6 Emerging Risks for Design Professionals
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Public-private partnerships (P3s) are an effective way to get complex and expensive transportation infrastructure projects done at a time when political will to invest public funds fall short.
While the approach has been successfully utilized for many different projects, overall adoption remains limited. Out of the United States’ total annual infrastructure spend of $1.2 trillion, roughly $20-25 billion goes toward P3 projects, or about 2 percent.
Part of what has kept P3 to this niche is a dependence on toll-based revenue structures. But new revenue approaches such as Availability Payments could make the model work for a much broader scope of projects, including social infrastructure like hospitals and public schools.
“The insurance community, construction community, and finance community all have an interest here. These three industries could get aligned and work together to help promote P3s as a potential alternative solution for what needs to get built and rebuilt and improved in the next five to 10 years,” said Thomas Grandmaison, executive vice president, Energy and Construction Industry Leader, AIG.
P3s come with a set of both benefits and risks, but new financing approaches combined with an evolving political climate that seems to favor infrastructure investments could be the dawn of a P3 Golden Age.
Developments in finance structures and insurance coverage make P3s more attractive for both public and private partners.
Roads built under a P3 model have typically generated revenue from tolls. The financing of these projects is therefore based on traffic forecasts that estimate the number of cars using the road every day, over a period of 30 to 50 years.
And when those forecasts are inaccurate, the entire project is put in jeopardy. In 2016, SH 130 Concession Co., the private entity that financed, constructed and maintained State Highway 130 — a 41-mile toll road connecting Austin and Seguin in Texas— filed for bankruptcy. The project cost $1.3 billion. SH 130 tried to attract drivers with a high speed limit of 85 mph and an alternative route around other gridlocked highways, but motorists ultimately opted for longer commutes that required no toll payment.
In California, the 10-mile South Bay Expressway suffered the same fate, declaring bankruptcy in 2011. Same for the privately operated Indiana Toll Road, which went bankrupt in 2014.
That’s why availability payments have become increasingly popular.
With availability payments, the public entity issues a periodic payment of a predetermined amount to the private partner as long as the project is available for its intended use at the expected performance level. In this arrangement, the public partner collects any tolls and retains the risk that revenue may not meet expected levels. These arrangements help to attract private partners who don’t want to take on traffic risk, but also allows public sponsors to retain some ownership and control over the road going forward. Availability payments can also enable non-transportation P3 projects, including water treatment plants, ports and public facilities like hospitals and schools.
“There is no shortage of interest in private financing,” Grandmaison said. “There’s plenty of capital out there, and now potential financiers can feel more secure in their investment. The availability payment option often provides the difference between investment grade, and non-investment grade debt, dramatically reducing the cost of debt and increasing the number of potential investors.”
Insurance coverage plays a part in that security as well, and carriers have been pushed to build creative and flexible solutions to accommodate the size and complexity of P3s. Current trends and P3 project structures need sureties providing alternative solutions that incorporate liquidity elements that can address both concessionaire and rating agency concerns.
“As P3s become more prevalent, builder concessionaire teams and brokers will be asking the insurance market to think more holistically about how separate coverages can be brought together in a coordinated and aligned fashion to make the buying process more streamlined,” Grandmaison said.
There may be multiple large contractors working on a P3 project, and none wants to take the entire program onto their balance sheet. Same goes for the mix of private investors involved. And then there’s the public entity that wants full insurance protection even though they take a back seat in terms of project management and execution.
“You’re creating a six-headed monster as the owner or sponsor of the insurance program,” Grandmaison said. “It’s a more complex risk assumption than the traditional setup where the public entity is responsible for insuring construction, but takes on operation of the project through a separate program.”
Complete and coordinated coverage for all of the risks involved in complex projects alleviates fears — held by both public and private parties — that one entity will be more exposed than their partners, or that risk will be allocated unfairly. For P3s to be executed smoothly, it’s critical to have insurers involved that have the full breadth of experience and capabilities to fill this need. In addition, not all insurers are comfortable with project terms that are often longer than 5 years (sometimes 8-10 years), and providing operational coverage during course of construction or post construction.
AIG is one of few insurers that can provide all of the coverages traditionally needed for construction projects like workers’ compensation, general liability, builder’s risk, inland marine, environmental, professional liability, surety and even some ancillary coverage like cyber and kidnap and ransom.
