2011 Aon Industry Risk Report - Construction

2011 Industry Report: Construction

Aon Risk Solutions

Construction Industry Report - 2011 1

Table of ContentsForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Executive Summary . . . . . . . . . . . . . . . . . . . . .4

Risk Insights . . . . . . . . . . . . . . . . . . . . . . . . . . .6Top 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 . . . . . . . . . . . . . . . . . . . . . . . .11Priorities 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 . . . . . . . . . . . . . . . . . . . . . . . .19Coverage Terms and Conditions . . . . . . . . . . . . . . . . . . . . . . . 20

Premium Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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

Methodology, Notes and Disclaimers . . . . . . .24

Aon at a Glance . . . . . . . . . . . . . . . . . . . . . . .25

Key Contacts . . . . . . . . . . . . . . . . . . . . . . . . .26

2 Construction Industry Report - 2011

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 10th 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


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 .


Key Findings Risk Insights

� Greatest risks – The two greatest risks indicated by respondents to Aon’s 2011 Global Risk Management Survey are economic slowdown and increasing competition .

� Risk preparedness for the top 10 risks – The construction industry’s overall preparedness for the top 10 risks has increased from 60 percent in 2009 to 67 percent in 2011 . Respondents rate regulatory/legislative changes, with only 39 percent, as the least prepared risk .

� Losses associated with top risks – For the construction industry, economic slowdown tops the list of risks with the most losses in the past 12 months at 75 percent .

� 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 typically utilize a combination of risk registers, a structured enterprise-wide approach and senior management's intuition and experience .

� External drivers strengthening risk management – Economic volatility and pressure from customers remain the most important external drivers strengthening risk management for the construction industry .

Client Insights

� Priorities in choice of insurer – Value for money/price is ranked the highest priority among construction respondents in selecting an insurer, followed by claims service and financial stability/rating .

� Desired market changes – Construction respondents are looking for increased ability to recognize internal risk management through lower premiums, more flexibility and broader coverage/better terms and conditions for the insurance market .

� Risk management department – Among construction respondents, 60 percent indicate that they have a formal risk management department . Among those, 54 percent say their risk management department reports to the CFO . In the case where no formal risk management department exists, 44 percent also indicate that their CFO handles risk management .

� Retentions/deductibles – Overall, the majority of surveyed construction companies have not changed their retentions compared to their prior policy period .

� Umbrella/Excess liability limits – The average limit purchased by construction companies stands at USD 96 million . The highest limit purchased is USD 450 million, while the lowest limit purchased is USD 1 million .

� Global programs – 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 purchase some lines and leaves local offices to handle other lines . Among the global policies that organizations purchase, the most common types indicated in the survey are related to general liability including public/product liability, directors' and officers' liability (D&O), and property damage/business interruption .

� Use of captives – Thirty-three percent of construction companies surveyed report the utilization of a captive or Protected Cell Company (PCC) with 18 percent saying they will initiate a plan to create a new or additional captive or PCC in the next three years . The most common coverages currently underwritten are general/third-party liability, auto liability, employers’ liability/workers compensation and property .

Market Insights

� Coverage terms and conditions – Overall, the majority of construction respondents have indicated that the terms and conditions for all surveyed lines of coverage remain unchanged in comparison with those in prior years . The coverage line that 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 experienced the most restrictions (15 percent) .

� Premium rates – Despite the challenges presented by unprecedented global catastrophic losses in 2011, the amount of insurance capacity remains abundant thereby keeping insurance premiums competitive . There are signs of corrections being addressed in specific lines of insurance, but the anticipated hard market correction remains elusive .


General IntroductionIn 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 RisksRespondents 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 10th 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

Risk Insights


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 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

Capital availability/credit risk

Commodity price risk

Cash flow/liquidity risk

Injury to workers

Third party liability

Regulatory/legislative changes

Failure to attract or retain top talent

Damage to reputation/brand

Increasing competition

Economic slowdown

2011 2009

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

75%48%

57%

57%

59%

91%

88%88%

94%89%

15%39%

47%63%

50%58%

64%71%

50%61%

Data Source: 2011 Global Risk Management Survey


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 RisksFor 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

Capital availability/credit risk

Commodity price risk

Cash flow/liquidity risk

Injury to workers

Third party liability

Regulatory/legislative changes

Failure to attract or retain top talent

Damage to reputation/brand

Increasing competition

Economic slowdown

2011 2009

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

19%25%

32%64%

35%57%

42%47%

43%44%

21%23%

27%7%

6%

0%

74%43%

75%50%



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

Board level discussion and analysis

10%

Senior management intuition and experience

50%

Business unit risk registers or key risk

indicator worksheets26%

External service provider/advisor

3%

Structured enterprise-wide approach

11%

Other0%


Assessment of Major Risks

Board level quantitativeanalysis

8%

Senior management intuition and experience

50%

Business unit quantitative analysis

26%

Consult with external service provider/advisor

5%

Structured enterprise-wide approach

10%

Other1%


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)

