GEORGE HAITSCH: Thanks Bill. Hi, everybody. George Haitsch I am the leader of the North American tech, media, and telecommunications industry division. And I'm excited to participate in this first joint industry podcast, for me at least, in partnership with construction.
And we-- Bill and I and our team had a vision of sharing developments in this space that have been driven over the past year, primarily in North America as a result of the onshoring that's occurring with respect to technology, specifically semiconductors in the United States driven by the CHIPS Act.
President Biden really kicked things off in September 2022 announcing Intel's $20 billion construction project in Ohio, which was a really mega project in the space for both tech and for construction. And it's just expanded from there as many more major technology companies and some smaller and middle market technology companies have taken advantage of the funding available from the federal government to begin to onshore production capability back into the United States.
There are many parts of the tech industry that have seen the positive impact. But this semiconductors by far have been the area where we've seen the most activity with these major projects that are kicking off all over the country.
BILL CREEDON: Hey, George. Thanks for the overview. The activity in the tech sector, it does seem to have taken off since the CHIPS Act. The global chip shortage for 2021 and 2022, it really disrupted a lot of supply chains, it caused a lot of subsequent product shortages from cars to computers, devices in many industries. Also, we've seen it in Europe. Are they responding to the same in Europe as they have in the US?
GEORGE HAITSCH: Absolutely. There's been a lot of government-sponsored activity around the world. The supply chain disruptions that you highlighted were really a wake up call, not just for the semiconductor or the technology industry but politicians, governments, consumers all around the world were really put in a position of dealing with shortages that significantly impacted personal lives and also impacted business results.
So, the European Union also has put forth their own version of the CHIPS Act. And in fact, China has its Integrated Circuit industry investment fund. So, everyone is concerned about some of the bottlenecks and shortages that occurred. There's also a lot of geopolitical concerns with respect to just how important Taiwan is as a potential bottleneck.
And given the tension between China and Taiwan that has a lot of people paying attention and thinking about where their critical components are being produced, tested, packaged, et cetera. And how they can ensure a smoother supply chain to support their business goals and to fulfil their obligations to their customers.
BILL CREEDON: George, do you see this intense activity-- do you see it continuing for into 2024, 2025?
GEORGE HAITSCH: I do. I do.
BILL CREEDON: What's the horizon?
GEORGE HAITSCH: The onshoring or right shoring or whatever the term is used by different companies and governments is a major initiative. I think it's going to be something that we'll be seeing as a factor over the next few years. These mega projects that we've talked about are going to take years to complete and they're going to be repositioning a lot of the major technology players entire supply chain and distribution model.
So as those mega projects roll out, their competitors further down in the food chain and also the satellite companies that do different pieces of the vertical manufacturing process are going to be considering onshoring as well. So, we're seeing that same onshoring occurring not just in semiconductor manufacturing but in semiconductor testing and packaging, for instance.
A lot of that is outsourced by the main suppliers to third parties and those companies are now onshoring as well with some significant products being launched that I can think of. For example, by Amcor in Arizona.
BILL CREEDON: That's exciting. Let's go to Ed. Ed, great to have you on the podcast. You've been a lead CAR builder's risk broker on multiple chip manufacturing facilities this year. As we just talked about some of these values for single sites are ranging from $3 billion to some of the numbers we're hearing are upwards of $90 billion that will be in one location. How has the market for the CAR or the builder's risk reacted to this size and scale of project?
ED HOLLAND: Generally speaking, the market really has stepped up to the challenge of these mega projects. We are seeing capacity being both provided by domestic markets and international markets that see this as a great opportunity to support this rapidly expanding sector.
Whilst these values are indeed some of the largest we've ever seen in the construction sector, these are highly engineered projects with risk management and mitigation measures fully considered by clients and contractors right from the outset. So that really has been a key driver in presenting these projects to insurers to generate the best terms and conditions possible.
BILL CREEDON: It's excellent. And when you do look at these values how much of it-- what's the scale-- how much of it is actually shell versus what's going into the building and the technology that's being put inside?
ED HOLLAND: Bill, it's a really critical question this because it does differ from a lot of construction projects. So broadly speaking, what we are seeing is the physical shell and core attributes around 50% of the overall value with the remaining for the equipment that is actually being installed.
However, that equipment can exceed the shell and core prices. So, it is important that accurate estimated values are detailed at inception. These projects are typically vast in their square footage we're seeing campuses in excess of 4 to 5,000,000ft. Which equates in real terms to around 110 NFL football fields, from my research. But importantly these values are being spread over this significant area.
From an underwriting standpoint, we are seeing innovative solutions, though, being provided by the market. Where the values for the completed shell and core can be transferred over to operational market before the overall construction project has been completed. So that really is a benefit from a capacity standpoint.
