Hard market softening for construction sector, but inflation pressures still loom over insurance industry
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Insights
The construction sector's projected growth at an average annual rate of 5.2% from 2024 to 2027 signals a robust expansion phase, indicating a recovery from previous market downturns. This upswing is primarily fueled by significant government spending and private investments in infrastructure. The emphasis on renewable energy projects aligns with global efforts to transition to sustainable energy sources and meet decarbonization targets. It is imperative to note that such investments can stimulate economic growth by creating jobs and enhancing productivity through improved infrastructure.
However, the sector's growth trajectory is not without its challenges. High inflation, elevated interest rates and labor shortages are increasing construction costs, which could dampen activity in certain regions. These economic factors can lead to higher borrowing costs for projects, squeezing profit margins. The construction industry's health is often seen as a barometer for the broader economy and these mixed signals could have ripple effects across various sectors, influencing stock market performance and investor confidence.
Insurance plays a critical role in the construction sector by managing risks associated with large-scale projects. The report from WTW underscores a moderate increase in insurance rates across most regions, a consequence of the high frequency of catastrophic events in 2023, with insured losses reaching $100 billion. This trend of escalating insured losses is becoming increasingly common, reflecting a shift in the risk landscape, possibly due to climate change and other systemic factors.
Insurers are adapting to this new normal by implementing stricter technical underwriting criteria and seeking pricing adequacy to improve combined ratios, which measure profitability by comparing paid claims and operating expenses to premium income. A stable rate environment, as indicated by WTW, suggests insurers are becoming more adept at pricing risk appropriately. However, the industry faces pressure from rising claims costs, particularly in healthcare, construction materials, workforce and litigation. This could affect the profitability of insurers, especially if they are unable to adjust pricing swiftly to offset growing expenses. Stakeholders in the insurance and construction sectors will need to monitor these developments closely as they could impact market stability and financial performance.
The construction sector's recovery and expansion are expected to be uneven across different regions, with North America, Latin America and Europe poised for significant investments, particularly in technology infrastructure like semiconductors, giga factories and data centers. These investments are critical as they support the digital economy's growth and the increasing demand for data processing and storage capabilities.
Conversely, the anticipated contraction of construction activities in some European countries and Australia, due to economic headwinds, suggests a more complex and region-specific analysis is required when evaluating the sector's prospects. Investors and businesses within the construction and related industries, such as manufacturing and technology, should consider these regional disparities when making strategic decisions. The potential for 'best in class' risks and clients to secure flat rates or slight discounts indicates that high-quality project management and risk mitigation strategies are increasingly valued in the current market environment.
LONDON, March 14, 2024 (GLOBE NEWSWIRE) -- 2024 marks a period of greater optimism for the construction sector, as it moves away from the hard market cycle that’s been in effect for many years, with global infrastructure construction output set to grow at an annual average rate of
This year, activity and growth in the construction industry will be led by large scale government spending and supported by private investment in infrastructure, both aging and new, including roads, railways, airports, ports, and urban mobility projects. Also in the energy sector, predominantly in renewables, as populations continue to grow at a fast pace and because of the need for accessible and reliable energy supply and to comply with countries’ decarbonization plans.
Heavy investment in manufacturing is expected in the technology sector with many projects expected to commence construction works this year, including semiconductors, giga factories and datacenters across various regions, but notably in North America, Latin America and Europe.
Yet, construction activity is expected to retract in some countries within Europe and Australia, due to the increased construction costs for projects as a result of economic factors including high inflation, elevated interest rates and labour shortages.
Maria Sanchis, Global Head of Construction Broking, WTW, said “While the prolonged period of inflation is easing, continued uncertainty will cause moderate rate increases across most regions, which can partly be attributed to consecutive insured losses, amounting to
Equally, well adopted strict technical underwriting criteria, more predictable coverage and confident pricing adequacy will likely lead towards an improvement in combined ratios and a stable rate environment. However, rising claims costs will likely also impact markets’ profitability particularly in key cost factors such as healthcare, construction materials, workforce and litigation and some insurers may struggle to maintain rates and perhaps not raise pricing fast enough to cover record growth in expenses.”
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Media Contacts
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