Infrastructure

Seven Questions for Three-Time Power Broker Adrian Pellen

Various plans call for as much as $1 trillion in domestic infrastructure spending in coming years. While this presents massive business opportunities, risk, as we know, comes with it.
By: | May 16, 2017 • 6 min read

Adrian Pellen joined Marsh’s U.S. Construction Practice as U.S. Infrastructure Leader in November 2016. In this role, he is responsible for delivering risk advisory and strategic services to developers and contractors pursuing new infrastructure projects across North America. Adrian brings more than eight years of construction and infrastructure experience to the role, having worked on more than 30 public private partnership projects in Canada and the U.S. He was named a Risk & Insurance Power Broker® in 2013. 2014 and 2016. R&I sought Mr. Pellen’s take on the need for infrastructure improvements in the U.S., and the risks and opportunities involved.

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R&I: Should these plans come to pass, we can expect large amounts of foreign capital to flow into this country. What are some key risks to be aware of with that much capital coming in to fund domestic infrastructure projects?

AP: The single biggest risk in the U.S. infrastructure market is political uncertainty. Although both federal-level Democrats and Republicans have $1 trillion plans, infrastructure procurement is largely executed at the state and municipality level. There are a myriad of factors affecting infrastructure procurement including a state’s policy towards alternative delivery methods, enabling legislation, community opposition and environmental permitting etc. … These factors can contribute to significant delays, high pursuit expenses, and lost opportunity cost.

For domestic infrastructure firms, the risks may be even larger. Foreign capital inflows will be accompanied by disruptive technologies and new construction methodologies that could impact the competitiveness of local players. I also anticipate that the increased capital inflows — seeking consistent returns that infrastructure provides — will outpace the supply consistency for new projects and as such it will put downward pressure on margin, forcing infrastructure firms to take the same or greater levels of risk for lower returns.

R&I: The construction industry is already facing a labor shortage. How badly might this shortage intensify if these projects are greenlighted? What are some of the most worrisome impacts of an intensifying labor shortage?

AP: In the near to medium term, the shortage of qualified labor will make for challenging headwinds for construction companies. According to the AGC (Associated General Contractors of America), construction companies are  creating jobs at a faster rate than the general economy but they aren’t able to fill them quickly enough. This issue will only be further exacerbated by an increase in infrastructure spending. In the current protectionist environment, I do not anticipate a large inflow of foreign workers to reduce this burden either. These industry dynamics could result in project delays, reduction in competition, or worse, damage or liability resulting from construction defects or other errors resulting from the use of unqualified or over-burdened labor.

I am hopeful that it’s a matter of supply and demand in the long-run. The current hunt for talent will continue to drive greater emphasis on human capital management whether through training, career mapping, compensation or other innovative methods to attract and retain talent. Hopefully these efforts will enhance the pool for qualified talent.

R&I: What new products and risk transfer services do you see insurance carriers developing to help their insureds respond to the challenges of this level of increased construction activity?

AP: The insurance industry will need to broaden its risk-bearing appetite by expanding products to cover business risks that large infrastructure firms are absorbing, rather than focusing principally on providing hazard triggered — property damage and liability — insurance products. The insurers are responding with the emergence of non-physical damage triggered weather insurance and other parametric risk management products that continue to become viable means of transferring business risk associated with infrastructure projects. We’re also seeing the deployment of new products to cover the assessment and delay costs arising out of archaeological and paleontological discoveries.

R&I: Let’s talk about the different project delivery methods; design-build, integrated delivery, etc. What risks do these new delivery methods create for contractors? What products should they be thinking about now that they might not have had a need for previously?