In addition, by the time that the main process equipment is being installed, many if not all of the building management systems are in operation. So, incidents that may well occur during the installation or the testing and commissioning can be managed and mitigated to minimize the overall impact on any events that may well occur during these periods.
All of these factors if we bring them all together what they're resulting in is more manageable probable maximum loss scenarios, which ultimately can be assessed and then protected by the traditional insurance market. And that's what we are seeing our carriers supporting our important clients with.
BILL CREEDON: So, the phasing of values is pretty important for the underwriting process. And how are you working with clients, and why is that important to the marketplace to understand that to have a really detailed schedule on the increase in values at the site?
ED HOLLAND: So, the scheduling and also the build up of values over time is absolutely critical. Touching upon my, sort of, previous point about the shell and core value versus the equipment installation. It's fairly smooth build up during the shell and core construction, but once we are installing these pieces of equipment, these are multi-million dollar pieces of equipment. Obviously, the value sharply increase the moment that they are delivered to site and ultimately are exposed from an insurance perspective.
So, the visibility and transparency of our clients, right from the outset, is essential in order to understand how that then impacts the potential PML scenarios, both from a natural catastrophe perspective, but also from a human risk perspective as well.
BILL CREEDON: And Jen. So, let's shift over to the casualty side and some of the programs. First, I'm curious from the casualty side the scale of these projects. Billions of dollars. Obviously, thousands of laborers and folks on the site. How's the size at all impact you on the casualty underwriting side?
JEN CATE: Absolutely. The size and scale of these projects is certainly changing the dynamic of our marketplace and how the projects are being viewed overall. Certainly, from the casualty standpoint, it's very similar to what Ed was discussing for the builder's risk. We do definitely take a look at what the values are considering the core value versus the equipment value.
To Ed's point, we're now seeing that be similar to a 50/50 variance to where it used to be between 10% to 30% on the lower tech type projects. So that increase in value being of equipment is something we certainly take a look at when rating the casualty programs.
Now I do want to say when we have a casualty program that's a dual line program where you've got general liability and workers compensation, oftentimes that is rated based on your payroll. Another opportunity that we've had to take a look at these larger projects is the fact that payrolls can be escalated because of labor shortages. So, a lot of times the markets want to take a look at how the payroll is being considered in conjunction with the actual labor availability for these projects in the certain locations.
Certainly, labor shortages can affect how the projects can be completed on time. It can artificially inflate the exposures. That increased payroll is something that we see quite often.
BILL CREEDON: Jen I just had a question on that topic. I mean, obviously from a tech industry perspective, what's coming to the table from our clients is an owner exposure. So obviously our construction practice deals with contractors as clients as well. But maybe you could share with us a little bit about what's important as we help these owners build programs that are responsive to the contractors building the projects. What areas would you suggest risk managers and others responsible for risk financing at a technology company think about that are of particular importance to the contractors?
JEN CATE: Absolutely. That's a great question. And it starts actually with before we even go to the markets with the projects themselves, we have conversations with those owners about bringing to the table the contractors and their concerns in building these programs.
And we always share with them that them telling their story to the markets is well received and we try to get ahead of that with the markets and bring together those two, the owners and the contractors to share the story of the project. The pre work that's done before they even choose the sites. And then the expectations of those contractors so that the markets are well aware of the needs of the owner and the contractor.
BILL CREEDON: You bring up the markets, Jen. And you've done obviously a number of these. Both you and Ed gave an indication that the markets are still very positive in this space. And as you share that with the listeners, each owner's different. How are you setting these projects apart in the industry? What are you doing that maybe sets the pace for the underwriters on the pricing or how they approach the project? Are there any differences that you're seeing?
ED HOLLAND: So, I'm happy to go first with that one Bill. So, in my view, there are sort of three critical factors with these projects. The firstly being the project location. So important both from a natural catastrophe standpoint, wind, quake, flooding is all has the potential for significant impacts on these projects.
But also importantly, from a supply chain perspective, due consideration is being given to the transportation links and the accessibility of these sites because ultimately a number of the process equipment that is being installed commonly is being sourced from overseas locations. So, we need to see there from a transportation bottleneck standpoint how those factors could impact the construction project.
Secondly, the selection of the general contractors. Insurers are wanting to see that the best general contractors are being selected. So commonly information regarding the selection criteria is being requested at that underwriting stage.
And then lastly proven technology. Whilst these projects are being constructed to cater for the future evolution of the technology sector, construction insurers are generally interested in what is being used now to build these projects. So, the use of data and analytics is increasingly being used to evidence the performance of new materials and building techniques to ensure that projects are delivered both in terms of safety and sustainability and on time.
