2011 Aon Industry Risk Report - Construction

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2011 Aon Industry Report - Construction Industry

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2011 Aon Industry Risk Report - Construction

  1. 1. Aon Risk Solutions 2011 Industry Report: Construction
  2. 2. 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 . . . . . . . . . . . . . . . . . . . . . . . . .26Construction Industry Report - 2011 1
  3. 3. ForewordAon is pleased to present you the 2011 Construction Industry Report . Over the pastfew years the construction sector has faced many risks and challenges, which havechanged the way companies view and prioritize their resources in response to risk . Inthis report, we would like to highlight a few key findings and observations to guideyou 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 industry2 Construction Industry Report - 2011
  4. 4. 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 managerisk, organizations must assess the likelihood and potential impact of all viable riskevents in order to be prepared for the next catastrophe and maximize future growthopportunities .If you have any comments or questions about the survey, or wish to discuss thefindings further, please contact your Aon account executive .Best regards,Kevin WhiteChief Executive OfficerAon Risk SolutionsConstruction Services Groupkevin .white@aon .com1 Global Construction 2020 Report” by Global Construction Perspectives and Oxford EconomicsConstruction Industry Report - 2011 3
  5. 5. Executive SummaryOrganizational sustainability in the construction industry demands proactiveunderstanding and management of risk . In the current and evolving economic,legal and regulatory landscape, the risk profiles of construction companies canchange quickly . Recent challenges such as extensive regulatory and compliancechanges, and a large number of global weather and geotechnical relatedcatastrophes in 2011 remind us that threats to organizations increasingly comefrom all directions and in many different forms, and the ability to manage theserisks is key to survival and success .Staying abreast of the latest trends relative to risk is essential to remainingcompetitive and relevant in the increasingly global market . We provide thisreport to assist in the understanding of emerging issues and help you learnwhat your peers are doing to manage risk, overcome challenges and captureopportunities . 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 .4 Construction Industry Report - 2011
  6. 6. „ Retentions/deductibles – Overall, the majority of surveyedKey Findings construction companies have not changed their retentionsRisk 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 managements 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 .Construction Industry Report - 2011 5
  7. 7. Risk InsightsGeneral IntroductionIn today’s global environment, construction companies are facing increasingly complex challenges: volatilepolitical liabilities, extensive regulatory and compliance changes, economic interdependence, rising litigation,technology failures that could potentially disrupt businesses, and mega-mergers . The stakes for organizationsare high . It has never been more critical for businesses to access accurate and the most up-to-date information inorder to proactively address business risks at every level of the organization . In this section, we provide industryspecific 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 ManagementTop 10 RisksRespondents are provided a list of 49 risks and are asked to select the 10 they believe to be the top risks that their organizationsface . Economic slowdown remains the number one risk for the construction sector as respondents are still concerned over the slowpace of economic recovery and increasing public sector budget deficits in developed countries . Increasing competition has jumpedfrom sixth in 2009 to second in 2011, which is likely to be fueled by high supply and limited demand compounded by an aggressivebidding environment – sometimes at or below cost . Damage to reputation/brand has experienced a significant hike in ranking, from11th in 2009 to third overall in 2011 .Regulatory/legislative changes has jumped from 10th to fifth in ranking, reflecting the increasing pressure and cost constructioncompanies are facing while complying with changes stemming from new and pending legislation on issues, such as minimumwages, pending 3 percent withholding on federal, state and local agency sponsored projects, health care reform and increasinglimitations 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 constructiondefect claims and the courts’ interpretation of insurance coverage available to pay these claims . Coverage certainty will continueto 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 thecredit 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 amongeconomies around the globe . Therefore, it is important for organizations to embrace an enterprise-wide approach to managingrisk and optimizing their strategy on a global basis6 Construction Industry Report - 2011
  8. 8. 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 riskData Source: 2011 Global Risk Management SurveyWhere ranking numbers are duplicated that indicates a tieRisk Preparedness for the Top 10 RisksPreparedness 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 2009Data Source: 2011 Global Risk Management SurveyConstruction Industry Report - 2011 7
  9. 9. From 2009 to 2011, cash flow/liquidity risk and capital availability/credit risk needs have experienced the greatest change in riskpreparedness 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 theleast prepared, at 39 percent . In the past, regulatory and legislative changes normally took shape in a gradual process, allowingcompanies 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 anorganization’s culture, and as the economic recovery is underway, we expect an upward trend in risk preparedness over the nexttwo years .Losses Associated with Top 10 RisksFor the construction industry, economic slowdown ranks at the top of the list with the most losses in the past 12 months at75 percent . On an aggregated basis, the average percentage reported by this industry for losses related to the top 10 riskshas decreased from 40 percent in 2009 to 37 percent in 2011 . Comparing to the 2009 results, six out of the 10 top risks haveexperienced more losses in the past 12 months . Increasing competition and economic slowdown have the greatest increases inassociated 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 2009Data Source: 2011 Global Risk Management Survey8 Construction Industry Report - 2011
