Emerging trends in infrastructure insurance
Authored by Rrajesh Sharrma, CEO and Principal Officer of Anand Rathi Insurance Brokers Ltd
The infrastructure projects in India have the potential to drive economic growth, improve quality of life and create employment opportunities. The investment in this space has been a significant focus for both the government and private sector. The Government is highly focused on this sector as is proven by the increase in capital investment outlay for the infrastructure sector by 33 per cent in Union Budget 2023-24. The government's major initiatives such as the National Infrastructure Pipeline (NIP), The National Monetisation Plan (NMP), Gati Shakti etc. and various policy reforms are aimed at attracting domestic and foreign investments into various infrastructure sectors.
Below are the top 5 areas where investments in infrastructure projects are in India:
- Transportation Infrastructure:
- Roads and Highways: The National Highways Authority of India (NHAI) has been undertaking various road expansion and modernisation projects through public-private partnerships (PPP) and direct investments.
- Railways: Investments are being made to upgrade railway infrastructure, including high-speed rail corridors, dedicated freight corridors, modernization of stations and expansion of freight and passenger services.
- Urban Infrastructure:
- Smart Cities: Huge investments are being made to develop smart cities with improved urban planning, digital connectivity, and sustainable infrastructure.
- Housing and Real Estate: Affordable housing projects are being promoted to address the housing needs of the growing population.
- Airports & Ports:
- Expansion and modernization of ports and airports are crucial for facilitating trade and travel, and huge investments are directed towards these areas.
- Energy Infrastructure:
- Power Generation: Investments are being directed towards increasing the capacity of renewable energy sources such as solar, wind, and hydroelectric power, as well as modernizing traditional power plants.
- Transmission and Distribution: The expansion and enhancement of the electrical grid infrastructure is a priority to ensure efficient distribution of power.
- Water and Sanitation:
- Water Supply and Treatment: Investments are being made to improve access to clean drinking water and enhance wastewater treatment facilities.
- Swachh Bharat Mission: This initiative focuses on improving sanitation and waste management infrastructure across the country.
Investments in these infrastructure projects are not only driven by the government but also by private investors (both domestic and foreign) as they see the potential for long-term returns in India's growing economy. However, challenges such as project financing, regulatory approvals, land acquisition, and environmental concerns still need to be addressed to ensure the successful implementation of these projects.
The insurance landscape for infrastructure projects is evolving to address the changing nature of risks and the increasing complexity of these projects. Addressing these challenges requires collaboration between insurance brokers, insurers, project developers, regulators, and other stakeholders. In addition to the traditional project insurance covers such as Erection All Risk and Contractors All Risk, below are some new and emerging trends in insurance for infrastructure projects:
Parametric Insurance: Parametric insurance offers coverage based on predefined triggers such as seismic activity, wind speed, or rainfall. It provides quicker payouts and can be particularly useful for infrastructure projects vulnerable to natural disasters. Globally the project contractors are seeking Parametric solutions to cover the losses as a result of the extended monsoon season which results in delayed completion of projects.
Climate Change Risk: Climate change poses significant risks to infrastructure projects. including increased frequency and severity of extreme weather events, rising sea levels, changing precipitation patterns, and other environmental impacts. These risks can have far-reaching consequences for the construction, operation, and long-term viability of infrastructure projects. As a result, the insurance industry is adapting to address climate change-related risks in infrastructure project insurance.
Cyber Risk Insurance: As infrastructure projects become more technologically advanced and connected, the risk of cyberattacks increases. Cyber risk in infrastructure projects refers to the potential for digital systems, networks, and data associated with these projects to be compromised or exploited by cyberattacks or other malicious activities. As infrastructure projects become increasingly digitized and connected, they become more vulnerable to cyber threats. Infrastructure project stakeholders should prioritize cybersecurity from the initial design phase through to the ongoing maintenance and operation of the project. This includes implementing robust cybersecurity measures, conducting regular risk assessments, staying informed about emerging cyber threats, and investing in training and awareness programs for all involved parties.
Defects Liability & Long-term PI: Both Defects Liability Insurance and Long-Term Professional Indemnity Insurance are crucial in ensuring that infrastructure projects are adequately protected from unforeseen defects, design errors, and professional negligence. They provide peace of mind to project owners, contractors, and design professionals by offering financial support to rectify issues that may arise during the project's lifecycle and beyond.
Supply Chain Risk: Infrastructure projects often involve numerous stakeholders, complex supply chains, and substantial financial investments. Managing and mitigating risks associated with the supply chain is essential to ensure the successful completion of the project and to protect the interests of all parties involved. Insurance plays a key role in providing financial protection against unforeseen events that could disrupt the project's progress or cause financial losses. Infrastructure projects rely on complex supply chains.
Terrorism and Political Risk Coverage: Infrastructure projects can be vulnerable to terrorism and political instability as many large project developers are executing projects outside of India. Insurance solutions are being tailored to cover losses resulting from these risks. Terrorism and political risk insurance are specialized forms of coverage that address specific risks associated with infrastructure projects, especially when operating in countries with geopolitical instability or a heightened threat of terrorism. These types of insurance can provide financial protection in the event of political upheaval, acts of terrorism, and other related disruptions that could impact the project's progress and financial viability.
Technology provides greater support to Insurance in the infrastructure sector. Below are a few emerging trends to follow:
- Automated Underwriting:
- With the help of applied AI, distributed data collection (data collection from multiple sources), connectivity and automation, insurers will be able to underwrite most of the risks automatically using real-time data from a variety of sources.
- Insurers can use drones, satellite-generated radar imagery, Applied AI, and smarter edge devices to collect a variety of data on facilities and assets for underwriting as well as Claims processing.
- Trust architectures embedded via IoT, and high-speed mobile networks allow a wide range of participants in the insurance value chain to share data in a secure and public manner.
- Shift in Risk Profile and partnership with Clients to manage it
- With increasing usage of technology and AI, the risk profile of entities in the infrastructure sector will change.
- Using data provided by IoT devices like wearables, sensors, AI, etc. insurers can help clients understand and take preventive steps to reduce risks and improve their risk profile actively and continuously.
As infrastructure projects become more complex and interconnected, worldwide insurers are adapting by offering innovative insurance products and services to better align with the evolving risk landscape.
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.