Mitigating Project Risks: Infrastructure insurance market set to see bigger play

Infrastructure insurance market set to see bigger play

Infrastructure projects are vulnerable to business, maintenance, commercial and political risks at every stage of development because of their high capital expenditure and extended gestation periods. An economy’s ability to mo­bilise and allocate resources relies he­a­vily on the insurance industry. In developing countries, such as India, infrastructural develo­p­ment and economic growth are closely linked. In India, the insurance business also contributes to the development of basic and social infrastructure.

Infrastructure projects have a variety of ris­ks, which is why the insurance cover requir­ed for them must be tailored to their specific needs. Insurance companies often classify infrastructure projects as part of the “engineering projects” sector, and the products they provide are restricted to the first four to five years of the project’s lifecycle. Public and private insurance solutions offered for infrastructure projects and components are almost identical in terms of their content. The need for risk management in a project begins with the transportation of goods and machinery from India and abroad and continues through storage, erection and commissioning, until the project is handed over.

Due to the high level of competition, only risk-averse enterprises are able to thrive in this market. A proactive risk management strategy may go a long way towards ensuring the sm­ooth flow and completion of projects. The infrastructure industry places a high value on mitigating risk. Deregulation, liberalisation, private initiative, and newer means of project financing have boosted the availability of project in­surance. Ad­ditionally, India has experienced a spike in infrastructure projects during this time period, creating a new market for project insurance products. With the growth of infrastructure projects, whether ports, airports, industrial facilities, po­wer plants, refineries or roadways, the capacity to manage project risks has in­c­reased as well. In today’s climate, project in­surance, whi­ch covers particular risks of pro­perty, machi­nes, profits, and liabilities for vari­ed industries such as air­ports, bridges, ware­hou­ses, ports, power, highways, refineries, pi­pe­­lines, water tre­at­me­nt, pumping stations, compressor stati­ons and mass transit, has become more important. The insurance products currently available in the market can be divided into two catego­ries: pro­ducts that cover specific risks and comprehensive packages that cover a wide range of hazards under a single policy. In contrast to individual policies for each component, comprehensive packages insure a bundle of construction and project risks under a single policy, eliminating the need to purchase coverage for each component separately.

Surety insurance: A 2021 development

India’s insurance regulator has unveiled interim norms for surety contracts in response to the country’s aim to promote infrastructure, a sector prone to delays, defaults and litigation. The proposed IRDAI (Surety Insurance Contra­cts) Guidelines, 2021 will enable surety insurance or bonds to be offered. These are simply assurances in the absence of a collateral. Su­rety insurance protects the awarding authority, such as the government, against substandard performance, project failure or contractor default. However, for building contractors, they operate as working capital guarantees.

The surety plan is more critical now than ever with India announcing a plan to spend Rs 5 trillion on roadworks over the next three years. Nonetheless, the industry is prone to project delays and cost overruns. Private contractors bidding for public works are discouraged from obtaining bank guarantees because of concerns about bad loans. In established markets, surety bonds are widely used. Canada, Europe, Australia and New Zealand all give similar protections, and the concept is gaining traction in Africa and Southeast Asia as well.

The initiative to establish guidelines for sure­ty contracts will aid in meeting the infrastructure sector’s significant liquidity and finance needs. Surety bonds will level the playing field between major, mid-sized and small contractors.

According to the Insurance Regulatory and Development Authority of India (IRDAI), insurance companies now also have the opportunity to invest in debt securities issued by infrastructure investment trusts (InvITs) and real estate investment trusts (REITs), which is expected to boost investment options for the country’s growing start-up ecosystem.

Another investment of Rs 60 billion into organisations that provide export insurance coverage has been approved by the union cabinet, with the aim of facilitating more exports worth Rs 5.6 trillion over the next five years.

Conclusion

The insurance industry’s engagement in infrastructure development has grown over the years, with its grasp of project risks, mitigation techniques and risk-sharing agreements integrated with the robust financing framework. This proactive approach must be maintained in order to increase the market share of the project insurance industry. Not only must project insurance uptake increase, but insurance companies’ financial sustainability must also be strengthened to cover such large-scale infrastructure projects. The finance ministry took a significant step in this direction by injecting $413.13 million into state-owned general insurance firms in February 2021 to bolster their overall financial health.