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Modular construction and project cargo insurance

Construction Blueprints Podcast: Season 2 – Episode 5

May 20, 2024

An informative podcast series that brings you the latest perspective from the construction industry.

In this episode of Construction Blueprints, Iris Chan, Head of Corporate Risk and Broking, Hong Kong & Macau and Executive Director, Construction Hong Kong & Macau, is joined by Mike Wyatt, Associate Director, Global Marine, International Trade & Logistics. Our experts take a deep dive into what is modular construction, the drivers behind its significant growth, the associated risks and how companies can mitigate those risks.

When thinking about modular construction, it’s important to take into consideration factors such as transportation and project delays. In this episode we also explore project cargo insurance, which is insuring goods in transit from the supplier through to the project site.

Modular construction and project cargo insurance

Transcript for this episode:

Construction Blueprints Season 2, Episode 5: Modular construction and project cargo insurance

MICHAEL WYATT: People wouldn't have considered that there was anything that could happen to goods in transit that could have resulted in an overall delay to the project. Modular changes that.

NARRATOR: Welcome to the WTW podcast, Construction Blueprints, where we discuss the latest risk management and insurance trends, as well as issues facing the construction industry. We'll speak with a variety of construction leaders and experts on global topics who can help provide you a blueprint for building your industry knowledge.

IRIS CHAN: Hello, everyone. My name is Iris Chan. I'm sitting in Hong Kong. And today, welcome you to our WTW Construction Blueprint podcast. And today's subject is modular construction. And in Hong Kong, we actually call it modular integrated construction. There is some difference, I will share with you a bit later. And first of all, let me introduce my modular construction broadcast partner, Michael.

Mike, would you mind introducing yourself?

MICHAEL WYATT: Hello, everyone. I'm Michael Wyatt and I work for International Trade and Logistics in London, which is part of Global Marine. And my involvement here is with regard to project cargo insurance, which is insuring goods in transit from the supplier or manufacturer through to the project site.

IRIS CHAN: Thanks, Mike. So in this episode, we will explore a few things. The first will be the drivers behind the growth in these types of construction methods. Second is the risk involved in these types of construction methods. Third is how these risks are viewed by insurance companies, your risk carrier. Last but not least, is some recommendations on mitigate those risks.

So may I take a bit of time to give you a bit of background of why we suddenly think of to talk about modular construction? So in Asia, modular construction has grown significantly in the last few years. And probably you think of why that growth so quick, suddenly. In the old days we also have prefabrication.

So one of the key drivers of this growth, certainly, is about urbanization. More people move to cities. But bear in mind, the size of the city is continuing to expand. And as a result, people move to the city. It means they demand for affordable and quality housing.

And modular construction is a cost effective way to meet this demand. And of course, there is a lot of different issues with modular construction that have been improved over the years. The growth initiative in infrastructure project is not only about the same method to residential. For both residential and infrastructure projects, we will also use modular, or you say, prefabrication, segments.

In railway construction, we use segment. They are well used in the Asia-Pacific region. And also some reason is because of the need. Because of the risk itself, modular is better. For example, like in Japan, is a highly earthquake area. And we can use modular construction that can be designed and built to be earthquake resistant housing.

And the third one, actually very important, is after COVID-19 our experience suggested that there is need for more interchangeable, more flexibility on the usage of building. For example, like during COVID, if you remember, we change school or exhibition center to hospital. So modular actually have the sort of characteristic that could change the usage.

And in Hong Kong-- back to Hong Kong, my hometown-- in Hong Kong, we call it modular integrated construction. At one work, not because of it, just Hong Kong like to add one work. It's slightly different. It's also still industrialized construction method. But the MIC, Modular Integrated Construction, it actually also means that the modular complete with finish, fixture, and fitting and everything done in the manufacturing.

So after it is done, it basically send it to the construction site and like LEGO block, put up together. And so how we say that it's integrated because of you have everything in there, even your kitchen door. So that ends up of a background.

And let's go to talk about why we need MIC. When we use all other construction method for so much time, why we suddenly need MIC. And also, I will invite Mike to tell us what about transportation would that be actually helping we use more often on MIC, Modular Integrate Construction.

So the benefit of this, I would say that it's mainly from safety, time control, and budget-- also, sustainability. It's all about increased productivity. I think that is something in the construction industry have been chasing for years and years, how to reduce costs, how to make the construction process more sustainable, and how to increase the productivity.

