Thursday, 11 October 2018

Managing the complexity of multinational construction insurance

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Managing the complexity of multinational construction insurance

Major construction projects are increasingly likely to be found in emerging economies on the African continent, with investment from China and India supporting the trend as governments woo investors to local economic development projects. 

These mega construction projects cost anything from US$100 million upwards, hence insurance and risk management are crucial components that are factored in right from the planning stages of a project as these costs will form a significant part of the entire construction budget,” explains Tirelo Tsheoga, Head of Distribution, Sub-Saharan Africa at Chubb South Africa.

Compiling a well-conceived insurance roadmap for a mega construction project is a complicated undertaking, requiring the input of multiple stakeholders within a complex and disruptive technological and legislative framework.

“The process normally involves the appointment of an Engineering, Procurement and Construction (EPC) contractor who is generally responsible for all the activities from design, procurement and construction, to commissioning and handover of the project to the project owner.  The spectrum of cover required is usually vast ranging from core lines such as property, general liability, marine, business interruption and directors’ and officers’ insurance; through to specialty lines such as business travel, group personal accident, cyber, environmental liability and terrorism protection,” explains Tirelo.  

In many African countries, such as Nigeria and Kenya, the insurance landscape is also becoming increasingly regulated.  “More often the local insurance market requires first option on the placement of insurance, before a portion of the insurance profile can be placed outside of the country borders.  In some instances, such as Kenya, the legislation is very specific, dictating that only 65% of the insurance premium may be exported, retaining 35% locally.  Managing the local legislative requirements along with project-specific risks and insurer appetites adds to the complexity of construction insurance,” says Tirelo. 

Structuring a multinational insurance programme requires an in-depth understanding of the transactional elements of cross-border insurance, particularly as this relates to local tax and insurance regulatory requirements. 

“There is a great deal of underwriting involved in the compilation of a complex multinational insurance schedule that accounts for the maximum probable loss that could be incurred,” says Tirelo.  “The underwriting decision will set the limits and the value of the policy from where brokers are then able to tender for the business.  At this stage, the broker will approach insurers to identify the price, the terms, conditions and exclusions under which cover would be granted and the limit that they are willing to insure the project for,” he explains. 

“A comprehensive risk management strategy also needs to be in place to support the insurance programme to keep exposures to a minimum.  This is normally achieved by putting pro-active processes in place to mitigate risks as far as possible to create an optimal work environment.  Increasingly, construction companies face risks from all sides, from site security, weather catastrophes, health and safety, skilled labour shortages, contractual risk, professional liability right through to cyber and terrorism risks.    

“The final selection of insurance offerings on the table need to reflect local insurance legislation, adhere to international policy as well as offer a tax-optimised solution.  “It is a task that requires a great deal of input, not to mention the time spent on finalising it.  There needs to be a thorough understanding of all potential risks, who bears or shares it, and mature risk management. Finding a solution that meets such a diversity of construction risks, especially across geographies, is an enormous task that needs early engagement of insurers.  Ultimately, it requires strong and early collaboration between client, broker and insurer to develop the optimum risk management and cover solution,” concludes Tirelo