In its recently published paper ‘Recommendations for Project Risk Management in Underground Construction’1, the German Committee for Tunnelling (DAUB) has explicitly named the insurer as an important stakeholder in underground projects. The role and responsibilities of the insurer are clearly described there. It is recommended that the client puts together the insurance package at an early stage, based on the project-specific risk analysis and taking into account the technical and contractual framework conditions.

In reality, however, the procurement of project insurance takes place at a rather late stage, usually prior to the tender stage or even afterwards. This significantly limits the insurer’s ability to get involved in the project risk management concept. This could have major implications on the amount of the insurance premiums and/or lead to limited insurance cover. The willingness to offer innovative insurance solutions for the project may equally be limited as a result.

This article describes the current practice of how project insurance policies have generally been procured to date. It highlights the potential benefits of involving insurers earlier than has been the practice previously. It also explains the requirements for such an earlier involvement. The article proposes a way forward with a pilot case to verify the expected results.

THE STATUS QUO

For most construction projects, a number of project insurances are taken out either by the owner or by the construction companies (see Figure 1). In addition to pure property damage cover, such as Contractors’ All Risks insurance (CAR) or Contractors’ Plant and Machinery insurance (CPM), these also include a whole range of liability coverages. Third Party Liability (TPL) and Professional Indemnity (PI) are of particular importance here, as the frequency and intensity of claims in these areas is particularly high.

The typical process is that the future policyholder usually commissions an insurance broker to procure project insurances.

The broker compiles the risk information available up to that point, creates a risk profile, selects suitable policy wordings and then, ideally, presents the project to the potential project insurers.

The insurers analyse the available information and prepare a binding quotation by an agreed date. If the technical capability is comparable, the bidding insurer who submits the most attractively priced offer is usually awarded the contract as the leading insurer (the Lead).

Based on the agreed conditions of the Lead, the broker then appoints the necessary number of co-insurers until the risk is 100% placed.

If the project insurances are arranged by the Owner for all parties involved in the project, this usually takes place after completion of the planning phase before the construction contracts are tendered.

In the case of ‘Build-only’ contracts, at least the main construction methods, the planned construction schedule and the Client’s budget are known at this point.

If it is a ‘Design & Build’ project, only a conceptual design is provided by the Client as a basis for the insurance offer. Essential construction parameters, such as the actual construction methods chosen, the construction schedule and the price structure, are defined by the bidding contractors and are not known at all or only partially known to potential insurers at the time of insurance procurement.

This form of contract is especially critical in underground projects where the contracted construction companies are expected to assume the full ground risk, although only a rough ground investigation programme was provided by the Client at the time of tendering. Under such conditions, many potential project insurers tend to act conservatively and include factors to account for this uncertainty, which in turn can impact the insurance premium, the level of deductibles and the scope of cover. Particularly risky forms of cover, such as the ‘Delay-in-Start-Up’ (DSU) insurance, which are often prerequisites for privately financed projects, are difficult or even impossible to obtain under these circumstances.

During the insured construction period, the possibilities for project insurers to get involved in the risk management process are limited. Risk monitoring is usually reduced to more or less regular site inspections.

During these inspections, the Lead insurer’s risk engineers obtain information about the construction progress, the current and future risk profile and the situation on the construction site. If recommendations for risk improvement are made at the end of the inspection, they are usually non-binding.

An assessment can also be provided on possible lack of compliance with any insurance policy conditions, for example with regards to flooding or fire-fighting clauses.

Ultimately, insurers are not directly involved in the risk management concept implemented in the project. Nevertheless, the insurance industry has made some valuable contributions to improving the risk quality of underground construction projects over the last two decades, e.g., with the introduction of the ‘Joint Code of Practice for Risk Management of Tunnel Works’.2

EARLIER INSURER INVOLVEMENT – REQUIREMENTS AND ADVANTAGES

The purpose of project insurance has been established for decades. In the event of sudden and unforeseen accidental events (see Figure 2), it essentially provides compensation for personal injury and financial loss to third parties as well as for property damage to the insured construction work. For this purpose, it was previously sufficient to take out a corresponding insurance package at the most favourable conditions possible at a comparatively late stage of project planning or shortly before the start of construction.

However, the question arises under which circumstances an earlier and more active involvement of the project insurer would make sense and what advantages this would have for the project participants.

The considerations outlined below primarily concern large-scale projects that are either implemented by an experienced public project owner or individual privately financed projects (PPP) where lenders have a strong influence on project planning and execution. Ideally, these types of projects should be implemented using the so-called Integrated Project Delivery concept (IPD).

Usually, cost, schedule and risk for a project are determined separately. But they are interdependent and influence each other (see Figure 3).

A probabilistic model that considers these factors, including their uncertainties, correlations and dependencies, in an integrated manner can depict and predict project outcomes far more realistically.3 It is therefore ideal for use in IPD-based projects, as it creates the incentive for project implementation in partnership, with the aim of a fair pain/gain distribution between all stakeholders.