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

All IndustriesConstruction

Natural weather events

Pressure from suppliers/vendors

Political uncertainty

Other

Workforce issues

Demand from investors for greater disclosure and accountability

Increased focus from regulators

Large third party liability losses/litigation

Pressure from customers

Economic volatility 64%50%

34%18%

26%

19%25%

38%

21%22%

15%13%

13%14%

10%11%

8%6%

8%14%



Client Insights

General IntroductionThe 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 InsurerValue 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 ChangesWhen 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

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

52%

55%

29%28%

14%

10%7%

18%

31%32%

63%52%

52%42%

58%59%

All IndustriesConstruction

Other

Better quality of service

More product innovation

More sophisticated information technology (IT) systems

More flexibility

Increased capacity

Broader coverage/better terms andconditions

Recognition of investments in internal risk management

e�orts through lower premiums



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

Yes60%

No40%


Department Staffing

1-2 30%

3-5 30%

6-11 21%

Over 12 19%

Retentions/DeductiblesOverall, 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

HigherSameLower

Workers Compensation

General Liability

Auto/Motor Vehicle Liability

Directors’ and O�cers’ Liability

Property

Professional Indemnity/Errors and Omissions Liability

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

88%

7%

5%

3%

7%

5% 5%

81%9%

79%

82%

90%

11%

11%

81%9% 11%

14%

10%


Limits Umbrella/Excess LiabilityWhen 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 LiabilityOverall, 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 ProgramsWith 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 coordination from corporate headquarters

7% 3%

Corporate headquarters controls some lines and leaves local office to purchase other lines

41% 38%

Corporate headquarters controls procurement of ALL insurance programs (global/local)

52% 59%

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 parent and local policies issued to local operations

57% 50%

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 Liability

83% 89%

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 CaptivesA 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

Coverage2011 - Currently

underwritten

2011 - Continue/plan to underwrite same/new risk in

next five years2011 - Percentage of

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 Controlled Insurance Program

11% 21% 11%

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

General IntroductionAccess 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

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

Workers Compensation/Employers Liability

General Liability/Public Liability

Auto/Motor Vehicle Liability

Directors’ & O�cers’ Liability

Professional Indemnity/Errors and Omissions Liability

Property

5%

9%

9%

4%

75% 21%

73% 18%

89%

2%

2%

2%

8% 84% 6%

5% 77% 18%

13% 60% 25%

Improved Policy Coverage ConditionsUnchanged Policy Coverage Conditions

Somewhat More Restricted Coverage ConditionsSignificant More Restricted Coverage Conditions


Premium RatesThe 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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

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

Property Professional Indemnity/Errors andOmissions Liability

Directors' and O�cers'Liability

Auto/Motor VehicleLiability

General Liability/

Public Liability

WorkersCompensation/

Employers Liability

6% 8% 13% 2% 2% 8%

10%

27%

31%

18%

4%

2%

7%

18%

51%

16%

7%

13%

13%

56%

13%

2%

10%

12%

44%

12%

6%

4%

21%

13%

42%

10%

6%

10%

24%

35%

18%

6%

2%



Economic Insights

General IntroductionUnderstanding 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 DataThe 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 .


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Aon Global Risk Insight Platform® (Aon GRIPSM) is the world’s leading global repository of global risk and insurance placement information . By providing fact-based insights into Aon’s USD 54 billion in global premium flow, Aon GRIP helps identify the best placement option regardless of size, industry, coverage line or geography .

The Web-accessible data produced by Aon GRIP helps Aon brokers evaluate which markets to approach with a placement and which carriers may provide the best value for clients . It also gives Aon brokers a leg up when it comes to negotiations, making sure every conversation is based on the most complete, most current set of facts .

Based in Dublin, Ireland, the Aon Centre for Innovation and Analytics provides Aon colleagues and their clients around the globe fact-based market insights . As the owner of the Aon Global Risk Insight Platform (GRIP), one of the world’s largest repositories of risk and insurance placement information, the Centre analyzes Aon’s USD 54 billion global premium flow to 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 firm, Aon is committed to helping clients respond quickly and effectively to changing market conditions that may impact their businesses . The Aon Situation Room™, accessible at www .aon .com, provides clients with fact-based information to help guide their businesses through this volatile period .

In the Aon Situation Room, clients will find current insurer financial strength ratings and the most recent updates from Aon’s Market Security Committee on specific carriers . The latest news, legislative action, and earnings information is included on the site as well . Clients can also register to receive up-to-date e-mail alerts .

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Innovation and Analytic

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Key Contacts

Construction Services GroupKevin WhiteChief Executive OfficerAon Risk Solutions Construction Services Group kevin .white@aon .com+1 .617 .457 .7717

Mary Ann KrautheimClient Strategy OfficerAon Risk Solutions Construction Services Groupmary .ann .krautheim@aon .com+1 .212 .441 .2013

Aon AnalyticsGeorge M. Zsolnay IVHead of Aon Analytics - U .S .george .zsolnay@aon .com+1 .312 .381 .3955

For Media and Press InquiresKelly DrinkwineDirector of Public RelationsAon Corporationkelly .drinkwine@aon .com+1 .312 .381 .2684

ContributorsSamantha BurnsCathy Gavin

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© 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