Despite their big benefits, P3s also come with significant hurdles. Even with a shifting government agenda that prioritizes infrastructure, local political will can still be difficult to muster.
If a P3 project doesn’t pan out, taxpayers end up paying the balance. Local governments sometimes struggle to justify such costly projects that potentially place their constituents’ wallets at risk. To overcome that hesitance, political leaders want to be assured that their private partner has the capacity to stay with a project over its long lifespan.
“One of the challenges we’ve seen here in the States is that Departments of Transportation want to ensure that the companies that are contracted to keep the project running for up to 30 years actually remain in place,” he said. “There is hesitance to transfer that ownership over to a party that may want to cash out as soon the market shifts.”
Of course, having comprehensive insurance coverage alleviates fears for public sponsors as well.
“AIG is really a full service carrier that can provide everything a customer might need on a project-specific basis,” Grandmaison said. “AIG has been in the market of flexibility and creativity for years and will continue to be so.”
The future certainly looks promising for P3, and the insurance industry looks poised to face any new challenges it brings.
To learn more about insurance solutions for P3 projects, visit http://www.aig.com/business/insurance.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.
Underwriters at Lloyd’s are accustomed to taking on complex, even daunting, risks. The company’s leader looks at the world today and sees plenty of opportunity, but also much to be concerned about.
“Political instability is something that troubles me more than anything else because I think there is now more uncertainty across the world than there has ever been,” said Inga Beale, CEO of Lloyd’s of London.
“It feels that all of the norms that I grew up with are being challenged — openness, globalization, acceptance, inclusion — on a global scale.”
Appropriately, we’re sitting around a table in Beale’s modern glass-fronted office at the top of the Lloyd’s Building — itself a vision from the future — to talk about Brexit and Lloyd’s newly announced Brussels subsidiary.
Add to the mix Donald Trump and the threat of nuclear attack from North Korea, the bombing of Syria and a spate of terrorist attacks across Europe, and it’s clear we are living in the most dangerous period certainly since the Cold War, or possibly ever, believes Beale.
That belief received even more chilling reinforcement when terrorists detonated a bomb at an Ariana Grande performance in Manchester, England on May 22. Twenty two people, some of them children, were killed and more than 50 wounded in that attack.
Three years ago, it was Beale herself making world headlines with her appointment as the first female CEO in Lloyd’s 329-year history. But now Brexit and other seismic disruptions to world order have taken center stage.
Lloyd’s announced at the end of March that it would establish a new European subsidiary in Brussels in time for January 1, 2019 renewals so it can continue writing risks for all 27 European Union (EU) and three European Economic Area states after the UK exits the EU.
Currently, it uses its passporting rights to serve EU customers from London, but the expected loss of those rights after Brexit necessitated the establishment of a new subsidiary.
For now though, it’s business as usual, said Beale, with the UK remaining a full EU member for at least two more years. She added, with a reassuring smile, that there will be no immediate impact on existing policies, renewals or new policies written during that time.
“We were campaigning very much to remain in the EU before the referendum because we knew what the likely impact [of leaving the EU] would be on Lloyd’s,” said Beale, whose impressive resume includes stints with GE Insurance Solutions, Zurich and Canopius.
“We rely very much on our licensing network, and being part of the EU means that from London we can write insurance and reinsurance for all of the EU countries with our passporting authority.
“But with the UK exiting the EU, it now means that we lose those licensing powers to offer insurance with immediate effect. To counteract this, we have determined to set up a subsidiary within the EU, meaning that about five percent of our global revenues will have to go through this subsidiary because it is insurance business offered to our EU-based clients.”
Beale and her team also negotiated that most of Lloyd’s underwriting business will remain in London, as will the majority of the transactions and decision-making powers. Meanwhile, the manpower needed to run the new Brussels operation will be in the “tens rather than hundreds,” she is quick to point out.
“It’s not a huge raft of people having to move over,” she said.
“Lloyd’s will continue to do 95 percent of its business as it has always done — it’s only the other five percent that will have to go through a separate legal entity, and we’re not anticipating any further changes to our business model as a result.”
Beale, whose dual role is both supervisor and advocate for the market’s 100-something member underwriting syndicates, says that the franchise board chose Brussels over other locations including Luxembourg, Dublin and Malta because of its “robust and quality” regulatory regime.
