Material risk events in P3s: 2011 vs. 2016
By David BowcottRisk Management material risk event P3s risk risk management
As some of you may be aware, the firm I work for (Aon) has more than 2,500 construction clients, and 13 of the top 15 Canadian contractors as clients. We have also acted as risk advisor and broker to a majority of the major projects in the Canadian market. One area where we have particularly strong penetration is the Public-Private Partnership space (P3s), where we have acted as risk advisor and broker to more than 85 per cent of all P3s that reached financial close. Given that P3 market share, we’re able to compile claims data to a statistically significant level, and thus give the industry an accurate picture of where the risks are manifesting in the P3 space. It should be noted the P3 space does enjoy a tremendous track record of success when it comes to on-time and on-budget delivery, and the loss ratios for most lines of cover, in both construction and operations, are strong.
So, what have we done with all of this data? Well, we are working on it. For example, in 2011 we did a study that tracked the frequency of material risk events on P3s and most recently, and as a follow-up to our 2011 study, we completed our assessment of material risk events on P3s up until 2016. By putting the 2011 results beside the 2016 results we are given a trend perspective. The following are the results of those two studies, which I had the pleasure of presenting to the Canadian Council for Public Private Partnerships at their annual conference in November.
When viewing the above information you should know, most of our data came from claims that were reported under policies we placed into the insurance market. We then took that data and uncovered the apparent root-cause of loss related to each claim. Of note, some of the claims were not insured; however, we were made aware of these uninsured material risk events through our business dealings and extensive network within the construction and P3 communities.
So what do the below graphs tell us? The most obvious trend we can see from this data is professional risk events and workmanship risk events are on the rise. In 2011 the combination of professional events and workmanship events accounted for 60 per cent of all risk events. In 2016 we see that 70 per cent of all risk events are attributed to these two root-cause categories. It should be noted, that professional events are most often design failures or failures to render professional services. As well, the workmanship events are failure of the prime contractor and most often failure of the subcontractor or supplier to deliver on their contracts as per proposed schedule, budget or quality. Some additional insight not shown in the graphic — professional events accounted for 67 per cent of all risk events on civil jobs, however, they only accounted for 29 per cent of all risk events on social (or buildings) jobs.
Though there are other insights I would love to share, I want to focus on this size and the upward trend in professional and workmanship risk events. I’ll say it again, 70 per cent of all material risk events on Canadian P3s were related to professional or workmanship risk events. Given this large number it makes a lot of sense for governments, concessionaires, design firms and contractors to have a sit-down in order to investigate why this number is as large as it is. I think we all have suspicions as to what is causing this growth in frequency and it’s clear that frank and transparent communication between key stakeholders is needed.
In my next article I’ll put forward some thoughts on what I believe is making this number so large, what is causing the number to grow, and, further, potential solutions that could be put in place to minimize the frequency (and severity) of professional and workmanship risk events. I’m confident that effective communication will be a vital ingredient in any solution put forward to successfully reduce these numbers.
David Bowcott is Global Director – Growth, Innovation & Insight, Global Construction and Infrastructure Group at Aon Risk Solutions. Please send comments to firstname.lastname@example.org.