  10. 10. Identification and Assessment of Major RisksSurvey respondents cite senior management’s intuition and experience as the primary method to identify and assess major risksfacing their organizations . In practice, respondents are probably using a combination of risk registers, a structured enterprise-wideapproach and senior management intuition and experience .Should organizations relying predominantly or exclusively on management experience and intuition for their major risk decisionsbe concerned?In today’s fast evolving business environment, where the past may not always be the best predicator of the future, exclusivereliance on senior management’s intuition and experience to identify and assess risks could result in a significant loss to anorganization . 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 riskis desirable, adding consistency to the process and enabling the organization to more effectively assess the potential impact of anidentified 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 tomake the most informed objective and predictive decisions .Identification of Major Risks Assessment of Major Risks Other 0% Board level discussion Other Board level quantitativeStructured 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%Data Source: 2011 Global Risk Management SurveyConstruction Industry Report - 2011 9
  11. 11. External Drivers Strengthening Risk Management (past two years)Economic volatility and pressure from customers remain the most important external drivers strengthening risk management forthe construction industry . Following the financial crisis, construction companies are having a greater awareness of the need toprotect assets and the balance sheet from unexpected loss . When dealing with increased pressures from customers to completeprojects 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 IndustriesData Source: 2011 Global Risk Management Survey10 Construction Industry Report - 2011
  12. 12. Client InsightsGeneral IntroductionThe right knowledge at the right time can assist organizations in their risk strategies and positively impact the total cost of risk . Theconstruction industry has capitalized on timely information available to consumers and enterprises for some time . Aon empowersour 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 CaptivesPriorities in Choice of InsurerValue for money/price is ranked the highest priority among construction respondents, followed by claims service and financialstability/rating . In the 2011 survey, value for money tops the rankings by construction respondents, jumping up from the fourthplace in 2009 . This increase reflects the current business environment in which construction companies have been operatingfrom an unprecedented global financial crisis to a period of unstable and slow recovery . We expect value for money/pricing willcontinue to be an important factor in the foreseeable future and especially during the economic recovery, when organizationsseek 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 9Data Source: 2011 Global Risk Management SurveyConstruction Industry Report - 2011 11
  13. 13. Desired Market ChangesWhen asked what changes construction organizations would most like to see in the insurance market, the majority ofrespondents desire:„ Recognition of investments in internal risk management efforts through lower premiums„ More flexiblility„ Better quality of service and broader coverage/better terms and conditionsThe nature of the construction industry often requires immediate attention by an insurance carrier to address project-specificrequests such as bid requests, contract review, and appropriate endorsements . Companies may be looking for their insurers toprovide 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 thefrequency and severity of loss, and according to the survey, they would like to see recognition of this investment by carriers in theform 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 IndustriesData Source: 2011 Global Risk Management Survey12 Construction Industry Report - 2011
  14. 14. Risk Management DepartmentAmong construction respondents, 60 percent say they have a formal risk management department . Among those, 54 percentindicate that their risk management department report to the CFO . In the case where no formal risk management departmentexists, 44 percent say their CFO handles risk management . Those with an in-house risk management department typically maintaina 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%Data Source: 2011 Global Risk Management SurveyRetentions/DeductiblesOverall, the majority of construction companies have not changed their retentions during their prior policy period . The drivingfactors 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 savingsSimilar to the results in 2009 and 2010, we expect there will be little pressure on insureds to amend their current retentions/deductibles in 2011 .Construction Industry Report - 2011 13
  15. 15. 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 HigherData Source: 2011 Global Risk Management SurveyLimitsUmbrella/Excess LiabilityWhen it comes to selecting the appropriate level of excess liability limits, organizations utilize many different methods . Anoptimal 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 companiesoperate, 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 limitpurchased 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 companywith 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 percentbelieve 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 $400,000,000Data Source: 2011 Global Risk Management Survey and other proprietary databases14 Construction Industry Report - 2011