“At the time, I didn’t even know that reinsurance existed, but once I discovered it I absolutely loved it.” — Inga Beale, CEO, Lloyd’s of London
It also provides access to a multilingual talent pool, is near to London, and, most importantly she stresses, is located in a member state with a “very high certainty of staying in the EU.”
“We want people who reflect our customers,” she said.
“The London insurance market is littered with people from all over the world because London is such a global insurance hub, so we need experts here who speak the language and understand the different cultures.”
Despite its large European market, it’s the other side of the pond where Lloyd’s really thrives. Approximately 46 percent of its business comes from the U.S., mainly California earthquake and East Coast hurricane risks, she said.
Lloyd’s also remains the No.1 excess and surplus lines insurer in the U.S. and the largest non-U.S. domiciled insurer, she added.
“We have done really well in terms of growing our E&S market share over there,” she said.
“That’s our sweet spot; those non-standard risks that are hard to place.”
By contrast, Beale said that reinsurance has become a much more competitive market with new entrants offering alternative types of reinsurance putting a squeeze on prices. As a consequence, Lloyd’s has focused more on insurance, she said.
“We have also done well in Canada and with our delegated authority through our Managing General Underwriters and Managing General Agents,” she said.
“It’s this very local and specialist distribution channel that has been our success story across North America.”
In January, Beale was made a Dame Commander of the Order of the British Empire — the female equivalent of being knighted — and is also the Association of Professional Insurance Women’s Insurance Woman of the Year for 2017.
“What concerns us most is not individual risks such as earthquakes and hurricanes, but rather assessing the aggregation of our exposures to financial and liability-type risks with no geographical boundaries.” — Inga Beale, CEO, Lloyd’s of London
As the person directing Lloyd’s, she is also acutely aware of the shift in power towards emerging economies, with McKinsey recently reporting that 67 percent of commercial insurance growth will come from those markets by 2020.
In response, Lloyd’s has focused its efforts on Asia and Latin America, transferring more than half of its managing agents to its Shanghai and Beijing platforms; and it was recently granted final approval to open a reinsurance office in Mumbai, she said.
“That’s where the future’s going to be,” she said.
“We know that a lot of the business is no longer coming to London in the traditional way, hence we have set up a Singapore platform and platforms in China, and opened up an office in Dubai as well as in India to be closer to our clients and brokers there.”
Lloyd’s profits last year were flat at $2.7 billion, while GWP was up $3.9 billion.
The market made a profit despite taking a $2.7 billion hit for major claims — the fifth highest such total since the turn of the century — primarily due to Hurricane Matthew and the Fort McMurray Wildfire in Canada.
Although natural disasters are Lloyd’s bread and butter, its real strength is in insuring complex risks, from cargo ships and satellites to political and terrorism risks.
It’s the aggregation of those harder-to-quantify risks such as cyber security that concerns Beale most. Expected to grow to $7.5 billion in global premiums business by 2020, cyber is a big focus for Lloyd’s. It has a 25 percent market share and aggregate limits of approximately $650 million per risk, she said.
“What concerns us most is not individual risks such as earthquakes and hurricanes, but rather assessing the aggregation of our exposures to financial and liability-type risks with no geographical boundaries,” she said.
“We saw that with the financial crisis and the collapse of Fanny and Freddie, and its impact on Greece, but now it’s cyber.
“We have interviewed numerous risk managers and they are telling us that they are only insured against less than 10 percent of the risks that their businesses face on a daily basis. Our challenge is to make sure that we are continuing to adapt as fast as their businesses do and that we are delivering the relevant products that they need.”
Another area where Lloyd’s has seen an uptick is political and terrorism risk, said Beale.
The U.S. standoff with North Korea, Brexit and a swath of ISIS terrorist attacks across Europe have only exacerbated the problem, heightening fears among those countries’ citizens and tearing whole communities apart.
“We would love to get to a stage where a client can track something being quoted or a claim being paid, just like you do with a package being delivered [to your home].” — Inga Beale, CEO, Lloyd’s of London
Just witness the anguish of the victims and families in the Manchester concert bombing.
“We have seen a dramatic increase in demand for these types of products because of the political instability everywhere at the moment, particularly for companies that are trading cross border with countries where governments can suddenly intervene at a moment’s notice,” she said.