And also, as you know, in every single city, developed country or city, we also face the same problem-- that is shortage of labor. Even not the shortage could be because of the population aging. It also could be because of the new generation. They do not really want to work in the construction site anymore. That's why a lot of cities face a shortage of labor. And industrial life, the construction, is getting even more important.

The second is every day we talk about sustainability and wastage in the construction site. So with MIC, we can have a more accurate control in respect of use of the construction materials in a more precise way. And, of course, what Mike will share with us, is also now we have advancement in transportation. So that actually allow us to move this big concrete block from the manufacturing to the construction site in the perfect timing.

So, Mike, would you like to give us some idea on how the modular will be transported?

MICHAEL WYATT: OK, so when we're looking at modular and transportation, I mean, transportation, we're used to with Project Cargo, with the goods being moved. But what you have here is there can be much more of a concentrate of value. So I've been involved in placing insurances where one module has been worth $400 million, for instance.

So you've got a big exposure that could be impacted by one item. Where it becomes more complicated is, if you like the transport implications, in that you could have very wide dimension, very high, very long, high tonnage involved. So therefore, that can add complications in how you're going to actually ship.

So you can end up with more use of things like barges than you would traditionally have. And that, then, can be affected, for instance, by weather conditions much more. You don't want to be towing a slow moving barge when, for instance, there's a typhoon heading your way. That can cause real issues.

But I think the area or the biggest implication for me isn't so much the goods themselves as the consequences if something goes wrong. Because to actually replace a module can be so much longer because of the prefabrication. So that's where people need to consider extending cargo insurance to include elements of delay that traditionally they may not have done for lots of project types. I think that's what I'd say on that one.

IRIS CHAN: Yeah, that's right. I'm sure that has been gone through so many challenges, you know, to develop these MIC to the current stage. There's one more thing quite important that hasn't been mentioned. So other than the transportation advancement, also technology advancement that is another thing quite important. Because now, a lot of contract work, they will adopt some sort of building management technology-- that's so many of them. And that allowed the manufacturer, the contractor, the engineer, the site main contractor to share information on the same platform.

I would also, I believe, the company, they transport all these construction MIC modular. They were also able to get in, as a supplier, part of the supplier, in that platform, as well. Because it is so important to have good communication between all the stakeholders because as you can imagine, construction sites doing one thing and the factory doing another thing, when they both, they don't talk to each other. And then the shipping company doing another thing.

If they don't talk to each other, that means they will have a lot of trouble in respect of it make that really unproductive.

MICHAEL WYATT: I agree with you. We'll come on to how you can mitigate a bit later on, Iris, with that. So what do you see as the potential risks from construction site when it comes to modular construction?

IRIS CHAN: I would describe it probably in three stages. So the first one, that certainly is during production. So Mike here just said that site, when there is a large number of units, and they are quite similar design. And that they are produced in the same factory. So the quality of those units and whether they are 100% fit when they get into the construction site, when they put together, that is extremely important.

You can think of when I produce a few hundred units. But those units, when they get to the construction site, start to unload and lifting. And after they install it, you find there is problem in all of them. How difficult that is to correct to modify.

So I think that's one of the main issue. So that's why in respect of the quality, to control the quality and to communicate amongst all the stakeholders, that's extremely important. And also like in Hong Kong, very typical-- as you imagine, Hong Kong, you got very narrow streets. The construction site always, you have no space to load all your segments, to load all your modular.

And what it means is every single modular will need to deliver to the construction site just at the right time. And then actually, you can lift it to install. So you think of the timing is extremely important. And so if that is delay and the experience is not enough for organizing all this process, that will become problematic.

And also, I can imagine that it's during transportation. So Mike, you already mentioned that issue during transportation. So I better just go into installation. So installation.

Yes, installation, that certainly will be heavy lifting. I give you an example. In Hong Kong, we are planning to build over 400,000 units in the coming 10 years And that it's only part of contract work. We will need heavy lifting. But that's a lot of contract work, other contract work like infrastructure work. We also need heavy lifting technique.

And that is not that many people they know how to do it properly and how to do it safely. So think heavy lifting will be one of the key risk area. And the second one is the interface. When you put all these modular, stack it up together, and then you still need to install to link it with the mechanical, to piping, to electricity.

So all these that would be another risk I would think of that will be quite different from that is in central or traditional construction methodology. So Mike, what do you think about the risk during transportation?

MICHAEL WYATT: I've sort of said it already with the major risk that I see is delay. Because a lot of residential projects wouldn't have actually been considering delay as a risk. So you have to buy delay as an extension to a project cargo policy. It's not there. But people wouldn't have considered that there was anything that could happen to goods in transit that could have resulted in an overall delay to the project.