  16. 16. Contractor’s Pollution LiabilityOverall, contractor’s pollution liability limits purchased have remained static . However, the trend by carriers to exclude certainexposures relating to building materials or construction defect (mold) from general liability policies may encourage contractors tofind coverage through the purchase of a contractor’s pollution policy .Global ProgramsWith the prolonged economic downturn and increased globalization, the methods construction companies utilize to managethe finance of risk has come under greater scrutiny . Many organizations with cross-border operations maintain a combination oflocal and global insurance policies implemented without much central oversight . This has created overlapping policies which mayinvolve multiple brokers, consultants and insurance carriers (each with individual service fees) that are disconnected from theoverall global goals and program structure . In addition, the lack of visibility on international premiums, service fees or self-insuredloss 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 41percent say their corporate headquarters purchases some lines and leaves local offices to handle others . Only 7 percent of surveyedcompanies 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 corporateheadquarters, 51 percent indicate they have purchased programs which have global policies issued to parent companies and localpolicies 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 holisticview of their risk finance strategies, ensuring global optimization of program cost and structure while addressing evolvingcompliance and regulatory concerns .Global coordination and administration ensures consistency, transparency, security, and ultimately peace of mind . Organizationswith 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 coverageConstruction Industry Report - 2011 15
  17. 17. Global Insurance Buying Patterns Category Construction All Industries 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&Oprograms have gained popularity as local insurance and indemnification regulations and requirements evolve and carriers’ abilitiesto administer these programs strengthen .Types of Global Insurance Coverages Purchased Category Construction All Industries 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%Data Source: 2011 Global Risk Management Survey16 Construction Industry Report - 2011
  18. 18. Use of CaptivesA pure captive is a special purpose insurance or reinsurance company formed primarily to (re)insure the risks of its owner andrelated parties . In addition to pure captives, group and mutual captives with multiple owners and a range of cell companystructures 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 indicatinga plan to create a new or additional captive or PCC in the next three years . Only nine percent of respondents say they have acaptive 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 Category Construction All Industries 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%Data Source: 2011 Global Risk Management SurveyOf the construction companies that report having a captive or PCC, the most common coverages currently underwritten aregeneral/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 nextfive years:„ Sub-contractor default insurance – 11 percent„ Environmental/pollution – 11 percent„ Owner controlled insurance program/contractor controlled insurance program – 11 percentThe above facts are interesting and tie in with a general trend – captive owners are seeking opportunities to create diversity acrosstheir portfolios and maximize their captives’ strategic impact .Construction Industry Report - 2011 17
  19. 19. 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%Data Source: 2011 Global Risk Management Survey18 Construction Industry Report - 2011
  20. 20. Market InsightsGeneral IntroductionAccess to timely insights on policies, premiums and carriers allows construction clients to make quicker andmore accurate decisions while seeking to obtain the best coverage and rates . Aon has invested resources todevelop the industry-leading research and platforms and to ensure our clients have access to the data theyneed, when they need it . Findings by line of coverage include:● Coverage Terms and Conditions● Premium Rates Aon GRIP DashboardConstruction Industry Report - 2011 19
  21. 21. Coverage Terms and ConditionsOverall, the majority of construction respondents indicate that the terms and conditions for all surveyed lines of coveragehave remained unchanged in comparison with programs in prior years . The coverage line that has experienced the most change incoverage 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 suchclaims constitute an “occurrence," defined as an “accident” within the general liability policy . All but two states have addressedthis issue in recent years . In some cases, when the judiciary has rendered an opinion in favor of the insurance carriers’ (nooccurrence), 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 ConditionsData Source: 2011 Global Risk Management SurveyPremium RatesThe construction insurance market is extremely competitive . Capacity in this sector has been steady over the past three tofour years and this has had a significant impact keeping rates low . Estimated global capacity within the international onshoreconstruction insurance is roughly USD 3 billion and USD 3 .5 billion on an Estimated Maximum Loss basis, with additional capacityavailable globally from the onshore property markets . The volume of business placed into the global insurance market over thepast 36 to 48 months as a result of escalating contract values and the increase of global development has attracted new players toprovide 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 75percent of respondents indicate a flat to decreasing rate environment for all reviewed lines . The two lines of coverage respondentsindicate to have exhibited the most reductions in rate levels are property (45 percent) and general liability/public liability (42percent) . For those respondents that have purchased workers compensation/ employers liability, this line has the highest numberof respondents with an increase in rate (25 percent) .20 Construction Industry Report - 2011
