Gotthard base tunnel – Six questions about risk management
On 1 June 2016, almost 17 years after construction work was first commenced, the Gotthard base tunnel will be officially opened with an inauguration ceremony. Heiko Wannick, a tunnel construction expert at Munich Re, talks about the success factors associated with tunnel projects of this scale.
What were the greatest challenges during the construction work?
The project was prototypical in character, with many uncertainties involved. Never before has a tunnel project of such scale been carried out in high-altitude mountains, with extreme challenges for the construction logistics. Due to its length of 57 kilometres, the tunnel was divided up into several separate construction lots. Millions of cubic metres of excavated material had to be removed from different points. In terms of structural engineering, the engineers were faced with the task of coping with overlying bedrock of up to 2,300 metres in height, allowing only a limited number of sample boreholes to be drilled for pre-construction ground investigation. However, it can be said that despite occasional problems, not only during excavation with the tunnel boring machines but also during drill and blast operations, the project, on the whole, was conducted very successfully.
To what must project owners, contractors and insurance companies pay particular attention in tunneling projects?
In addition to this, a proven and fair contract concept between client and contractors is also essential to avoid legal conflicts in the case of variation orders. Some construction companies purposely seek out weak points in the contract wording while preparing their bid. Having been granted the contract on the basis of a very competitive tender price, they try at a later stage to make up their costs by means of countless contractual claims. This strategy is being applied increasingly in recent years, with the result that more and more construction projects are ending up in court.
Some clients try to shift as many risks as possible to the construction companies. This becomes particularly problematic whenever a fixed-price contract is awarded and the ground risk is allocated to the contractor. If unforeseen ground conditions are encountered, as often is the case in tunnel construction, this frequently results in additional costs and delays.
For insurers, it is crucial to ensure that policies are clearly worded and leave no room for ambiguities. The clearer the policy wording, the greater the probability of a correct and fair settlement of claims. Vague or contradictory wordings inevitably lead to uncertainties in interpretations, which, in extreme cases, require a court ruling.
Of course, with such projects, we also make sure the Principles for Sustainable Insurance and associated ecological, social and governance (ESG) factors are adhered to.
How can it be ensured that risk management does not suffer due to tight deadline and budget pressures?
To what extent does the "Code of Practice for Risk Management of Tunnel Works", developed by the International Tunnelling Insurance Group, an alliance of insurance companies and construction industry representatives, help?
A premium erosion has taken place in tunnel project insurance. To what should an insurer pay particular attention in such large-scale projects?
In addition to adequate pricing and appropriate deductibles, insurers also have to consider the jurisdiction in the respective markets. The higher the legal uncertainty, the greater the risk for the insurer in the case of a claim.
What do you think about the future development of premiums?
In view of the low premiums, it only takes a few smaller claims or some large claims in the portfolio to run up losses. These are then identified late – in some cases too late for taking suitable countermeasures. At Munich Re, we practice active cycle management, that is to say we are prepared to continue to act as the leading insurer at our terms and conditions, but otherwise –given the current market conditions – we will only participate selectively and with reduced shares, if at all. What is decisive for us, in addition to the quality of the risk and the client's risk management, is the extent to which the above-mentioned legal uncertainty plays a role in a market, and how well we can assess the behaviour of the stakeholders. Ultimately, there is no way around a further reduction in our capacity. After all, we know from past market cycles what can happen, in particular in the case of long-term business such as complex large-scale building projects, if the required premium level is undercut on a sustained basis and losses are run up later.