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Public-Private Partnerships: Paving the Way for Infrastructure Revitalization

Many factors for infrastructure projects that are seemingly coming together could signal the dawn of a P3 Golden Age.
By: | March 1, 2017 • 5 min read

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.

New Revenue Structures

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.”

Evolving Risk Management

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.

Political Considerations

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.

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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.




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Insurers Take to the Skies

This year’s hurricane season sees the use of drones and other aerial intelligence gathering systems as insurers seek to estimate claims costs.
By: | November 1, 2017 • 6 min read

For Southern communities, current recovery efforts in the wake of Hurricane Harvey will recall the painful devastation of 2005, when Katrina and Wilma struck. But those who look skyward will notice one conspicuous difference this time around: drones.

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Much has changed since Katrina and Wilma, both economically and technologically. The insurance industry evolved as well. Drones and other visual intelligence systems (VIS) are set to play an increasing role in loss assessment, claims handling and underwriting.

Farmers Insurance, which announced in August it launched a fleet of drones to enhance weather-related property damage claim assessment, confirmed it deployed its fleet in the aftermath of Harvey.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now,” said George Mathew, CEO of Kespry, Farmers’ drone and aerial intelligence platform provider partner.

“The current wind and hail damage season that we are entering is when many of the insurance carriers are switching from proof of concept work to full production rollout.”

 According to Mathew, Farmers’ fleet focused on wind damage in and around Corpus Christi, Texas, at the time of this writing. “Additional work is already underway in the greater Houston area and will expand in the coming weeks and months,” he added.

No doubt other carriers have fleets in the air. AIG, for example, occupied the forefront of VIS since winning its drone operation license in 2015. It deployed drones to inspections sites in the U.S. and abroad, including stadiums, hotels, office buildings, private homes, construction sites and energy plants.

Claims Response

At present, insurers are primarily using VIS for CAT loss assessment. After a catastrophe, access is often prohibited or impossible. Drones allow access for assessing damage over potentially vast areas in a more cost-effective and time-sensitive manner than sending human inspectors with clipboards and cameras.

“Drones improve risk analysis by providing a more efficient alternative to capturing aerial photos from a sky-view. They allow insurers to rapidly assess the scope of damages and provide access that may not otherwise be available,” explained Chris Luck, national practice leader of Advocacy at JLT Specialty USA.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now.” — George Mathew, CEO, Kespry

“In our experience, competitive advantage is gained mostly by claims departments and third-party administrators. Having the capability to provide exact measurements and details from photos taken by drones allows insurers to expedite the claim processing time,” he added.

Indeed, as tech becomes more disruptive, insurers will increasingly seek to take advantage of VIS technologies to help them provide faster, more accurate and more efficient insurance solutions.

Duncan Ellis, U.S. property practice leader, Marsh

One way Farmers is differentiating its drone program is by employing its own FAA-licensed drone operators, who are also Farmers-trained claim representatives.

Keith Daly, E.V.P. and chief claims officer for Farmers Insurance, said when launching the program that this sets Farmers apart from most carriers, who typically engage third-party drone pilots to conduct evaluations.

“In the end, it’s all about the experience for the policyholder who has their claim adjudicated in the most expeditious manner possible,” said Mathew.

“The technology should simply work and just melt away into the background. That’s why we don’t just focus on building an industrial-grade drone, but a complete aerial intelligence platform for — in this case — claims management.”

Insurance Applications

Duncan Ellis, U.S. property practice leader at Marsh, believes that, while currently employed primarily to assess catastrophic damage, VIS will increasingly be employed to inspect standard property damage claims.

However, he admitted that at this stage they are better at identifying binary factors such as the area affected by a peril rather than complex assessments, since VIS cannot look inside structures nor assess their structural integrity.

“If a chemical plant suffers an explosion, it might be difficult to say whether the plant is fully or partially out of operation, for example, which would affect a business interruption claim dramatically.

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“But for simpler assessments, such as identifying how many houses or industrial units have been destroyed by a tornado, or how many rental cars in a lot have suffered hail damage from a storm, a VIS drone could do this easily, and the insurer can calculate its estimated losses from there,” he said.

In addition,VIS possess powerful applications for pre-loss risk assessment and underwriting. The high-end drones used by insurers can capture not just visual images, but mapping heat, moisture or 3D topography, among other variables.

This has clear applications in the assessment and completion of claims, but also in potentially mitigating risk before an event happens, and pricing insurance accordingly.

“VIS and drones will play an increasing underwriting support role as they can help underwriters get a better idea of the risk — a picture tells a thousand words and is so much better than a report,” said Ellis.

VIS images allow underwriters to see risks in real time, and to visually spot risk factors that could get overlooked using traditional checks or even mature visual technologies like satellites. For example, VIS could map thermal hotspots that could signal danger or poor maintenance at a chemical plant.

Chris Luck, national practice leader of Advocacy, JLT Specialty USA

“Risk and underwriting are very natural adjacencies, especially when high risk/high value policies are being underwritten,” said Mathew.

“We are in a transformational moment in insurance where claims processing, risk management and underwriting can be reimagined with entirely new sources of data. The drone just happens to be one of most compelling of those sources.”

Ellis added that drones also could be employed to monitor supplies in the marine, agriculture or oil sectors, for example, to ensure shipments, inventories and supply chains are running uninterrupted.

“However, we’re still mainly seeing insurers using VIS drones for loss assessment and estimates, and it’s not even clear how extensively they are using drones for that purpose at this point,” he noted.

“Insurers are experimenting with this technology, but given that some of the laws around drone use are still developing and restrictions are often placed on using drones [after] a CAT event, the extent to which VIS is being used is not made overly public.”

Drone inspections could raise liability risks of their own, particularly if undertaken in busy spaces in which they could cause human injury.

Privacy issues also are a potential stumbling block, so insurers are dipping their toes into the water carefully.

Risk Improvement

There is no doubt, however, that VIS use will increase among insurers.

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“Although our clients do not have tremendous experience utilizing drones, this technology is beneficial in many ways, from providing security monitoring of their perimeter to loss control inspections of areas that would otherwise require more costly inspections using heavy equipment or climbers,” said Luck.

In other words, drones could help insurance buyers spot weaknesses, mitigate risk and ultimately win more favorable coverage from their insurers.

“Some risks will see pricing and coverage improvements because the information and data provided by drones will put underwriters at ease and reduce uncertainty,” said Ellis.

The flip-side, he noted, is that there will be fewer places to hide for companies with poor risk management that may have been benefiting from underwriters not being able to access the full picture.

Either way, drones will increasingly help insurers differentiate good risks from bad. In time, they may also help insurance buyers differentiate between carriers, too. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]