  22. 22. 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 theirmarket shares will continue to fuel a competitive market environment for most lines of coverage in the near future except forworkers compensation and general liability . Insurers are beginning to either become more selective in the risks they accept orare 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 businessrelating to construction risk is becoming increasingly problematic for carriers . Lack of robust investment income, the continueddeterioration of the exposure base and increased loss development from more robust years all serve to put pressure on theprofitability 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%Data Source: 2011 Global Risk Management SurveyConstruction Industry Report - 2011 21
  23. 23. Economic InsightsGeneral IntroductionUnderstanding current performance and perception of the future financial strength of a sector is important in any analysis . In thissection, we provide insight into market environment for the construction sector .Industry DataThe global construction industry will be influenced by several economic factors for the foreseeable future . Unemployment andunderemployment are stubbornly static . The impact of the recession on the outlook for construction starts has taken a morenegative turn . Economists are still somewhat optimistic that the U .S . economy will avoid another recession even though forecastsfor 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% Baseline Forecast YOY % Change -8 .3% 3 .3% 9 .5% 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% Baseline Forecast YOY % Change -3 .1% 3 .6% 7 .0% 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% Baseline Forecast YOY % Change -4 .8% 4 .8% 10 .2%*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 bynearly 5 percent by 2012, but instead, it is expected to fall . Consumer confidence, which is at an all time low, has also negativelyaffected the industry . General builders are feeling the pinch as margins have diminished greatly due to increased competition overthe last couple of years . The stronger organizations are looking at growth either through acquisition or finding a way to fend offbeing the acquired .22 Construction Industry Report - 2011
  24. 24. 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 atrend 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 thechallenges of the continued viability of the sector .Construction Industry Report - 2011 23
  25. 25. Methodology, Notes and DisclaimersThis 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 . Breakdownof 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, providedanalysis 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 correctnessof the data and opinions expressed in this report, however, neither Aon nor its employees make any representation or warranty asto the accuracy or completeness of the data or opinions expressed herein . Aon has no liability to the recipient or any other partyresulting from the use of, or reliance upon, the contents of this report .Copyright 2011 Aon Corporation .24 Construction Industry Report - 2011
  26. 26. Aon at a GlanceAon 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 2008brokerage, and human capital solutions and outsourcing . and 2009 . A .M . Best deemed Aon the number one insuranceThrough its more than 59,000 colleagues worldwide, Aon broker based on revenues in 2007, 2008 and 2009, and Aonunites to deliver distinctive client value via innovative and was voted best insurance intermediary 2007-2010, besteffective risk management and workforce productivity reinsurance intermediary 2006-2010, best captives managersolutions . Aon’s industry-leading global resources and 2009-2010, and best employee benefits consulting firmtechnical 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 globalhighest 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 nAon Analytics provides clients with forward-looking business Based in Dublin, Ireland, the Aon Centre for Innovation andintelligence, comprehensive benchmarking and total cost-of- Analytics provides Aon colleagues and their clients aroundrisk analysis as well as global market insights using proprietary the globe fact-based market insights . As the owner of the Aontechnology like the Aon Global Risk Insight Platform to enable Global Risk Insight Platform (GRIP), one of the world’s largestmore informed and fact-based decision making around repositories of risk and insurance placement information, therisk management, risk retention and risk transfer goals and Centre analyzes Aon’s USD 54 billion global premium flow toobjectives . 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 advisoryAon Global Risk Insight Platform ® (Aon GRIPSM) is the world’s firm, Aon is committed to helping clients respond quickly andleading global repository of global risk and insurance effectively to changing market conditions that may impact theirplacement 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 guideidentify 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 insurerThe Web-accessible data produced by Aon GRIP helps Aon financial strength ratings and the most recent updates frombrokers evaluate which markets to approach with a placement Aon’s Market Security Committee on specific carriers . The latestand which carriers may provide the best value for clients . It news, legislative action, and earnings information is includedalso 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 .Construction Industry Report - 2011 25
  27. 27. Key ContactsConstruction Services Group For Media and Press InquiresKevin White Kelly DrinkwineChief Executive Officer Director of Public RelationsAon Risk Solutions Aon CorporationConstruction Services Group kelly .drinkwine@aon .comkevin .white@aon .com +1 .312 .381 .2684+1 .617 .457 .7717 ContributorsMary Ann Krautheim Samantha BurnsClient Strategy Officer Cathy GavinAon Risk SolutionsConstruction Services Groupmary .ann .krautheim@aon .com+1 .212 .441 .2013Aon AnalyticsGeorge M. Zsolnay IVHead of Aon Analytics - U .S .george .zsolnay@aon .com+1 .312 .381 .395526 Construction Industry Report - 2011
  28. 28. Aon Corporation200 East Randolph StreetChicago, Illinois 60601T +1 .312 .381 .1000aon .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 anymeans, including photocopying or recording, without the writtenpermission of the copyright holder, application for which should beaddressed to the copyright holder .6995-P096315010-0811

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