Both project and material risks are considered some of the highest in the infrastructure industries, yet infrastructure constitutes only 7 percent of the total general insurance.While the insurance firms in India cover most of the material risks, less tangible ones such as risks of overruns emerging from clearance delays are not insurable.G Srinivasan, CMD, United India Insurance Company Ltd, explains to Shashidhar Nanjundaiah and Daya Kingston how they could be.
What are the typical insurables in the infrastructure industries?
Insurance is critical in infrastructure projects: Any lender, international or domestic, will not fund a project unless there is an insurance policy in place.Infrastructure projects require customised insurance covers.
Insurers generally consider infrastructure projects under the engineering insurance segments.The segment accounts for seven percent of the total general insurance i.e., of over Rs 44,000 crore, a paltry proportion compared to the value and size of projects involved.All these sectors are insurable both in their construction and operation phases.
Insurables would include both accidental material damage and loss of profit following delay / interruption consequent upon material damage. Insurance can be extended to third party liability also.
The broad product offerings under the infrastructure insurance space are (1) Contractors Plant and Machinery (2) Storage cum erection (3) Contractors’All Risks (CAR) insurance (4) Erection All Risks (EAR) insurance (5) Operational covers.
Basically, when an infrastructure project is being set up, there is a need for various kinds of insurance.The first is where the machinery comes from India or abroad.There is a risk exposed to the machinery during transit, for which we have an insurance called Marine Insurance.When the machinery is being erected, there are various kinds of losses possible due to lack of workmanship, cyclone, earthquake, fire and so on which are covered under the Storage-cum-Erection Insurance.When it comes to machinery on which many contractors work, either the principal can take a policy covering all or each contractor can take one for his part of the contract.A contractor may have a lot of machinery and these can be covered under Contractors’ Plant and Machinery Policy.
If there are damages due to a cyclone or time overrun, the project is delayed by six months or one year, the profits an entrepreneur would have earned is lost so we have an insurance called Advanced Loss of Profit InsuÂrance.We have a package that consists of Marine-cum-Advanced Loss of Profit Insurance.This is the stanÂdard insurance infrastructure projects take.
For building construction, we issue a Contractors’ All Risk, which covers all risks for a civil construction as the project is coming up.These are the policies in the infrastructure domain.
What risks do you cover and not cover? Do these include project risks?
We cover both project and operational risks.Project insurance is a comprehensive insurance covering materiÂals in transit, storage, during erection and commissioning.Operational insurance covers hazards associated with operation of the plants and/or utilities.Any peril which is unforeseen, accidental and sudden in nature is held covered under these policies.
Policies are extended to cover lenders’ and financial interests in terms of loss of projected and or earned reveÂnue following insured material damage.We do not cover damage due to nuclear radiation, war or war-like situations, natural wear-and-tear and such.
What are the types of assessment an insurance team conducts?
We have technical people and engineers to look at the project sites and project details, understand the risks, identify the contractor, consider his experience of interÂnaÂtional markets, understand whether this kind of proÂject has been implemented anywhere else in the world, and so on.Based on this, we design an insurance prograÂmme that the customer wants. Some customers want wide covers and some prefer limited covers.Additionally, international lenders demand Advanced Loss of Profit insurance, and we work on understanding their conÂtraÂctual requirements.
What is United India’s exposure to infrastructure? Which infrastructure sectors are the most active in your business?
We are currently the market leaders in construction insurance, with more than 30 percent of market share. More than 80 percent of our exposure in construction insurance relates to infrastructure.We have been posting very high growth: Our market shares have been growing and we have been showing the highest profit in the market for the last three years. We’re market leaders in the infrastructure and engineering insurance segments.
We are in all the sectors in infrastructure projects like roads both greenfield and brownfield such as the Taj Expressway and KMP Expressway in the UP-Haryana corridor, roads in Andhra Pradesh, Gujarat, Karnataka, Orissa and Tamil Nadu.
In the urban infrastructure sector, we have insured Hyderabad Metro, and portions of Delhi Metro and Bangalore Metro. In ports and airports, JNPT is in our books, so is Mumbai International Airport.
Our forte within infrastructure insurance space, howÂever, is in the power sector.Currently, we have more than 65 large thermal power projects insured with a value of more than Rs 182,000 crore.We also have a strong presence in the hydro power construction insuÂrance, windmills, solar power and nuclear power proÂjects.The largest nuclear project in the country at Kudankulam is insured by United India.
What happens if an insured power plant fails to take off because of a retracted government policy or public protest, because of which a private partner’s investment may be at stake?
If the insured power plant failed to take off, it would impact the insurance business from the plant as the project cover may not lead to the operational covers.
Since your exposure to power is the greatest among infrastructure sectors, how have the current coal prices, domestic and international fuel linkage problems, and SEBs’ continued bleeding impacted insurance to that sector?
There is no direct impact on insurance, except for the fact that these adverse factors would impact operation of the power plants and result in slowdown of investments in the sector with its adverse impact on the insurance business. We have not had any instance of our power project customers shutting shop.