BILL CREEDON: Yeah. Jen let's take a little different perspective. How can an owner, or if it's a contractor, how can they set themselves apart on one of these projects?
JEN CATE: Absolutely. So many times with these mega projects, we see that this is not the first project that the owners or contractors have worked together or the first time that they've done a large project like this, right. So, they're able to set themselves apart in the fact that they've learned from past experiences.
They're able to provide safety measures and loss control standards that they're going to follow that the markets are willing to take a look at from a different light, because many of these projects are similar in how they're put together, how they're working together with the contractors. And so the underwriters are very interested in hearing that story.
We oftentimes see the owners pull together presentations for the markets that give them an overview of a previous project, that gives them an insight into the fact that they've learned step by step how they've done a project before and how that's going to benefit them on the going forward projects.
Also, in similar conversation to what Ed was saying with the material supplies and demand of projects that these clients are familiar with the fact that there's a delay in the supply chain. And so many times we'll often order in advance of a project site even being selected knowing that they're going to be doing these projects and be able to have materials up front and ready to go for the next phase of the projects.
So, another thing that the carriers are looking at is the fact that they're prepared to provide an actual timeline for these projects versus an estimated timeline that may end up with a long tail, a long extension period needed because these owners and contractors are very familiar with how long it actually will take to build these mega projects.
BILL CREEDON: Right. I'm going to talk to George here in a second on these supply chain issues. But I want to ask just because you hit on it. You get these people together, you get the markets together, you get them listening to the contractor and to the owners. One of the questions that has to be coming up is where are you getting the labor for these?
I know on some of these projects they're expecting 10,000 laborers to be on the project at the peak period. Does that come up Jen? And what are the concerns and what are some of the responses you're hearing?
JEN CATE: Absolutely So we're hearing from all of the owners for these mega projects that it is one of the top considerations that they look at when they choose the location for these mega projects. They have extensive reports that they do when they go into the areas and make sure that there's going to be labor availability, make sure that there's sustainability for bringing in additional labor for specialized needs if they need to do that.
Including the support for the communities to make sure that there's utilities that are needed and everything that will be provided because as you said, there's thousands of workers that are utilized for these types of projects. But certainly, something that the market is interested in hearing from the client. How did you determine that this location is viable from a labor standpoint?
BILL CREEDON: And the contractors have all been very confident in their ability to--
JEN CATE: Absolutely.
BILL CREEDON: --plan for that. Yeah, it's good. George Jen just talked about some of the issues that impact this industry. The technology space is really known for seeing over the horizon. And they're quick to-- they're quick to act maybe even before some other industries if they start to see any turbulence or issue on demand. Do you see that-- is there anything that is of particular interest to, let's just say, with the semiconductor folks that are manufacturing?
GEORGE HAITSCH: Yeah. I think one of the things is that the disruptions in the supply chain in recent history certainly are driving some of this behavior. But there are other trends that are happening in the technology space bill that are really also being factored in by the technology companies and their customers.
If you think about the production of batteries for electric vehicles, if you think about what's been happening in the past year around artificial intelligence and the actual power that's required to drive AI it's significantly greater than what was typically happening before. So, all of that ties back to the underlying infrastructure, some of which comes back to semiconductors, some of which does not. But the environment within which these technology companies are operating is very much a factor in their business planning and development as it ties to construction.
So, data centre construction in support of cloud technology is a major factor that we're seeing as a trend related to this. Because firms are anticipating the increased utilization of AI and what that's going to require in terms of independent capacity for each of these cloud environments the companies are operating on. Additionally, another as mentioned, would be the production of EV batteries for automobiles.
So, all of that's happening as well as tech companies are anticipating significant changes, not just because of what happened historically with the supply chain, but also because of trends that are developing in technology sector as a whole.
BILL CREEDON: You bring up a great point that I want to segue to a question for Ed. Ed you talk about the EV infrastructure and George mentions that you're seeing now battery manufacturing or you're seeing battery component manufacturing. Is the marketplace looking at these as all similar and as attractive as they are the semiconductor manufacturing facilities? What's your thought on that?
ED HOLLAND: So, there are definitely parallels bill between them albeit though the EV battery sites that are being developed are generally a little smaller. We're talking in the single digit billions as opposed to the double digit billion values, which is mad to think. But the technology and the specifications of areas such as clean rooms and things like that, there is parallels there. So, from a risk of loss perspective, there are parallels that the market is drawing between the two types of projects that you've referenced.
BILL CREEDON: And I know an issue that's hitting the industry right now and especially we're going to say in that battery manufacturing area is once it comes off construction it's getting that permanent property placed properly in the marketplace. Are you seeing a shift almost from the natural resources world on the energy side where we'll start developing forms that take us through construction and maybe that first year or two in for permanent property and operation?
