Insurance can succour creditworthiness, financial closure and project success. Yet it does not cover critical items responsible for project overruns and slowdowns. Ajay Bimbhet, Managing Director, Royal Sundaram Alliance Insurance, explains to Daya Kingston and Shashidhar Nanjundaiah the scope and limitations of infrastructure insurance.
How long have you been in this sector and what’s attractive about it?
Royal Sundaram has been in the business of insurÂance of the infrastructure sector from inception of the company. The growth in the sector, the uniqueness of each risk and the pride of being associated with prestigÂious projects make it an attractive sector. However, curÂrent market conditions are such that many insurers are losing money in certain sectors because of competition.
What is Royal Sundaram’s exposure to infrasÂtÂructure? Which sectors are the most active for you?
Royal Sundaram offers insurance to wind farms and metro rail projects. Taking on from the technical expÂertise of our Global partner RSA, and combined with the abundant local experience of our underwriters, we have established ourselves as strong players in these segment.
In the wind energy segment, we are associated with both the manufacturers of WTG as well with independent power projects. We have also been involved in urban transport projects like the Delhi Metro Phase I & II and Bangalore Metro. We are now bidding for other metro rail projects of Chennai Metro and Hyderabad Metro.
What risks do you cover? Are project risks covered?
Risks associated with a project can be multifarious: Business risks, political risks, financial risks, and so on. Insurance is restricted to covering only the direct finanÂcial losses arising out of a physical damage to the proÂperty in the project. The need for insurance in a project starts right from the time of transit of goods and machinery from within India or abroad for the project, and continues through storage, erection and commissiÂoning till handÂing over. Insurance policies can be tailor-made to offer seamless cover for these risks. However, business risks are not in the scope of insurance.
What are typical insurables in infrastructure projects?
Traditionally, project policies covered the insured against property damage and Third Party Liability. A project policy covers storage, erection, commissioning and testing at the project site. Often, these are offered as Erection All Risks or Contractors All Risks. Another popular policy is the Marine Policy, which covers the transit from suppliers’ premises to the project site.
A few covers offered during erection of projects are:
Advance Loss of Profits: This policy indemnifies the Principal or the Owner of a project for the actual loss of profits, sustained due to delay in completion of Insured’s work arising due to an insured peril.
Professional Indemnity: There is increased interest in this categroy following FII funding. It protects the insured’s business, should anyone claim that professional advice has proved negligent or caused harm or damage.
Agreement Period: With the increase of public-private partnership in various forms such as build–operate–transfer (BOT) or build–own–operate–transfer (BOOT) etc, today, we see clients looking at a seamless cover for the entire agreement period.
Decennial Liability: The name indicates that it covers for 10 years after completion of the project for loss or damage due to faults in erection/construction.
Once the project is commissioned, operational poliÂcies, such as the Industrial All Risk (IAR), Standard Fire, Special Perils and Machinery Breakdown policies, take care of material damage and associated loss of proÂfits. Liability risks are also covered sepaÂrately. In recent times, there is a spurt in demand for specific policies.
Do you play an advisory role in risk management to infrastructure companies?
Our strong Risk Management Solution Team has been providing input to projects both in terms of minimiÂsing losses and comprehensive insurance covers from the start of a project up to operation. Our services have been well received and appreciated by our clients.
What is the extent that insurance plays a role in the financial success of an infrastructure project?
Even during the financial closure of a project, the lender is very keen on the insurance programme envisaÂged for the risks, and a few lenders have their own specÂifications that they would like to include in the progÂramme. In some cases, lenders of some of the more proÂtoÂtype projects insist on an insurance programme for financial backing.
With the advice given by insurers for risk minÂimÂisation or elimination and quick settlement during a claim, insurers support the principal in effective compÂletion of the project as per plan. Also a timely Risk Management Service rendered by the insurer
goes a long way in making the completion of a project smoother.
How can you quantify insurance’s contribution to a project’s creditworthiness?
In today’s environment, with large capital outlays and long gestation periods, infrastructure projects are fraught with business risks, maintenance, commercial and political risks at the project implementation, constrÂuction and operational stages. Financial institutions are wary of committing funds to the sector unless they have a backup. Indeed, many lenders additionally specify the minimum credit rating that an insurer participating in the project should have. Hence, a sound insurance programme from a reliable insurer goes a long way enhancing the project’s creditworthiness.
Insurers play a pivotal role to ensure that the progress of the project is not affected by fund crunch or creditworthiness. To support the insured, insurers work in a threefold manner:
• By offering optimum and correct insurance coverage during the finalisation of the policy
• Offering sound and effective risk management praÂctices throughout the project
• Quick settlement of claims
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 would take up?
Unfortunately, business risks are not the subject matter of insurance.
When will insurance cover for project risks (such as land acquisition, time overruns and repayability of assured revenues) be a reality? What is stopping that coverage now?
At present, the Indian insurance industry does not cover land acquisitions. Project overruns caused by insurable perils can be offset by choosing the right insurance policies. However, delays due to other causes, such as cash crunch and trade uncertainties would not fall under the purview of insurance policies since they are business risks.
What is the trend you foresee in infrastructure risk management?
The infrastructure sector has grown tremendously in the last five years and is bound to grow further. The sector is also ridden with risks that are unique to it—be it business or insurable risks. For the sector to grow and grow profitably, given the competition, only risk managed companies would come out shining. Hence, de-risking will become—if it has not already—a priority in infraÂstructure sector. From the insurers’ perspective, we foreÂsee, it is important to cultivate a long term view to understand how projects will emanate and measures to improvise potential risk emerging from the projects.
Do you expect a flow of foreign investors into the infrastructure insurance segment?
Yes. Infrastructure requires huge capital investments. Considering the growth in the infrastructure sector and the opportunities for private participation provided by the government foreign investment would become inevitable. Further, in some cases like nuclear power plants, insurers may need to look outside India for expÂertise in technology, which could also result in foreign investments.
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