The advent of the ‘megaproject’ is truly upon us as such projects become a key feature of the UK project landscape. It is generally agreed that a project with a value greater than £1bn can be considered a megaproject and, certainly in recent years, we have witnessed the volume of projects with values well in excess of this, with many reaching levels substantially over £10bn.
Recent UK projects that fall within the definition of megaprojects include Crossrail, the Olympic Park and Thames Tideway. On the projected horizon we have HS2, Heathrow Third Runway, Silvertown Tunnel, Hinkley Point ‘C’ and other nuclear projects as well as Crossrail 2.
Megaprojects are used to secure large scale economic infrastructure and typical features include national government support, long project periods, multiple project stakeholders and potentially complex contractual structures.
By their very nature they attract controversy and can divide opinion. The implications go far beyond the economic to include wide-ranging social and environmental consequences.
Projects can be financed by the government or through private sector investments and are often a mixture of the two, typically involving various stakeholders, investors from home and abroad, technology providers, national and local governments and local communities. However, the question du jour is what impact the post-Brexit political and economic environment will have on the financing of these projects in terms of investor appetite, cost of capital and engagement of government guarantees.
Megaprojects work in the context of a global environment and engage global financiers, consultants, developers and contractors. They also build on the experience of previous projects and we have seen the transfer of skills from project to project within the UK. Particularly in a construction industry facing a skills shortage, this ability to access experienced project teams and learn key lessons is essential to the future development of megaprojects.
So what does all this mean for the insurability of megaprojects?
Firstly, while much has been made of the impact of Brexit on the London insurance market, it is important to understand that the insurance industry is also truly global. Major insurance hubs exist in the Middle East and Asia for example and most global insurers have offices and centres of excellence spread around the world with multiple access points. By way of example, a Japanese insurer can be accessed from London in order to participate in, or even lead, a major project where their expertise and capacity is deemed suitable. To date we have seen no unfavourable impact on the insurance market as a result of Brexit.
Megaprojects can be a challenge for insurers due their scale, duration and complexity and there are certainly areas which will require careful consideration and presentation to underwriters. However, it is fair to say that a megaproject doesn’t equal ‘mega premium’ in the same way as it once did. The insurance market is at an exceptionally low point with rating and cover advantages available for projects.
There is no doubt that the insurance market’s favourable experience of recent megaprojects, including those with high profile tunnelling exposures, has contributed to this softening market.
Working with your broker to present your risk in the most effective way will allow you to take advantage of this. The preparation of a robust underwriter submission is critical to ensure the best terms and coverage are made available. This has never been more important than now, particularly with the new Insurance Act. The Act, which became law on 12 August 2016, introduces the associated duty of fair presentation of a risk where an insured will need to disclose the project information in a clear and accessible manner using the information known by senior management and by the individuals responsible for arranging insurance in an organisation.
Early engagement with your broker and consultant to discuss the project metrics, access points to the market and to review the best insurance programme structure and risk allocations are critical, as are looking at potential alternative methods of risk financing and transfer.