ED HOLLAND: Yes, to a certain extent. I touched upon earlier about the various phasing of these projects. We're talking multiple billion dollars of exposure. And traditionally the construction market does sit slightly separate to the operational market in terms of a capacity standpoint. So once those assets have been completed, it is obviously preferable to transfer them.
However, it depends how the contract has been drafted between owners and contractors. So, we are requiring markets to be more flexible in terms of their approach. Lengthier times of testing and commissioning of different trains and lines is absolutely essential in order to make these assets transferable to the operational market.
BILL CREEDON: Good. Jen, are you seeing the same attractiveness from the marketplace?
JEN CATE: Absolutely. And I would say, to Ed's point, you know that the transition from your project coverage over to an operational program is also something that we look at closely within the casualty markets, especially because your SIP programs will include that extended period, that products comp ops period that typically is triggered when you get hit substantial completion of the project.
When we talk about the term substantial completion on these mega projects, it's sometimes a grey area and trying to determine when that actually has happened, especially if you're talking about phased projects within the one project, it can get a little dicey. We tend to follow whatever is happening with the builder's risk piece of it. Like to keep the operational programs and the project programs on the same track. So that's very important that we take a look at it that way.
Then also, as I mentioned earlier, we're not seeing as many needs to extend these projects, the mega projects, as we were with some of the smaller projects because they tend to stay closer to the timeline. So that helps us with that transition to operational as well.
BILL CREEDON: I think the one other thing that I've seen just having been involved with everybody, and maybe on both sides is the need for really bespoke endorsements for these projects in this industry. And George hit on a little bit. The industry has maybe the ability to see things happening, and they may want to pause a project. They may want to look at something and say we're going to take a different path and readjust. We need to have those endorsements that are very customized to this industry.
And you've seen the underwriters have taken-- have been somewhat positive for us in that regard. Correct?
JEN CATE: Yeah, absolutely. We're certainly seeing those standstill clauses come into play on some of these mega projects, especially if they shift gear mid-project on what they want to do moving forward because of what's happening in the tech industry. I would say also Bill we're seeing some standard exclusions that you would generally see on a project program being reconsidered for these types of plans. Silica comes to mind as an exclusion that our clients, by trade, they need to have coverage for the use of silica in the machining and the tech industry for these plants. So, we're seeing markets definitely adjust their standard terms and standard programs to incorporate what's needed for these clients.
BILL CREEDON: Excellent. George, you've got a unique perspective. You're working a lot with the risk managers on the tech side. What are they really after? Do they share with you what they're really looking for in a risk partner on these massive projects?
GEORGE HAITSCH: Bill what risk managers are really looking for and other financial professionals at technology companies is deep subject matter expertise specific to technology construction, but also an understanding of their own industry. Brokers and risk consultants need to be bringing to the table that joint industry perspective, that construction expertise that is, essentially, being outsourced.
Because keep in mind technology risk managers, technology financial professionals are dealing with technology risks as part of their job. The very specific and unique nature of construction risk is not typical to them the way that it would be for contractors or other construction professionals. So that is something that WTW or any broker needs to bring to the table for their clients.
But specific-- some of the issues you've been hearing Jen and Ed talk about around what's being built, whether it's the silica exposures or some of the equipment that's being brought in that's very unique in terms of manufacturing components needs to be understood as well. So, the partner that's being selected needs to have developed that cross industry expertise bringing that deep resource bench of specific construction risk management, risk consulting and broking with all the related loss control and claims, et cetera to the table.
But delivering it through the filter of the client's own industry, which in this case is tech. So, there's very few that can bring that to the table. Obviously, Bill you and I have been working side by side on this issue for a long time. So, I'm confident in saying, based on the feedback we've heard, that we've developed something special here. And that needs to be something that any risk professional needs to be targeting when they're looking for assistance with a very significant construction project in the tech industry sector.
BILL CREEDON: George, really good insight. I think that's going to be a wrap for us today. As always, thanks for co-hosting with me today.
GEORGE HAITSCH: It's been my pleasure. I've really enjoyed the experience, Bill. Always great to work with you and your team.
BILL CREEDON: Thanks George. And Ed, thanks for joining from London. Really appreciate you contributing today.
ED HOLLAND: Thanks, Bill. It's been great to give an international perspective on this really important topic.
BILL CREEDON: Thanks Ed. And Jen, as always, thank you so much for being part of the podcast.
JEN CATE: My pleasure, Bill. I always enjoy giving insight from a casualty standpoint on these topics.
BILL CREEDON: And thanks, everybody who listened and thank you for joining the WTW Construction Blueprints podcast. We'll talk to you on the next show. Thanks.
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