Risk in Context

COVID-19: Implications for Real Estate and Construction Industries in Asia

May 04, 2020

Continuing our webcast series on COVID-19’s implications on industries, on 29 April we looked at Real Estate and Construction in Asia.

Joining me on the panel were:

Ed Farrelly, Real Estate Industry Leader, Asia
Steve Hutchinson, Construction Industry Leader, Asia
Joan Collar, Mercer Marsh Benefits Leader, Asia
Dennis Dalati, Claims Advocacy Leader, Asia
Sek Seong Lim, BCM and Resilience Service Leader, Asia

Real Estate Industry

Many companies, on both the occupier and owner side, have switched to revenue-protection mode as cash flows have slowed. However, investment flows will likely return across multiple asset classes, but buyers may wait until prices correct downwards.

It is now clear that long-term corporate action on pandemic preparedness makes economic and financial sense, benefitting shareholders. The world is shifting to a new state of risk awareness, with a demand to improve:

  • Resilience and ability to adapt and thrive
  • Sustainable and Wellness-enabled buildings
  • Investing in physical and operational improvements

There is thus an urgent need for Risk Managers to engage key stakeholders to raise awareness of risk and work towards solutions.

Construction Industry

With lockdowns and movement restrictions, construction projects face various immediate and mid-term impacts, such as dormant construction sites, imposed labor restrictions, disrupted global supply chain, and missed project milestones. Cessation of construction works have far-reaching consequences, such as financial impacts and contractual disputes.

Insurers are proactively issuing guidance to Insureds, with reactive responses in trying to reduce or remove future exposures similar to COVID-19.

Insureds need to comply with all policy terms and conditions and should rely on their appointed broker to guide them through the various requirements, and Marsh is advising clients on policy or insurance, practical measures, and managing any reactionary requirements from Insurers.

For both Real Estate and Construction sectors, insurers are tightening further to impose Infectious Disease exclusions across property policies.

Cost Savings

From a risk management and insurance perspective, businesses have several tools available to manage costs and improve cash flow. The approaches below were shared by Dennis, Ed, and Steve.

Speak with your Marsh broker if you believe you have a potential Business Interruption (BI) claim. We can help assess if the policy criteria are met and, subsequently, support the claims preparation to improve expediency.

Review Premiums

With likely changes to revenue figures, a thorough review of your business interruption values, may qualify you for a return premium or reduction to future premiums. We recommend discussing this with your broker to determine viability.

Alternatively, we can identify your most economically efficient means to finance your risk through Risk Finance Optimization (RFO), which ultimately gives you information on which risk management programs provide the best financial returns.

Alternative Solutions

Alternative Risk Transfer options, such as Parametric Insurance, can be a long-term alternative strategy, and the use of a captive may provide access to reinsurance markets and potentially more efficient capital.

Marsh is developing solutions that focus on transactional activities and can provide owners with a competitive advantage, such as surety bonds, or lease deposit bonds. Occupiers provide these to landlords in place of lease deposits. This can also facilitate new leasing transactions.

Employee Wellbeing and Productivity

Joan explained that there has been increased interest in extending coverage and/or limits for certain types of employees who are more exposed to COVID-19’s impact, and these include cash income benefits, increased limits for hospital expenses, and higher hardship allowances. For foreign talents, there is also interest in extended hotel or living costs allowances as borders shut down.

The insurance industry has also offered innovative benefits such as the implementation of telehealth facilities and home delivery of medicine. More companies are adopting this practice and it has been a key factor to drive utilization and costs down, beneficial for long-term cost savings, and we expect their continued use, as they are effective with less acute treatments.

When the Real Estate and Construction sectors recover, concerns around safety and security might still be prevalent, so it remains vital to pay particular attention to onboarding policies, employment screening, and testing. There may also be a complete overhaul to how companies, particularly those in the construction sector, house their foreign workers and provide basic necessities. We expect higher adoption of flexible working policies, non-traditional approaches to benefits, and mental health programs.

Shifting Risk Profile

Ed shared his thoughts on the changing structure of office markets, which has been an enabler for many companies to adopt work-from-home strategies. Decentralization has gathered pace in recent years and flexible work practices have become a tool for attracting and retaining talent.

The adoption of work-from-home strategies should not by itself imply weaker demand for office space, as such flexible practices provide a necessary buffer for businesses to continue operating during a pandemic.

Sek Seong discussed how to manage the changes to risk profile through the following ways:

Business Continuity Plan Reviews and Updates

In the short and medium-term, the focus should be on:

  • Staff safety and health: Safe distancing, screening protocols, adequate Personal Protective Equipment, active sanitation equipment, etc.
  • Planning for recovery or when governments ease restrictions: adopting a phased recovery to a “new normal” of business operations.

Pandemic Risk Vulnerability Assessment and Forecasting Models

In the longer term, these assessments and models enable organizations to evaluate different risk mitigation strategies, manage tail uncertainty under different scenarios, and balance revenue interruption versus cost control decisions.

Cyber Threats

Many companies have moved their businesses online or implemented more technology-based operations, drastically altering their risk profiles, necessitating revised risk assessments to financially quantify the exposure changes. This will inform their risk management strategy and insurance limits.

Financial and Professional Liability Risk Identification

COVID-19’s heavy impact could attract litigation for businesses, which may trigger coverage under D&O insurance.  We also expect D&O insurers to increase underwriting scrutiny. It will be critical to consult us and engage with insurers as early and openly as possible to manage these changes.

Risk Management and Business Enablement

Sek Seong, Ed, and I continued to outline how Marsh can provide immediate support through three primary activities:

  1. Preparedness assessment and advice as the crisis unfolds. 
  2. Providing additional management capacity, including additional reviews and PMO support to navigate the crisis. 
  3. Debriefing (lessons learnt) to better prepare for the future.

Our consumer solutions team also develops insurance solutions that can be offered on a B2B2C basis across many industries, for example:

  • Extended warranty programs for OEMs 
  • Customer engagement programs for the real estate and construction industries 
  • Employee benefits top-up programs for employers 
  • Property Technology solutions

Marsh has also developed Tenant Insurance Programs, tailored so that a landlord may offer tenants pre-negotiated rates and coverage through our digital platform. This fully protects an owner’s interests per their risk appetite and removes the administrative burden as standardized certificates of insurance are received electronically and document processing is automated. Find out more by contacting your Marsh representative.

Click here for the full replay of this webcast.

Cristina Vigilante

Head of Sales and Industries