“Similarly, businesses are looking to protect themselves against the ever-growing threat of terrorism, which is where Lloyd’s can step in to give them the confidence to keep on trading.”
Within Lloyd’s itself, Beale has been at the forefront of trying to modernize the aging institution. Despite its modern metallic and glass exterior, inside Lloyd’s there’s still very much what some might term a stuffy “old boys’ club” culture.
Men are required to wear a tie and women weren’t allowed into the underwriting room until 1972. Brokers still walk around with leather slipcases crammed full of paper.
Beale’s predecessor, Richard Ward, tried to modernize Lloyd’s but left plenty for Beale to address in that respect.
Beale committed $700 million over the next five years to upgrade Lloyd’s aging computer and IT systems, with the end goal of achieving one-touch data capture to speed up the premiums and claims process.
“It’s about following that data all the way through the process from the client to the intermediary and the underwriter, and the processing of the premiums and claims,” she said.
“We would love to get to a stage where a client can track something being quoted or a claim being paid, just like you do with a package being delivered [to your home].”
Another area Beale is keen to shake up is diversity within Lloyd’s itself. Currently the market is two-thirds male, while only 11 percent of the whole London insurance market are non-UK nationals — a damning statistic that Beale is all too aware of.
“The Lloyd’s market doesn’t reflect the demographics of the whole of London and we are very conscious that we’re not tapping into all of the available talent that’s out there,” she said.
“We need to cut out the old ideas, try to challenge the unconscious bias and create an environment that is welcoming for people who are a bit different.”
Beale has also been pushing the [email protected] initiative, currently in its third year, and in September Lloyd’s will host the third annual Dive In festival to promote diversity and inclusion in the insurance industry.
In addition, 95 percent of the Lloyd’s market has already signed up to its Diversity & Inclusion charter to improve diversity, she said.
“To attract the best talent we need to modernize and look at how we can change our working practices and hiring decisions for the better,” she said.
“There’s a vast amount of work that we are actively doing to encourage people to be more open and seek more diverse talent.”
On a personal level, Beale readily admits that she was late to the leadership game, and it was only her mentor, Annette Sadolin at GE, who convinced her to take her first promotion.
That lack of confidence is something that, as a leader, Beale has witnessed in her own team and she is keen to help overcome.
“Annette became very much a mentor for me throughout my career, so whenever I have had to make key decisions I would always ask her view,” she said.
“The key lesson that I have learnt from her is that things move so quickly and you need to take opportunities when they come along that give you exposure to something new, even if they don’t seem like a natural career path at the time.
“For me, being a leader is all about inclusion and being passionate about the people you work with because you need to inspire and motivate them. But there is also nothing more rewarding than watching people progress their careers.”
Beale, who initially harbored ambitions of being an architect, admits that she “fell into reinsurance,” starting as a trainee international treaty reinsurance underwriter at Prudential Assurance Company in London in 1982. But once she had a taste there was no turning back.
“At the time, I didn’t even know that reinsurance existed, but once I discovered it I absolutely loved it,” she said.
“I fell in love with the global nature of the risks that came to London; one day you could be looking at a piece of business from Chile, the next from Australia.”
But, back then, working in a male-dominated industry where she was the only woman among 35 men, Beale struggled to fit in. So she quit and went travelling for 10 months.
It was during her time as a receptionist at the BBC in Sydney, Australia that Beale worked under her first female boss, a formidable woman, she said.
Inspired by her boss’s strong work ethic, Beale decided to return to the insurance business.
She soon landed a job with GE Insurance Solutions in Kansas City, where she held various underwriting management roles, before being appointed president of GE Frankona and head of continental Europe, Middle East and Africa for GE Insurance Solutions in Germany.
After 14 years at GE, Beale moved to Switzerland with Converium as group CEO in 2006.
Two years later, she joined Zurich Insurance Group as a member of the group management board in Zurich before being appointed global chief underwriting officer, prior to her appointment as group CEO at Canopius in 2012.
The breadth and depth of her experience makes Beale a natural fit for the demands of the Lloyd’s top job.
There’s no doubt she’ll be drawing upon every ounce of that expertise and experience to keep Lloyd’s at the cutting edge of this harrowing new world we live in.