Building better homes in Asia Pacific: a collective effort

The APAC region must invest nearly USD 2 trillion annually in infrastructure to support growth, tackle poverty and respond to climate change, according to the Asian Development Bank.¹

As you can imagine, this represents an enormous challenge, but equally a tremendous opportunity to build a better region for everyone. 

Behind this dynamism, the regional construction and infrastructure sector faces some fundamental vulnerabilities, including shortages of skilled labour and economic uncertainty. Looming even larger is climate change and the associated increase in extreme weather events. 

However, the steady growth in population and urbanisation in parts of APAC is driving demand for large-scale building projects, presenting significant opportunities for sustainable development and infrastructure. 

Some events remain outside of our control, but there are clear shortfalls in the standard layers of protection for construction that we can address.

During construction phase, projects are typically covered under a contract works policy, which provides compensation in the event certain risks materialise. Once construction is complete, a post-completion policy takes over to provide protection against natural disasters and other risks. 

However, this leaves a critical grey area: neither the standard construction nor post-completion policy covers damages that arise later due to inherent defects in a building’s structure. For the property owner, this means they are exposed if defects are discovered. A recent spate of post-construction defects that have emerged in new-build apartments in Sydney, Australia, shows how these gaps can trigger financial losses, and a broader loss of confidence in the industry.²

This is why Inherent Defect Insurance (IDI) is essential. IDI provides 10-year, first-party cover protecting building projects in the event of structural instability or collapse due to design, workmanship or material defects that may have been inherent before handover. This bridges the construction and post-construction phases of a project and provides reassurance to potential owners and buyers.

The benefits of IDI are evident even before completion, or a loss event. Cover can help enhance project quality as insurance companies will engage independent inspectors to assess design and construction as work progresses. And for homeowners, it's reassuring to know they are protected by an insurer if issues arise.

Given these advantages, and the critical role housing plays in social and economic cohesion, many governments view IDI as an essential social protection measure.  

In APAC, however, IDI is still a relatively new concept. The risks construction projects are likely to face in the decades ahead means this must change. 

Our experience working with some of the region’s early adopters shows IDI is already having a positive impact. We collaborated with the Shanghai Government and the local insurance market to develop an IDI system to meet specific regional requirements. This successful model has now been adopted in over 40 cities across China, following Shanghai's lead. In Japan, we participate in the IDI reinsurance pool, where the government has, since 2009, required developers to either pay a deposit or purchase cover, in the wake of a scandal around falsified calculations on earthquake resistance.  

One of the best examples of IDI’s potential to create positive outcomes even in the absence of a regulatory backdrop is our recent partnership with Taiwan Fire & Marine Insurance to issue the first two IDI policies for a local developer. This highlights that customers are seeking greater assurance in construction quality and enhanced insurance protection, as these projects represent significant investments for them.

Additionally, it also demonstrates how IDI is a form of insurance that combines financial and long-term social benefits – which is why we encourage and anticipate greater adoption across APAC in the years to come.

For insurers exploring IDI, there are key considerations to keep in mind. First is that IDI is a ‘long tail’ business, in which provides 10-year protection to buyers after completion of works. This makes it important to seek reinsurance protection from a sound carrier with experience, like Swiss Re.

Second is that IDI relies on the establishment of a reliable independent inspection system, which provides the basis for coverage. Regulatory support is also needed to avoid anti-selection – that is, asymmetries in risk information that could disadvantage insurers – in the extension of IDI cover.  

Providing buyers a better home in our region will be a collective effort, requiring the active participation of developers, insurers, governments and other stakeholders. Our experience gives us confidence that we will all benefit from the results, as our region’s development takes place on more resilient foundations. 

Building resilience is key to constructing a stronger and more sustainable future in APAC and now is the time.