In the past two decades, a seismic change has taken place in the country’s project insurance industry. Deregulation, liberalisation, private project initiatives and new forms of project financing have increased the opportunity for project insurance. India has also seen a surge in large infrastructure projects over this period, thus providing a new market for project insurance products. As infrastructure projects are increasing, be it ports, airports, manufacturing plants, power, refineries or roads, the scope to mitigate project risks has also risen. Project insurance that covers specific risks of property, machinery, profits and liabilities for diverse projects such as those in the airport, bridges, warehouses, ports, power plants, roads, refineries, pipelines, water treatment plants, pumping stations, compressor stations and mass transportation segments have become increasingly relevant in today’s context.
Key features
Products for infrastructure project insurance and the components therein are largely similar in nature in both the public and private sectors. Nevertheless, the public sector dominates the product insurance market in the country with a share of approximately 70 per cent.
Further, the product offering in India is also similar to that in the West and the products offered in the Indian market are at par and in line with international markets. Hence, in terms of product coverage, the Indian market is as developed as any Western country.
Operationally, the size of the company is important in this market segment. Insurance companies with greater financial capacity are not only able to underwrite more projects but are also able to cover a big project seamlessly. On the other hand, a new company may not be able to cover big projects and would require reinsurance.
Mitigating risks
Insurance has traditionally been playing a supportive role in the infrastructure sector and sharing risk mostly in the area of direct property and machinery losses. Over time, projects and project contracts have become more complicated and there is increased demand for seamless coverage of the project from the beginning till the end including loss of profits and a delay in commissioning. An additional dimension of risk that looms large over the infrastructure industry is in the area of liability which is growing with the number of transcontinental high-value contracts, more global consumers and higher levels of awareness. Hence, project insurance has become essential for the success of a large infrastructure project and no project can successfully avail finance without proper insurance.
Limited use
Insurance coverage for infrastructure projects is limited in India. The infrastructure insurance segment accounts for only 7 per cent of the total general insurance pie, a measly proportion compared to the value and size of projects involved. There are only a few specialised covers available to suit the special insurance needs of infrastructure projects. Most of the available products are standardised covers that are of the “one size fits all” type. The insurance products available in the market come under two categories – products covering specific risks and comprehensive packages covering several risks under the same policy. The advantage of comprehensive packages is that these insure a bundle of construction and project risks under a single package rather than the need for purchasing policies for each component separately. Insurers generally consider infrastructure projects under the engineering projects segment. The products available cover four to five years of the early project life cycle of an infrastructure project.
Conclusion
Project insurance will play a vital role in the development of infrastructure in India. Therefore, efforts need to be made to increase the penetration of project insurance in the overall insurance market. There is a need to not only increase the offtake of project insurance but also to make insurance companies financially robust to insure such large-scale infrastructure projects.