Collapsing bridges, leaky pipes, crumbling roads – infrastructure in the western industrialised countries is not getting any younger. There are various reasons for this. Roads and bridges are being worn down by increasing, and heavier, vehicular traffic. Energy and water use is increasing, but water and sewage systems in major cities are relatively old. The same applies to public transport facilities, which often no longer meet today’s standards. The problem is compounded by the growing number of natural disasters which place new strains on our infrastructure each day.
Such problems can theoretically be solved, except that governments lack the necessary funds. McKinsey has estimated that the worldwide replacement of streets, railways, ports, and power and water supplies will cost US$57 trillion by the year 2030. Standard & Poor’s rating agency has accordingly calculated that at least US$500mn in infrastructure investment per year has to be coaxed from private investors, on top of the government expenditures.
Impact on the insurance industry
The insurance industry is bearing the burden of the ageing infrastructure primarily in the property insurance segment. Fire, water and storm damage is occurring more frequently and with greater consequences; buildings are collapsing and business operations are being interrupted. And liability scenarios can ensue as well. When a third party suffers damage due to ageing buildings, pipes or transmission lines, in many cases it becomes clear that wrongful acts by those responsible were also a contributing factor in the loss, in addition to simple wear-and-tear. Such wrongful acts may include faulty construction, defects in the products used, insufficient maintenance, poor instructions to staff, or a failure to comply with safety rules. Errors during rescue and salvage operations can also give rise to liability on the part of those involved.
Infrastructure project risks
The spectrum of risks in connection with infrastructure projects is broad. They can include political risks, construction, operations and maintenance risks, legal, contractual and financial risks, and force majeure. How is it possible to cover them all? Individual risks should be borne by the party best placed to manage and mitigate them. To do this, all participants must first agree on how to allocate the various risks. However, it is important to remember that risks should only be transferred to private investors where it is possible for them to control the risks or insure against them.
A challenge for our industry
The challenge for insurers on building projects is mainly to properly understand and assess the risks in all their complexity. Indeed, from an engineering perspective, every structure is unique. After all, the many general features, such as the condition, the materials and the technical requirements, can all differ widely from one structure to the next. This repeatedly presents challenges for everyone involved in a project, including the insurers.