The construction boom taking place in the Kingdom of Saudi Arabia is historic in nature and transformative in scale. Saudi Arabia will be the world’s largest construction market by the end of 2028, with a projected construction output value of $181.5 billion across all sectors, according to research from property consultancy Knight Frank. In 2023 alone, the Kingdom awarded a record $101 billion in contracts — the highest ever in the Middle East — according to MEED.
Saudi Arabia’s construction boom
Driven by the nation’s Vision 2030 plan to diversify its economy away from oil, construction projects have proliferated across the country. These include pioneering smart city initiatives, and key infrastructure projects to enhance services, expand urban spaces, and promote tourism.
However, construction projects are complex and capital-intensive. They often involve multiple stakeholders and span years or even decades.
Given this complexity, the associated risks are equally diverse. They typically include traditional challenges, such as project-specific concerns like delays, budget overruns, construction defects, and broader geopolitical factors. Digitalization, climate risks, rising costs, and supply chain chokepoints are all current challenges shaping construction companies’ risk profiles.
The identification, allocation, and management of risk should start from the initial project conception, with an analysis of the competing factors that determine the project’s commercial viability.
Typically, risk allocation takes place between the project stakeholders based on who is best placed to bear and manage a particular risk. Potential size, financial impact, and frequency of losses will play a part in prioritization. Those risks that cannot be managed will be factored into the final terms of any contract. This process underscores the importance of robust insurance and risk transfer mechanisms to safeguard developers, contractors, and investors.
Insurance solutions for the construction sector
Insurance solutions in the construction sector serve as a crucial risk management tool, providing financial protection against a wide range of exposures.
One of the most common insurance products in the construction industry is Construction All-Risk (CAR) insurance. It provides coverage for physical damage to the works, as well as third-party liability for property damage or injury to third parties arising from construction activities. The CAR insurance covers risks such as fire, accidental damage, or natural catastrophes. It can be tailored to the needs of each project, whether for civil engineering, infrastructure development, or for mixed use real estate construction.
The Delay in Start-Up insurance, an underlying Construction All-Risk insurance, is an additional protection available for investors should the project’s commercial operations be delayed. It protects them from losses incurred during construction.
Contractors’ Plant and Equipment insurance is another vital safeguard. Large construction projects rely on specialized machinery. This insurance protects against theft, fire, or accidental damage, ensuring contractors are covered if critical equipment is lost or damaged.
Other key solutions include Professional Indemnity insurance, which protects architects, engineers, and consultants against claims arising from design flaws or negligence, and Employer’s Liability insurance, which covers injuries or deaths of workers.
Surety bonds, such as performance, bid, and payment bonds, provide financial guarantees for project completion, offering protection if a contractor defaults. Meanwhile, Environmental Liability insurance covers risks related to land or water contamination from construction activities, helping contractors meet regulatory requirements.
Looking at alternatives
Beyond traditional insurance products, alternative risk transfer mechanisms, such as captives and parametric insurance, are available. And they are gaining traction in the Saudi construction sector and the wider region, given the rise in natural catastrophic events. However, these alternative coverages are still considered emerging solutions.
Large contractors and developers may opt to establish captive insurance companies to retain some of the risks themselves while transferring the rest to the reinsurance market. This can be more cost-effective for companies with significant exposure and a well-established risk management program.
In addition, parametric insurance is emerging as an innovative solution that pays out based on a pre-determined trigger — such as a specific amount of rainfall or wind speed — rather than actual loss. This type of coverage is particularly useful in mitigating risks related to natural catastrophes, such as floods or sandstorms, which can disrupt construction projects.
As Saudi Arabia embarks on its ambitious Vision 2030 journey, the construction sector is both a linchpin of the country’s economic diversification and a focal point for risk management challenges. Insurance and risk transfer solutions are essential in safeguarding the interests of developers, contractors, and investors as they navigate the complexities of mega-projects and an evolving risk landscape.
The Saudi construction sector, with its unique blend of opportunities and risks, underscores the importance of customized, innovative insurance solutions that can respond to the needs of the stakeholders. By utilizing traditional insurance products, alternative risk transfer mechanisms, and proactive risk management strategies, the sector can build resilience and ensure that its projects are completed on time, within budget, and to the highest standards of safety and sustainability.
Gaurav Bhatnagar is the president of Marsh IMEA.
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