Modular changes that. You can have such a long replacement time with modules straight away. If you're missing some of these modules for a floor on a residential building, if each floor is supposed to have a different configuration, the loss of one module could actually prevent you from proceeding beyond that floor. And then how long does it take you to get everything resourced, remanufactured and reshipped?

So it's a real issue that's there, this delay factor. So that's the one. Everything else with risks are, if you like the more normal cargo risks, such as making sure you're using the right vessels, you're using the right transportation methods, you're conscious of exposures to weather conditions, it's delay that is enhanced when you're looking at modular construction, if that answers the question.

IRIS CHAN: Yes. Yes. Thank you, Mike. I think that also posed higher risk in the factory. So, for example, if, in the factory, there is a major incident, we lost all the modular, or they are maybe they are half done, they are complete modular, and that will also affect delay of entire project. Because generally, how a factory store all the modular properly will be in quite a centralized storage.

So that is also, while you talk about the delay risk during transportation, also think of the factory, as well. It seems like there is a lot of benefit. It's quicker. It's on time. It's a sustainable. Yeah, even that's some risk. What do you think about the insurance company? Do you think they like it?

MICHAEL WYATT: From a cargo perspective, because you can have this concentration of value plus there can be more of a perceived risk from delay, you're unlikely to get a premium saving. From my point of view with this, it's more about clients trying to make sure they've got the right policy structure in place to protect them so that if something does go wrong, they are fully protected.

But as long as there's a good plan to mitigate risks, logistics, procedure plan, there's good packing instructions, then the pricing isn't that different from a conventional. You may, with some of the big modules because of the concentration of value, face a higher deductible. That's the thing, particularly if it's barging. It's not that much more expensive as long as you have good information.

IRIS CHAN: So information is very important.

MICHAEL WYATT: Yes, quality of information is always very, very good. So come on then, from the construction side, how does it work? Is it perceived as a better risk?

IRIS CHAN: So hopefully the construction insurance can save a little money in insurance premium because if you can imagine, the construction period will be shortened. Part of the construction, that already done in the factory. So it may also means the construction period is shorter on site. The lumber, like in Hong Kong, we have typhoon come to visit us every year.

So you can imagine if the years of like typhoon season you experience is shorter, than the insurance, the risk is smaller, and the insurance premium will be lower. And so that is pretty direct in the construction part. But the issue, we would also think of oh, now there is a factory over there. They are producing all these modular. And they are the supplier.

So the supplier, themselves, they also need to buy insurance while they producing the modular. And didn't come, that part of money, of insurance premium as to CAL, TPL, the contractor or and third party liability insurance. But here in Hong Kong, there's one big attribute of premium saving, actually. It's an employee compensation insurance.

Because through MIC, Modular Integrated Construction, we have much less worker work on site. And it means the wage roll is significant lower. The incident frequency rate is lower. And that drive the insurance premium, for employee compensation, or employer's liability, is smaller. So it gives a premium saving effect, definitely, in CAL, TPL, and employee compensation.

Do you think, actually, during transportation, do you think would that be, this modular construction, make any difference of claims from traditional construction methods, so that's why underwriters will like it more or it less?

MICHAEL WYATT: The claims themselves will be similar. If you're using different transportation methods, such as barging, as I say, it may need more checks. We would especially have more loading and discharge surveys held for modules to ensure everything's being done. But a lot of this is then just making sure that you've got very strong transportation plans in place between the client and whoever's being used for the transportation to try to mitigate the risks to ensure that everyone's clear about securing of goods, lifting of goods, the vessels that could be used, all that sort of thing.

So as long as there's a good attention to detail, if anything, the risk shouldn't be any different to a conventional transit, even though you've got much bigger, heavier items with wider dimensions. So yeah, hopefully as long as you're using the right people and the right information, insurers should be happy with it as a risk.

IRIS CHAN: So that's good. For installation or construction, in fact, the risks, the claims, I would say it's less claims, less lumber, a lot of claims that come from or caused by weather. As you know, these modular, when they deliver to the site, they already watertight. So the weather affecting that contract is not as much as individual, the traditional way of work.

But one common concern to underwriter that is more on common defect, so if there is some design fault. So if there's design fault in a traditional construction, it will have possibility you find it out early and then you correct it. But in these, MIC, the design probably done very early, before, well before, they put it in factory to manufacture it.

And when that happened, that will be lumber of the modules have the same design error. And by then, that will be quite difficult to fix. So I think that will be something, you know, very different. And that is saying the same problem with cause, which is delayed.

