“Intensity of risk management is rising” says Aon’s Mark Peterson

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The infrastructure industry faces rising risks to delivery that range from inflation and cyber security to the increasing complexity and scale of projects. The insurance industry is at the heart of adapting to and managing that risk. We speak with Aon’s Mark Peterson (MP) about how it is responding.

IG: In recent years we’ve seen the emergence of growing digital risk, climate risk, the effect of the pandemic and growing supply chain challenges. Is this potentially the toughest time ever for legal teams trying to manage and mitigate project risk?

MP: “It is true the industry is facing all sorts of risks and some of the risks are new – like climate risk and cyber risk – which are already severe. Longer-standing risks have also intensified due to tough market conditions and increasing project size and complexity, which affects design engineers in particular.

“I can’t say that risk management was ever easy, but recent years have seen the intensity of risk management needs rise and that is unlikely to reverse in the foreseeable future. So, we need deal with increased risk of project delivery – and by ‘we’ I mean the insurance industry and the designers, clients and builders of assets.”

IG: You mention the growing scale and complexity of projects. AON’s own Professional Liability Sentinel market reports have warned that insurer pay-outs on project-specific insurance have recently far exceeded premiums across many insurers. What is the future of project-specific PI insurance and what can the industry do to reduce the risks? 

MP: “This problem is acute in North America and is being seen around the world too, with professional liability losses on placements exceeding premiums. We could suggest that is because engineers bit off too much to manage, or that the insurance was improperly underwritten, but I don’t think either suggestion is reasonable as the sole cause. Hindsight is of course perfect – but decisions have to be made at the initiation of the project and many things are simply unknown.

“What matters more than the specific cause, is the impact. With claims rising beyond premiums, the market has shrunk and project insurance has become more difficult to obtain, which means industry has to adapt.”

“There are far fewer naïve actors now across all parts of the risk spread. Clients, contractors, designers and the insurance industry have become much better at understanding risk”
Mark Peterson, AON

IG: How will industry adapt to that?

MP: “We need to move towards far more bespoke solutions for clients and projects. We will also see greater reliance for firms on their annual corporate programmes and a greater focus on internal management of risk. There is also a question for companies about whether they create their own captive, which is something Aon consults on with more and more firms. 

“At the same time, the industry needs greater discussions early on between designers, contractors and clients to agree on sensible allocations of risk. These conversations are often intense, but they need to be had in order to get the risk balances right. Then we can work with each party to establish how much risk they will take on internally and how much risk will be covered by the insurance industry.

“So, we have a lot of ways to adapt and manage risk as an industry and some progress has been seen. There are far fewer naïve actors now across all parts of the risk spread. Clients, contractors, designers and the insurance industry have become much better at understanding risk and much more focused on the difficult conversations and decisions involved.”

IG: An added risk right now is inflation, with many nations adjusting to a period of high inflation for the first time in decades as supply chain problems and energy costs hit hard. Are the measures taken to mitigate that risk when inflation was low, still working?

MP: “There are mechanisms within insurance that can deal with inflation but there is a big challenge for projects that last many years. Reasonably assessing inflation spanning a ten-year project, at bid stage, is extremely difficult.

“We have been fortunate to have relatively stable inflation for a very long time now, which makes it easier to make fair estimates of costs years ahead of time. The present volatility changes that dramatically and waterfalls into insurance decisions. If a project doubles in costs due to high inflation, would the insurance coverage agreed at the start of the project still be sufficient?  Designers have had to assess costs fairly and reasonably but cannot be expected to see the future, so we may need greater flexibility.” 

“The challenge with inflation right now is that the range is much larger and that has a bigger impact on a project’s overall costs by year eight or nine.”
Mark Peterson, Aon

IG: That raises another issue. In some countries, we’ve seen growing numbers of engineers being claimed against on the basis of their expert assumptions and experiences put forward as early as tendering stages – before every detail of a project can be known. How can industry protect against that?

MP: “The standard is for engineers to act reasonably, so estimates should incorporate materials, supplies, timelines and importantly right now, inflation. All of these factors need to be built in. The challenge with inflation right now is that the range is much larger and that has a bigger impact on a project’s overall costs by year eight or nine.”

“Set against that, firms also need to bid competitively to win work yet estimating supply and labour costs at an early stage of design is very difficult as so many factors are simply not known. In the USA we see a lot of claims made and designers sued for ‘negligent’ estimates made at the bid stage. In almost all cases this reflects design-build contracts with estimates made while design is around 20% complete, so the unknowns are simply too large and can be woefully off. Engineers then have to fall back on the defence that they made reasonable assumptions that amounted to something like an educated guess.

“Fortunately, in the USA, we are now seeing a push towards progressive design-build contracts. That means estimates can be made with designs at around 80% complete. That improves the likely accuracy of estimates, which is good for all parties. Unfortunately, it also allows for the contract to be lost by the designer or contractor after 80% of the work has been complete.  This creates a whole host of other professional liability risks, which designers and insurers need to understand and account for.”

“fundamental systems like CAD are already covered by professional liability, but most nefarious activities (such as cyber-attacks) are not.”
Mark Peterson, Aon 

IG: Alongside all of that, one of the big risk areas raised in AON’s global market insights report earlier this year was cyber risk. Is there a growing understanding that ‘cyber risk’ is in fact multiple risks spanning loss of service due to system failures, all the way through to cyber-attacks?

MP: “Cyber risk has made a lot of headlines, although in construction it hasn’t been as big a problem yet. That may be because construction companies hold relatively limited data on individuals. However, data accumulation is growing across all construction platforms and projects.

“We should remain aware that fundamental systems like CAD are already covered by professional liability, but most nefarious activities (such as cyber-attacks) are not. Other types of coverage exist for such events, and we strongly encourage our clients to consider such coverage for nefarious activities, and to have risk management solutions for such events Including backups and teams in place for if the worst happens. At the moment, banking and retail have been the big focus for cyber attacks because of the personal data they hold, but we have started to see infrastructure attacked more than in the past. We are also in the early stages of having data-driven devices built into structures. These seem to be working well so far, but time will tell if they become targets for cyber-crimes.”

Mark Peterson will be joining a panel to discuss these and other issues around risk management at the FIDIC Global Infrastructure Conference in Geneva, Switzerland, on 12 September 2022.