Given the power distribution sector’s recent issues with repayability, it seems to be rather vulnerable to risks. Is this something that an insurance company such as yours would take up?
In order to be adequately insured, a risk needs to be measurable.The current repaying capability issues with power distribution companies are more due to inadequate pricing, coal availability issues and sometimes appear presumptive financial risk related. We would like to study the issues concerning this in greater detail before we come up with adequate insurance solutions within the permissible regulatory framework.As of now, howÂever, the insurance industry has not brought about any insurance protection programme for such contingencies.
To what extent do you believe that insurance and risk management have a role to play in the financial success of an infrastructure project? How do you quantify this creditworthiness?
Infrastructure projects are always long-gestation and capital intensive, and carry a plethora of risks in the early stages.The risk profile stabilises and drops once the project is commissioned and operational.
As the nation gains experience in the fledgling infrasÂtÂructure sectors, can insurance and risk management help them with better yield.While risk management would contribute by identifying the risks to be transferred in a scientific manner, insurance can provide the optiÂmum possible coverage to such risks and submit risk improÂvÂeÂment measures as a feedback to the risk manager and both together shall result in a synergic and optimal benefit situation.
Insurance is primarily a risk management tool.Besides promoting risk discipline of an infrastructure project, it also acts as a risk transfer mechanism to better manage the uncertainties associated with infrastructure projects and their impacts.Projects are exposed to such uncertainties resulting in time and cost overruns.Insurance addresses these issues by paying for the cost required to reinstate a damaged piece of equipment so that the Project managers can go ahead with their work; the lenders and financiers have a better comfort level when the policy of insurance provides for advance loss of profit including debt financing cost (interest).
For the purpose of quantifying the creditworthiness, insurers look for credibility of the developers, their experience in the related sector, their reputation in the market and the integrity of the Project Report.Integrity of the project report would mean if it takes into account all relevant factors in project execution including the related market scenario in both short term and long term perspective.
How can insurance boost the finance-worthiness of a project?
Insurance, when fully and appropriately taken, is seen as a form of capital support to the project.Such an insuÂrance cover would provide adequate comfort level to the lenÂders, if their interest is also marked in the policy. InsuÂrance is thus viewed as a contingency capital and to that extent enhances the finance worthiness of the project.
Can insurance cover for tricky risks such as land acquisition be a reality? What is stopping that now?
This can be addressed as a social welfare/security measure which is currently under government’s domain. Land acquisition for major infra projects is still the most contentious issues across all the stakeholders.There is a fundamental conflict between the entrepreneurs who would like to have the required land at a reasonable price and the land holders who would want a fair
market oriented compensation and a free will to sell.Government could be the key enabler to facilitate this to the satisfaction of all the stakeholders.The new Land Acquisition Bill would address most of these concerns.
As the risks associated with land acquisition for projects are not really measurable, they have not been seen as a potentially insurable risk as on date.However, once the contours of the proposed Land Acquisition Bill become clear and the potential risks associated with the acquisition become discernible and measurable, the insurance industry could come up with an insurance solution (on lines of title insurance), to support the infrastructure industry.
Would you recommend any other ways that insurance companies can invest in infrastructure?
Yes. I would like to see an increased level of insurers’ participation in the process of risk management of a project: Advising on safety measures, material handling at port, site of erection, stacking, storage practices, minimising period of interruption, etc.
Secondly, insurance companies already invest in infrastructure projects up to a maximum of 15 percent of the investible funds both through equity and debt within the mandate of the regulations.The insurance industry is also exploring the evolving concept of take out programmes to finance the infrastructure projects.
Are you happy with the take-out finance scheme as it exists today (with its recent revisions on COD, etc.)?
The take-out finance scheme for infrastructure proÂjects, as it exists today, has been well received by the lenders.
Has there been growth in this sector?
The last five years has been good for the general insurance domain.The last few years has showed a high growth trend in the infrastructure sector but the last few months has been a challenge as the economy has slightly slumped because of the Eurozone crisis.Our expectation is that it’s a temporary aberration and the sector will continue to grow as India needs many infrastructure projects and growth potential is immense.
What would you consider as the difference between insuring infrastructure projects in India and overseas?
If you ask me, it’s by and large similar.If there’s one business that’s global, it’s insurance.There are plenty of foreign investments coming into the infrastructure industries.The foreign lenders and equity partners would like insurance schemes to be at par with global standards, so we are in line with international practices now.
What are the challenges you face as a market leader?
The challenge is that a power project is very different from a road construction, which is different from a dam construction, and so on.We have to understand the project fully and design an insurance scheme that suits the needs of the project.Some projects are of such huge size that they may even go beyond our capacity to insure, so we go to the international re-insurers, get reinsurance backing for these projects and service them well (such as settling claims quickly and in time).This would ensure that they make up their financial losses and continue to implement them without financial difficulties.This is the challenge we specialise in.
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