Because of you think of the construction. If there is a large number of unit that effects some design error. And that design error could even cause, when they assemble, those modular have problem. Then it means you need to fix them on site or off site. So I think that will be disaster type of issue.

MICHAEL WYATT: Really you're saying the same as me. For you, it's about quality. It's quality control. In your case, with the build in my case with the transportation. They're the key areas to try to mitigate claims.

IRIS CHAN: Yes, it is. That's why at the very beginning I mentioned about technology advancement. It's so important because of construction, you need to be very, very well planned. And also, the design and the construction, the work program need to be transparent and update and always notify all the stakeholders and to avoid all this problem happened.

So MIC will not be success, will not be as productive as we want if you don't have all these infrastructure to back up the MIC construction activities. So what I think.

MICHAEL WYATT: That all makes sense.

IRIS CHAN: So after we discussed about the risks, the insurance company, the background, the technology. And would you have any recommendations to help us to mitigate some of the risk we just mentioned?

MICHAEL WYATT: I've already said it. It's very much to have a very clear plan in place for the logistics, transportation, the method of loading, securing all those elements that can be controlled. And then of course, most people should have a plan B in place, as in, what happens if it goes wrong? How are you going to change?

It with cargo transportation, that could be if a port becomes unavailable. What's the alternative? How would you get the goods to site? The mitigation is very much in that side of things, I think.

IRIS CHAN: I totally agree with you. I don't know how many times we mentioned quality in this podcast. And also, alternative is also very important, as you mentioned. You already have backup plan. And which is same as supplier? As far as I know, some project owner or contractor, they will deliberately use various source of supplier, modular supplier.

It is making the entire communication even more complicated. But the good thing is if there is one major issue in one supplier's manufacturing and then another one still working, you still have backup plan. That's very important, too. What is it your takeaway, Mike?

MICHAEL WYATT: OK, so it's two things. One is to consider whether you should be looking at purchasing delay insurance for transportation risks, just simply because an incident may cause delay to the project build schedule. So that's the most important.

And the second point is repeating, make sure you have a very robust logistics, transportation procedure and methodology for shipping modules through to site. And I think they're my two biggest takeaways from my perspective. And you?

IRIS CHAN: Thank you. I would think actually quite similar to you. I believe that, in respect of the insurance, it's quite important to double check the insurance you buy that is covering work on site, and also at the same time covering work off site. May not necessary the suppliers, because of you have all different scenario. That could be the supplier, after they deliver to the off site storage, and their responsibility's finished and that is on the project owner or the contractor's hands, your title.

And then you need to make sure that's being insured. I think that's important. And also, the second one, that will be communications. The communications-- because I mentioned about the defective design and the common defect. The communications, because construction site is keep changing during the entire construction period, to make sure every change be transparent and also make the stakeholder they are all on the same page, seeing the same thing.

That is one of the key area to ensure the quality of the modular. So would say that is a very important area in respect of controlling the risk other than insurance.

MICHAEL WYATT: That makes sense to me, anyway, from my perspective. Thank you, everyone, for listening.

IRIS CHAN: Thank you. Thank you, everyone, for listening.

NARRATOR: Thank you for joining this WCW podcast featuring the latest thinking and perspectives on people, capital, climate and risk in the construction industry. For more information, visit Willis Towers Watson offers insurance related services through its appropriately licensed and authorized companies in each country in which Willis Towers Watson operates.

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Podcast host

Head of Corporate Risk & Broking, Hong Kong & Macau

Iris has over 20 years of construction related insurance industry experience and has held various senior positions with major insurance brokers, focused on construction projects in Hong Kong, Macau, China, Singapore, Malaysia, Vietnam, Indonesia and North Mariana Islands. Iris is always seeking innovative risk transfer solutions for infrastructure, superstructure, hospitality, power and petrochemical projects in the region. Her core expertise includes contentious claims handling, lender advisory, risk analysis, insurance broking, and managing self-retention insurance programs and captives. Iris specializes in driving new business, designing project-specific and annual renewable insurance programs for mega-sized infrastructure and building projects from the construction phase to interfacing with the operation phase.

Podcast guest

Associate Director, Global Marine, International Trade & Logistics

Mike has over 40 years’ experience in the industry, including a total of 29 years with WTW. Particularly over the last 20 years Mike has taken a key role in the marketing, placement and day-to-day handling and management of a large number of Project Cargo insurance programmes for high-profile international clients. The clients have involved both Project Owners and Project Contractors and the projects have been spread across various business sectors including, but not limited to, Power, Refining, Nuclear and Renewables.

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