Underwriters must work with construction businesses to understand how modern methods of construction aim to eliminate randomised and systemic risks
The rise of modern methods of construction (MMC) “as a whole concept is here to stay”, meaning that the insurance and construction sectors must “get closer together” to “understand the difference between systemic risk versus randomised risk”, according to Mark Farmer, founding director and chief executive of Cast Real Estate and Construction Consultancy and author of the 2016 report The Farmer Review of the UK Construction Labour Model.
Speaking at an ABI webinar on 16 June 2021, titled Insuring the buildings of today and tomorrow: Adapting to overcome changing risks and future claims, Farmer explained that MMC is “an incremental issue that both construction and the insurance sectors need to get closer together to resolve how we’re going to do this in a way that everyone gets comfortable with, that we don’t create unintended consequences, that the insurers recognise the risk arbitrage of building things better”.
“That’s really the objective here. It’s not building in a different way for the sake of it – it’s to create a better solution,” he added.
At the “heart” of MMC, for example, is the drive to remove randomised and systemic risks from the construction sector.
Farmer said: “This is a really, really important issue to get our heads around and understand what we’re talking about in relation to MMC.
“That inevitability that [MMC] is only to grow as an area of house building means we just need to get that relationship right between the insurance underwriting sector and the construction sector to understand risk and understand the difference between what I call systemic risk versus randomised risk.
“That goes to the heart of what MMC is really trying to do. It’s trying to eliminate randomised risk that we’re seeing on construction sites at the moment, of failure that can’t be predicted because it’s variable and [based on] the labour and the workmanship and the competency and skills of the people involved.
“[On] the other side of the coin is systemic risk, or something in a manufactured system approach being done incorrectly and being done incorrectly over and over again. We have to drive that out through technical robustness and testing and [research and development] and sharing the evidence and data with the industry.”
In 2019, Farmer worked with the government and industry bodies such as the ABI to define MMC. This working group broke MMC down into seven different categories:
- Category 1: Pre-Manufacturing - 3D primary structural systems, such as off-site modular construction.
- Category 2: Pre-Manufacturing - 2D primary structural systems, such as off-site panel construction.
- Category 3: Pre-Manufacturing – Non-systemised structural components.
- Category 4: Pre-Manufacturing - Additive manufacturing, for example 3D printed components. Although this is not being used in the UK currently, Farmer predicts this will come into fruition over the next five to 10 years.
- Category 5: Pre-Manufacturing – Non-structural assemblies and sub-assemblies. Farmer said this is commonly used, but little known about by insurers.
- Category 6: Traditional building, product-led site labour reduction/productivity improvements. Farmer noted that this category includes innovations in building methods, such as modular wiring and brick slips – techniques that are designed to reduce the labour required to put materials together.
- Category 7: Site process led labour reduction/productivity improvements. This category is around site-based improvements, like the use of robotics. This raises further insurance questions – is a robotic brick layer a greater risk than a manual, human brick layer?
These categories are important in terms of deciding insurance risks “because some of them are structural and performance related and others are not impacted in that area of building performance”, Farmer added.
He believes that “unified” MMC standards need to be set by the government. These should outline insurance requirements for proof of resiliency, how MMC buildings perform in terms of perils such as flood and fire and cover issues around open sourcing repairs, maintenance and the adaption of buildings.
For him, these are “really important questions that need to be answered”.
Quantity versus quality
Previous, MMC has “come in fads” said Farmer, however he feels the most recent uptick in attention is “different this time”, which is why MMC needs to become a focus for the insurance sector.
As well as “bigger picture changes that are happening in the housing market and the broader construction market”, Farmer cited changing attitudes in government as another key driver towards MMC adoption.
“The idea of building 300,000 homes a year, or whatever the political manifesto commitment might be, in the past has perhaps been at the expense of quality. I think we’re in a time in the market now where that’s no longer the case,” he said.
“We have politicians who now understand that society expects quantity and quality to run side by side and that’s forcing the policy agenda in many respects across a series of different fronts, which all have implications on moving away from traditional ways of building.”
Another factor influencing MMC popularity is the “structural decline in our construction labour force”, Farmer added.
“It’s something I flagged when I wrote my government review back in 2016, that we were having non-reversable attrition in the construction workforce – we have more people retiring every year than we have coming into our industry,” he explained.
“We have Brexit overlaid on this and together with Covid, has forced an acceleration in the exodus of some parts of our construction supply chain, particularly from Eastern Europe. And we have this big challenge related to climate change and building resiliency that we need to build things differently, which involves different skills.
“So, if we’re going to build green and build back better, then that actually means a reskilling and upskilling of certain parts of the workforce.”
Furthermore, the Covid-19 pandemic picked up site-based productivity issues too, which could be rectified by an off-site MMC approach.
Farmer said that when construction staff went back to a “socially distanced way of working”, this “meant that even though total site output was down, productivity individually and in teams went up”.
He explained: “That’s really systematic of the lack of productivity we have when we crowd sites out with lots of labour doing things on top of each other, damaging each other’s work, creating defects and workmanship issues and coordination and mismanagement issues.
“It obviously has direct ramifications on the insurance sector in terms of the performance of buildings and how they react in terms of their technical robustness and resiliency and endurability.”
Recent research conducted by Farmer’s firm emphasises that MMC is here for the long haul.
Polling developers, investors, house builders and housing associations with a combined pipeline of over 120,000 units over the next three years, “there is a strong recognition that they’re going to be increasing moving to MMC over the next three years”, Farmer said.
“In fact, over a quarter of those developers said that more than half of their pipeline will involve MMC over that period, so evidence that this whole issue of MMC adoption is here to stay.”