary 2007-2010, best
effective risk management and workforce productivity reinsurance intermediary 2006-2010, best captives manager
solutions . Aon’s industry-leading global resources and 2009-2010, and best employee benefits consulting firm
technical expertise are delivered locally in over 120 countries . 2007-2009 by the readers of Business Insurance . Visit http://
Named the world’s best broker by Euromoney magazine’s www .aon .com for more information on Aon and http://
2008, 2009 and 2010 Insurance Survey, Aon also ranked www .aon .com/manchesterunited to learn about Aon’s global
highest on Business Insurance’s listing of the world’s partnership and shirt sponsorship with Manchester United .

Centr
Aon e
e

fo
Th

r
•
•

s
Inn

t ic
va a

ly
o
tio
n and A n

Aon Analytics provides clients with forward-looking business Based in Dublin, Ireland, the Aon Centre for Innovation and
intelligence, comprehensive benchmarking and total cost-of- Analytics provides Aon colleagues and their clients around
risk analysis as well as global market insights using proprietary the globe fact-based market insights . As the owner of the Aon
technology like the Aon Global Risk Insight Platform to enable Global Risk Insight Platform (GRIP), one of the world’s largest
more informed and fact-based decision making around repositories of risk and insurance placement information, the
risk management, risk retention and risk transfer goals and Centre analyzes Aon’s USD 54 billion global premium flow to
objectives . identify innovative new products and to provide Aon brokers
insights as to which markets and which carriers provide the
best value for clients .

As the world’s leading insurance broker and risk advisory
Aon Global Risk Insight Platform ® (Aon GRIPSM) is the world’s firm, Aon is committed to helping clients respond quickly and
leading global repository of global risk and insurance effectively to changing market conditions that may impact their
placement information . By providing fact-based insights into businesses . The Aon Situation Room™, accessible at www .aon .
Aon’s USD 54 billion in global premium flow, Aon GRIP helps com, provides clients with fact-based information to help guide
identify the best placement option regardless of size, industry, their businesses through this volatile period .
coverage line or geography .
In the Aon Situation Room, clients will find current insurer
The Web-accessible data produced by Aon GRIP helps Aon financial strength ratings and the most recent updates from
brokers evaluate which markets to approach with a placement Aon’s Market Security Committee on specific carriers . The latest
and which carriers may provide the best value for clients . It news, legislative action, and earnings information is included
also gives Aon brokers a leg up when it comes to negotiations, on the site as well . Clients can also register to receive up-to-
making sure every conversation is based on the most complete, date e-mail alerts .
most current set of facts .


Key Contacts
Construction Services Group For Media and Press Inquires
Kevin White Kelly Drinkwine
Chief Executive Officer Director of Public Relations
Aon Risk Solutions Aon Corporation
Construction Services Group kelly .drinkwine@aon .com
kevin .white@aon .com +1 .312 .381 .2684
+1 .617 .457 .7717
Contributors
Mary Ann Krautheim
Samantha Burns
Client Strategy Officer
Cathy Gavin
Aon Risk Solutions
Construction Services Group
mary .ann .krautheim@aon .com
+1 .212 .441 .2013

Aon Analytics
George M. Zsolnay IV
Head of Aon Analytics - U .S .
george .zsolnay@aon .com
+1 .312 .381 .3955


Aon Corporation
200 East Randolph Street
Chicago, Illinois 60601
T +1 .312 .381 .1000
aon .com

© 2011 Aon Corporation . All rights reserved .
Disclaimer: No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any way or by any
means, including photocopying or recording, without the written
permission of the copyright holder, application for which should be
addressed to the copyright holder .
6995-P096315010-0811

2011 Aon Industry Risk Report - Construction

Recomendados

Recomendados

Mais conteúdo relacionado

Semelhante a 2011 Aon Industry Risk Report - Construction

Semelhante a 2011 Aon Industry Risk Report - Construction (20)

Último

Último (20)

2011 Aon Industry Risk Report - Construction