It is now twenty years since the Heathrow Tunnel Collapse triggered a dramatic change in the relationship between the insurance market and the construction industry specific to tunnelling construction risks. This loss still represents a signi¬ficant reference point on the insurance landscape. At the time there was an immediate threat of future tunnelling work being uninsurable, which instigated significant collaboration between construction and insurance industry and a largescale review of both risk management approach to tunnelling work, and to insurance policy coverage available.
Globalisation
Twenty years on and both the insurance market and tunnelling construction market look very different.
Dramatic consolidation has arisen in both markets and globalisation of business has meant a sharing of technological advancement, best practice, and expertise across the world. International contracting firms now compete for project work on an ever more global platform and often bring with them a consolidation of expertise gathered from wherever major civil engineering projects are in highest demand. With this has come a significant level of best practice sharing. It also presents new challenges: capability stretching and technological breakthroughs in more challenging ground conditions and environments; risks of supply limitations and cost impacts – including finite skilled and professional labour force resource seen as a key risk of future project management; all competitively stretched and mobilised across geographically diverse regions wherever investment liquidity or sovereign capital is supporting demands for infrastructure upgrade.
Insurance markets are similarly globalising. Historic strong insurance centres remain competitive and highly capitalised, but are increasingly challenged from localised insurance hubs. Behind the lines much of this globalisation remains interlinked, and influences greatly the basis of insurance cover most easily available.
Insurers own views on best practice are similarly shared and globalised accordingly, but it also allows comparison where such practices have been slower to be adopted.
High levels of capacity invariably impacted price, and insurance premiums have been falling consistently for a number of years now. Accordingly it is perhaps appropriate to reiterate the fact that regardless of high levels of insurer capacity, and the resulting premium savings being enjoyed by the Construction industry generally, the fundamental expectations of insurers have not changed and best practice is still a key focus of any complex insurance programme.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataHow insurers assess the relative merits of a project
Despite these current high levels of insurer competition, underlying underwriting views remain consistent in what represents tunnelling best practice. Insurers continue to be most amenable to the broadest forms of insurance coverage available for those projects which represent the demonstrable adoption of best practice. And it may surprise some to read that better cover itself does not have a direct impact on insurance cost, it is however not offered to all and the relative merits of a particular construction project need to be represented to achieve these best cover results.
In representing the relative merits of a particular construction project to insurers, there are few more powerful messages to insurers than being able to represent a high calibre team of tunnelling professionals, working collectively across commercial boundaries to deliver a complex and unique tunnelling project. The capability and interlinking of the project team becomes a central focus in the risk assessment made by insurers. From the list of key areas of analysis insurers will focus upon, the interaction and experience of the professionals can arguably sit within almost all.
Capabilities and knowledge of key parties
Both corporate and individual CV’s are an important factor in insurers determination of the desirability of insuring a major tunnelling project. The collective knowledge of these people and organisations is paramount to demonstrating a breadth of capability to manage the many complications and challenges many of these vast projects represent.
Paul Hampshire of Liberty International Underwriters says, "We look to understand who is delivering a project, their expertise and experience in delivering projects of similar technical complexity in similar working conditions, even down to looking at the resumes of people in key positions."
It is not unusual for insurers to therefore review individual CV’s in the senior roles within the project teams proposed and by extension review in detail the structures of management and communication between the collective construction, design and employer interfaces within the overall project group.
Similarly, some employers have long and successful lists of projects they have procured, managed and delivered with world class contracting counterparties. This can create significant opportunity to consider options around insurance solutions as such experience can lead to appetite to handle a greater level of risk before insurance steps into a major event.
Design and Technical challenge
Technical innovation is an important part of any industry and the tunnelling world continues to develop viable solutions through ground conditions and for example using larger and more complicated TBM technology. Insurers can support much of this advancement and embrace such developments where there is confidence in the robust testing of these innovative solutions. Where such solutions are being put forward to the insurance market a high level of engagement is advised to be able to demonstrate the suitability of what has been proposed.
To highlight the importance of design interfaces, Munich Re estimate that 41 per cent of all tunnelling losses by value come from design error. From a project perspective this is therefore a key area of necessary focus. It is also important to therefore both have at hand detailed explanation of what is being proposed and how risk is being managed to mitigate likelihood of loss from this source. it is also important to understand the interface between physical damage and professional indemnity insurances as it is quite easy to have an element of such risk excluded, or be underinsured.
Living with JCOP
Tunnelling Joint Code of Practice is still a universally useful tool and one which insurers use as a benchmark to define best practices in tunnel construction. In reality, a number of broader risk management standards now incorporate much of this code of practice within their doctrine, but being able to demonstrate this application is still crucial. Fundamentally insurers wish to see evidence not only of its reference in procurement literature and construction planning, but also its integration into risk identification and analysis, application through recording planned mitigation and eradication of risk via risk registers, real time monitoring and planning around inevitable variations to ground conditions, water ingress, pressure variations, encountering of obstacles, on tunnelling drives.