The core principles of the IPD concept can be summarised as follows:

  • Early involvement of all key stakeholders to integrate expertise as early as possible (also referred to as Early Contractor Involvement (ECI))
  • Financial transparency through the application of the open-book concept, joint decision-making and development of project objectives.
  • Early identification and quantification of risks
  • Joint risk management and risk assumption, including remuneration dependent on project success (incentive contract)
  • Exchange of knowledge and information through technical tools
  • Equal position in the project team and unanimous decision of the core participants
  • Mutual, comprehensive exclusion of liability and avoidance of legal proceedings through internal conflict resolution mechanisms

The ideal methodology for the practical application of the IPD concept is the introduction of a Digital Twin (DT). This is a representation of a tangible or intangible object or process from the real to the digital world. DT has become a household word in large infrastructure projects as technological advances in modelling and simulation make it applicable.

Elements of a DT include, at the beginning, input and system integration of data on cost, schedule, risk and budget.

In the Project Risk Twin (PRT), the data are linked to appropriate software. Then, an integrated cost and schedule risk analysis, including uncertainties, is carried out by means of simulation. The analysis results are usually processed and presented in the form of individually tailored dashboards.4

Based on the core principles of the IPD concept, early participation of a suitable project insurer would make synergies possible and likely lead to beneficial results.

One of the few unique selling propositions of established, globally active project insurers is the immense wealth of experience resulting from their involvement in countless major international projects. This concerns both the experience with major losses and their causes, as well as the enormous expertise in loss prevention.

In the context of risk inspections carried out by insurers, the sharing of experiences from previous projects, so-called ‘Lessons Learned’, was repeatedly considered particularly valuable by the project engineers, based on the authors’ experience.

Especially with the contribution of these experiences from previous projects, suitable project insurers could make a valuable contribution to hazard analysis and risk assessment in the context of IPD.

Large international insurers and reinsurers also have additional expertise that the other project participants can only contribute to a limited extent or not at all. These include, in particular, highest standards in natural hazard analysis, fire protection expertise, experience in the area of environmental damage and the resulting reputational risk, cyber risk assessment and relevant experience in the ESG area.

Early and active involvement of the potential project insurer would thus have the great advantage of bringing additional valuable expertise to the IPD.

Furthermore, the involvement of the insurer in the risk management concept could lead to the acquisition of more attractive and risk-aligned insurance conditions for the project. These could include, for example, more favourable premium rates, advantageous deductibles or a broader scope of coverage.

Insurance types that are difficult to obtain, such as Professional Indemnity or DSU insurance, which is particularly important for privately financed projects, could thus be made available with less restrictions.

Even forms of cover that have not been offered so far, such as a policy that covers possible additional costs not related to material damage (Cost Overrun insurance), could be considered under the aforementioned circumstances.

Parametric natural hazard covers, such as earthquake or windstorm risk in highly exposed projects, could also become available if project insurers are involved in the risk management process and help clarify uncertainties and mitigate any major concerns.

THE WAY FORWARD

In order to confirm the potential added value of involving the project insurer at an early stage, it is necessary to implement it in practice within the framework of a pilot project.

Ideally, this would be a privately financed project with a pro-active project owner in which the concept of IPD is implemented.

In order to ensure a complete identification and quantification of the project risks and to adopt the IPD professionally, the involvement of a technical consultancy experienced in project risk management is indispensable.

Furthermore, a suitable project insurer must be identified and appointed. This insurer must be prepared to contribute its experience and expertise to the project in full and to exercise the role of lead insurer in all project phases in a responsible manner. They must also be prepared to reward positive findings from the joint risk assessment with advantageous insurance conditions.

In order to place the complete insurance package on the market at a later stage, it is advisable to involve a competent insurance broker.

This broker should also have well-founded competences in project risk management and bring these into the IPD process.

The feasibility of an early involvement of the project insurer within the framework of a pilot project should be able to be provided in a timely manner. If this new and more intensive role of the insurer in the project turns out to be beneficial for all parties involved, it could well become the standard for suitable future projects.

SUMMARY

Project insurances are usually only arranged shortly before the construction contracts are awarded. A potential project insurer therefore has significantly limited opportunities to familiarise itself with the risk profile of the project in detail and across all phases of the project.

This has a potentially unfavourable impact on the scope of the insurance cover and the premium charged, because insurers have to make provisions for the high levels of uncertainty.

In particular, projects where IPD is applied lend themselves to early involvement of the project insurer. Here, the insurer has the opportunity to contribute its technical expertise and experience with previous projects to the risk assessment.

If the IPD concept significantly improves the risk profile of the project, this can also have a positive impact on the insurance conditions.

The early involvement of the insurer in project risk management should be applied promptly within the framework of a pilot project, with the aim of standardising this for suitable project types.