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AP: With the increased utilization of private capital to fund infrastructure development through alternative construction delivery methods like public-private partnerships (P3s), rating agencies, like S&P and Moody’s, play an increasingly influential role for contractors. While procuring performance and payment bonds are nothing new for contractors under traditional infrastructure procurement method, the P3 delivery model often requires rating agencies to evaluate contractor default scenarios and performance security as a component of the debt rating process. This paradigm, coupled with constraints on qualified labor, generates an even greater emphasis on the use of surety and other performance security instruments to satisfy the needs of project owners and lenders. In this case, the continued evolution of increasing the liquidity of these instruments will be paramount in order to service debt payments and other financial obligations.

The insurance industry will need to broaden its risk-bearing appetite by expanding products to cover business risks that large infrastructure firms are absorbing rather than focusing principally on providing hazard triggered — property damage and liability — insurance products.

R&I: What’s best for the country as a whole, an infrastructure plan that leverages a solid percentage of private investment, or one that is predominantly government funded?

AP: There isn’t a one-size-fits-all approach. In the current environment, I anticipate that a significant percentage of the country’s infrastructure will be publically financed. It’s clear for countries facing significant infrastructure deficits like the United States that private investment has to play a major role in infrastructure revitalization and development.

There are clear benefits and efficiencies to be had from private sector financing, design, and construction through life-cycle management of infrastructure assets. The private sector brings ingenuity in delivering projects on time and on budget and for managing the most complex risks.

With that said, not all projects fit the profile required for private financing, such as smaller sized projects or those that require some form of user fees to support the underlying economics of a project. In addition, although private investors have access to tax exempt financing through Private Activity Bonds (PABs) and TIFIA or WIFIA loans, the public sector has a much greater capacity to access tax-exempt debt to be applied across a broader portfolio of projects.

R&I: What risks does the Internet of Things present to builders of large infrastructure projects? What hazards in this area must they guard against?

AP: As society continues to make use of new technologies that increase the connectedness in which we build, operate, and maintain infrastructure, it is crucial to understand the potential risks that come along with the Internet of Things. One risk in particular is that cyber criminals are focused on securing or sabotaging confidential data. Unfortunately, we also must guard our critical infrastructure including bridges, public transit systems, dams, and other assets from cyberattacks. The Internet of Things provides greater ways for cyber criminals to hack our infrastructure to cause physical damage to the assets themselves along with bodily injury and property damage to third parties.

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R&I: When we think about Public-Private-Partnerships — already in play in more than 30 states — what risk transfer mechanisms have you seen that work best? That you have the most faith in?

Robust contractual risk transfer remains the most important factor in P3s. What’s critical is that there is a fair and equitable risk allocation between project owners, developers financing infrastructure, contractors building infrastructure, and engineering firms designing projects.

There are no hard and fast rules to risk allocation; however, over time, there tends to be acceptance of what risks are commercially bearable to the private sector, others which are retained by the project owner, and those so severe they allow for dissolution of the contract. Adhering to P3 risk allocation guidelines put out by agencies like the Federal Highway Administration encourage commercial standardization of risk allocation, which promotes competiveness and reduces frictional costs. Insurance brokers and other risk advisors promote this process by working in tandem with P3 stakeholders to develop risk registers or matrices that map out risks allocated amongst contract parties and the various risk transfer mechanisms available to mitigate those risks.

More from Risk & Insurance

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The Profession

For This Pharmaceutical Risk Director, Managing Risk Means Being Part of the Mission to Save Lives

Meet Eric Dobkin, director, insurance and risk management, for Merck & Co. Inc.
By: | September 28, 2018 • 5 min read

R&I: What was your first job?
My first job out of undergrad was as an actuarial trainee at Chubb.I was a math major in school, and I think the options for a math major coming out are either a teacher or an actuary, right? Anyway, I was really happy when the opportunity at Chubb presented itself. Fantastic company. I learned a lot there.

R&I: How did you come to work in risk management?
After I went back to get my MBA, I decided I wanted to work in corporate finance. When I was interviewing, one of the opportunities was with Merck. I really liked their mission, and things worked out. Given my background, they thought a good starting job would be in Merck’s risk management group. I started there, rotated through other areas within Merck finance but ultimately came back to the Insurance & Risk Management group. I guess I’m just one of those people who enjoy this type of work.