Planning & investigation
It is acknowledged that geotechnical investigation and study can be a very expensive upfront cost in the planning a new tunnelling project. It is also a commercially sensitive subject between employer and contractor where much of the ground condition risk is potentially being transferred. The management of this risk, the manner of identification and testing of assumed baseline positions, monitoring through construction, and ultimately the commercial retention or transfer of cost variation, all key concerns to insurers. Paul Hampshire of Liberty International Underwriters says, "It is in the interests of all parties to undertake an early investment in evaluating and defining the project geotechnical conditions, and thereby establish some form of agreed common baseline from which to allocate and agree ground risk."
The greatest comfort is afforded to insurers where full and complete disclosure of ground condition investigations by the employer have been shared with contracting parties.
The collective investigations over potentially many years by an employer adds invaluable insight into underlying risk issues and design and construction solutions best equipped to deal with specific requirements arising.
All Party Collaborations
The manner and motivations behind the engagement of all parties is important. Construction expertise, their legal, engineering, and technical professional consultants and risk and insurance practitioners alike. And it is often the manner with which these human as well technical and commercial interfaces are managed which influences the insurance markets perception of a good project risk or otherwise.
Risk identification, and planning around mitigation, ultimately requires documented risk ownership and procedural clarity.
These allocations of risk are also key when insurers are considering the merits of a project. Hartmut Reiner at Munich Re summarises three key areas of interest when considering a tunnelling contract:
- A clear fair contract with Contingencies
- Owner willingness to retain major geological risks (retained anyway in the form of his reputation)
- A risk register has to be kept and made available to all project parties"
In the context of ground condition variations as an example, insurers are keen to see both how cost impacts of such variations have been allocated between parties, but also how efficiently this is lived with. For example how effective is communication of a recognised variation of ground conditions from TBM drive face through to control room management to instigate real time decision making.
Time/cost variables
If insurers are presented with a programme chart that has little or no room for flex, or with a cost margin that is tight and where ground conditions variation risk for example rests heavily with the Contractor, insurers may well conclude a higher level of risk inherent simply because of these factors. Patrick Bravery of Talbot Underwriting says, "The challenge is to weigh the technical requirements the ground imposes upon you against the commercial realities of trying to deliver the project on time and on budget – that’s where tension can arise."
How to select the right insurer
In an environment where insurers consider the tunnelling experience and capability of project teams to be an important indicator to future success, the same consideration to the tunnelling experience, connectivity and capability of the insurance professionals you are engaging is similarly justified. Specific pockets of the insurance market has a wealth of experience of tunnelling projects globally, often learned through the sharp end of complex examples of project recovery post large scale loss.
When engaging insurers with these experiences, significant benefit can be seen in the sharing of such knowledge and background (particularly in the post placement interactions with the project teams that will be on offer). Building relationships with fellow specialists from an insurance background can therefore prove invaluable through a project construction, a factor that becomes even more paramount should a loss arise and speedy claims resolution be achieved.
In the simplest of terms large scale tunnelling projects cannot be insured from a single insurance company. And on the more complex and high profile projects there are only a handful of insurance companies who would be respected contact points to broker the right insurance package. Even where local legal, cultural or market relationship expectations demand local insurance participation the reality is these same handful of insurers will be dictating coverage terms and conditions behind the scenes. It therefore makes sense to be identifying these decision-making insurance personalities first, and to tactically approach these parties at the place where decisions are ultimately made. From this tactical point in an insurance placement your broker is then best placed to seek insurance terms and leverage the result based on market appetite, coverage options and form, and most importantly post placement servicing and claims management. It is not unusual to therefore be broking a project in a number of insurance markets from London to Singapore, Zurich and Munich, Tokyo, New York and beyond.
Both broker and client leverage can play an important role here and the selection process should be very much a globally tactical approach. Post an insurance placement, these parties will continue to have contact with a project team and offer additional insight into the application of best practices and their own wealth of experience on projects that have gone well, but also those that have not. The experience of these insurance experts should also be seen as something to take advantage of. From an insurance perspective you are aligning yourselves with fellow professionals to best deliver highly complex works.
The power of people
Insurers give specific consideration to who is involved in a project and the expertise they bring with them, the interplay of procurement strategy and risk allocation, application of risk management principles and procedures, and interaction of holistic project teams, when assessing project risk.
At a time when insurance premiums are at an all-time low, but with coverage still a matter of negotiation; and input of your broker and insurers a potential added value post an insurance placement; it is therefore quite justifiable for the tunnelling industry to be making the same assessment of the credentials of the insurance professionals they are engaging.
