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P3: 3 Benefits + 3 Risks

Public-private partnerships carry both benefits and risks.
By: | January 9, 2017 • 5 min read

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The American Society of Civil Engineers issues a report every year tracking the status of the nation’s infrastructure across 15 categories, including airports, pipelines, roads, bridges and solid waste facilities. In 2013, the United States earned a D+, a mark that has been steadily declining since it received a C in the ASCE’s first report card released in 1988.

To combat its ailing infrastructure, federal and state governments will increasingly rely on partnerships with private investors to help get these big-ticket projects off the ground.

The U.S. Department of Transportation defines public-private partnerships, or P3s, as “contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects.”

In its whitepaper “The United States: The World’s Largest Emerging P3 Market,” global insurer AIG outlines the promise offered by these partnerships in fixing the nation’s crumbling infrastructure, but notes that they come with their own set of challenges. Below are three major benefits and three key risks to the P3 model.

As we enter into new political landscape in the U.S. with President-elect Donald Trump, the role of P3 may become increasingly important.

The Benefits

1. Filling Investment Gaps

In a time when public dollars are limited but infrastructure needs are infinite, P3s help to fill in the investment gap to make desperately needed upgrades to American infrastructure.

According to the ASCE, an estimated $1.723 trillion is needed for surface transportation, $100 billion for rail and $134 billion for aviation infrastructure. The expense is far outpacing the level of investment from the public sector.

According to a McGraw Hill Construction Dodge report, public works construction dropped 14 percent from 2011 to 2012, and was projected to drop another 6 percent from 2012 to 2013. If the shortfall in public investment isn’t made up in some way, continually aging infrastructure may lead to disasters that cost lives and compromise economic activity in the towns they service — and state governments will be liable for the damages.

Especially in challenging economic climates, P3s can ease the burden on government budgets and help critical projects come to life.

2. Increasing Efficiency

On top of filling a pressing public need, P3 projects also save time and money. Compared to public projects, they have a better track record when it comes to staying on budget and finishing on time.

According to a study conducted by Infrastructure Partnerships Australia from 2000-2007, 18 percent of traditionally procured projects ran past deadline, while only 10 percent of P3 projects were past due. When traditional projects ran late, they were delivered 26 percent later than originally expected. Overdue P3 projects, on the other hand, were completed only 13 percent later.

Forty-five percent of traditionally procured projects incurred additional expenses, compared to just 14 percent of P3 projects. When traditional projects ran over budget, they incurred 35 percent extra expenses, while over-budget P3s went over by only 12 percent.

3. Spurring Economic Growth

P3s also help to spur economic development. They offer a lucrative business opportunity for investors in a time when returns are typically low. And infrastructure projects – particularly transportation networks – enable economic growth in the communities they connect.

Take for example E-470, the 47-mile highway constructed outside Denver, Colo., to service traffic to and from the soon-to-be-opened Denver International Airport. Eight counties and cities pooled their funds in 1989 to build the road, with no federal funding whatsoever. The highway was completed four years ahead of the airport and was the first large tollway to use electronic tolling.

The road paved the way for economic development in a previously sparsely-populated area. The population along E-470’s corridor was expected to double in the years following the project’s completion. In fact, the population of Denver — and the whole state of Colorado —has risen so much that the toll road is undergoing expansion.

The ASCE’s 2013 Report Card stated, “We know that investing in infrastructure is essential to support healthy, vibrant communities. Infrastructure is also critical for long-term economic growth, increasing GDP, employment, household income and exports. The reverse is also true – without prioritizing our nation’s infrastructure needs, deteriorating conditions can become a drag on the economy.”

The Risks

1. Uneven Liability

The chief complaint of private entities that want to further P3s as viable delivery mechanisms is that the government allots an unrealistic portion of the risk to private partners. To make matters worse, most of that risk is not transferrable though traditional insurance methods.

Nailing down contractual language that is acceptable to both parties and spreads liability fairly is the primary obstacle in P3 deals.

According to AIG’s whitepaper, Administrator Victor Mendez, head of the Federal Highway Administration, has argued for more precise valuation of risk in P3 projects, so that public and private parties can place a dollar value on the amount of risk they are willing to assume and strike a fairer balance.

Insurers, for their part, will have to continually analyze the changing construction landscape and develop new products to meet the needs of the evolving P3 model. AIG, for example, recently developed a product to address contractual liability issues in P3 deals.

2. Long-Term Commitment

P3s require a long term commitment on the part of the private entity — as much as 20 to 30 years. Private investors have to be prepared not just for the construction, but also the ongoing management of the project, whether that means ensuring regular maintenance or operating tolling systems. On top of that, covering and projecting insurance costs for the operational and maintenance risk over that course of time provides another layer of complexity. Properly transitioning insurance coverage between course of construction and operational and maintenance can be challenging for some carriers.

Because it’s difficult to predict how the economic environment will change over the next several decades, private partners take on a big risk in assuming management responsibilities for that length of time. Proper due diligence, conducted by both parties, is necessary to ensure the private investor can go the distance.

3. Project Ownership

The general public has also shown concern that major pieces of infrastructure will be owned by a private company rather than the public, and therefore subject to that company’s financial viability over the long term, or to the needs of their bottom line. In other words, citizens don’t want their vital transportation networks and other facilities to be commoditized.

In reality, private investors merely help to finance and manage the project, while it remains the property of the public. Unless that message is communicated clearly, though, aversion to private sector involvement in public works projects could stall some P3 efforts.

In spite of the headwinds and slowly emerging P3 sector in the U.S., AIG stands ready to partner with stakeholder to manage the inherent risks, deliver solutions and value to our clients.

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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.




AIG is a leading international insurance organization serving customers in more than 100 countries.

More from Risk & Insurance

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Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.