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R&I: What is risk management doing right?
I think the community is doing a good job of promoting education, sharing ideas and advancing knowledge. Opportunities like this help make us all better business partners. We can take these ideas and translate them into actionable solutions to help our companies.

R&I: What could the risk management community be doing a better job of?
I think we have made good advancements in articulating the value proposition of investing in risk management, but much more can be done. Sometimes there is such a focus on delivering immediate value, such as cost savings, that risk management does not get appropriate attention (until something happens). We need to develop better tools that can reinforce that risk management is value-creating and good for operational efficiency, customers and shareholders.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?
I’d actually say there hasn’t been as much change as I would have hoped. I think the industry speaks about innovation more often than it does it. To be fair, at Merck we do have key partners that are innovators, but some in the industry are less enthusiastic to consider new approaches. I think there is a real need to find new and relevant solutions for large, complex risks.

R&I: What emerging commercial risk most concerns you?
Cyber risk. While it’s not emerging anymore, it’s evolving, dynamic and deserves the attention it gets. Merck was an early adopter of risk transfer solutions for cyber risk, and we continue to see insurance as an important component of the overall cyber risk management framework. From my perspective, this risk, more than any other, demands continuous forward-thinking to ensure we evolve solutions.

R&I: What’s the biggest challenge you’ve faced in your career?
Sticking with the cyber theme, I’d say navigating through a cyber incident is right up there. In June 2017, Merck experienced a network cyber attack that led to a disruption of its worldwide operations, including manufacturing, research and sales. It was a very challenging environment. And managing the insurance claim that resulted has been extremely complex. But at the same time, I have learned a tremendous amount in terms of how to think about the risk, enterprise resiliency and how to manage through a cyber incident.

R&I: What advice might you give to students or other aspiring risk managers?
Have strong intellectual curiosity. Always be willing to listen and learn. Ask “why?” We deal with a lot of ambiguity in our business, and the more you seek to understand, the better you will be able to apply those learnings toward developing solutions that meet the evolving risk landscape and needs of the business.

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R&I: What role does technology play in your company’s approach to risk management?
We’re continuing to look for ways to apply technology. For example, being able to extract and leverage data that resides in our systems to evaluate risk, drive efficiencies and make things like property-value reporting easier. We’re also looking to utilize data visualization tools to help gain insights into our risks.

R&I: What are your goals for the next five to 10 years of your career?
I think, at this time, I would like to continue to learn and grow in the type of work I do and broaden my scope of responsibilities. There are many opportunities to deliver value. I want to continue to focus on becoming a stronger business partner and help enable growth.

R&I: What is your favorite book or movie?
I’d say right now Star Wars is top on my list. It has been magical re-watching and re-living the series I watched as a kid through the eyes of my children.

R&I: What is the riskiest activity you ever engaged in? When I was about 15, I went to a New York Rangers versus Philadelphia Flyers game at the Philadelphia Spectrum. I wore my Rangers jersey. I would not do that again.

Eric Dobkin, director, insurance & risk management, Merck & Co. Inc

R&I: What is it about this work you find most fulfilling or rewarding?
I am passionate about Merck’s mission of saving and improving lives. “Inventing for Life” is Merck’s tagline. It’s funny, but most people don’t associate “inventing” with medicine. But Merck has been inventing medicines and vaccines for many of the world’s most challenging diseases for a long time. It’s amazing to think the products we make can help people fight terrible diseases like cancer. Whatever little bit I can do to help advance that mission is very fulfilling and rewarding.

R&I: What do your friends and family think you do?
Ha! My kids think I make medicine. I guess they think that because I work for Merck. I suppose if even in a small way I can contribute to Merck’s mission of saving and improving lives, I am good with that. &




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]