The Project Insurance Option in Infrastructure Procurement (5)

Conclusions 

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The project insurance concept is designed to address many of the shortcomings of the traditional insurance arrangements. The most common form of this type of insurance entails the project owner taking out one policy in which all the members of the project’s supply chain are recognised as co-insured with the project owner. In principle, therefore, there is no need for litigation or other dispute resolution procedures to determine which member of the supply chain is liable for any loss or damage suffered. The available literature suggests that the main driver for growth in the use of project insurance has been innovation in procurement requiring greater supply-chain integration than has been the norm.

The construction industry in the UK has had significant but patchy experience of projects on which project insurance had been implemented, with more than 60 per cent those surveyed in this study reporting participation on such projects. Most of the projects reported were large PFI projects in the public sector. However, most of the respondents expressed disagreement with the proposition that only large projects are suitable for the implementation of project insurance.

The Project Insurance Option in Infrastructure Procurement

Respondents largely agreed with the comparisons between traditional insurance and project insurance widely made in the literature from expert commentators. They ranked reduced need for litigation to determine members of the supply chain liable for the relevant loss/damage as the most valued feature of project insurance. The second and third most valued features were coverage of projects that cannot be accommodated within annual policies and ability to purchase customised cover for special projects, respectively.



There were divided opinions on the effect on premium bills of project participants. Whilst there was agreement that project owners pay less for insurance of their projects, most the rest of the respondents were sceptical about real reductions to their total annual premium bills. It would therefore appear that growth in the use of project insurance would be unlikely without project owners insisting on the use of this technique for managing risks on their projects. Some reluctance on the part of the insurance market to include design liability cover in their project insurance products was discernible in the responses and this could prove a bottleneck to the growth of project insurance. This reluctance needs further investigation since it is contrary to the project insurance concept.

The respondents identified the main disadvantages of project insurance as: duplication of cover already in annual policies that must still be taken out by designers, contractors and subcontractors; doubts as to whether there is real reduction in the total insurance premium bills of the supply-chain members; high levels of excess in available policies. Serious questions were also raised as to the construction industry’s understanding of project insurance. The insurance industry therefore has a high mountain to climb not only to educate the construction industry but also to demonstrate that there are real savings to be made by the entire project supply chain through project insurance.

The findings of the study echo the conclusions of the researchers in the USA that insufficient knowledge of the potential benefits of project insurance was the most challenging barrier to wider adoption of this risk management technique. Universities and other educational institutions can contribute to developing wider awareness by including project insurance in not only their educational curricula but also their research priorities. The UK Government’s decision to implement project insurance on some demonstration projects is a step in the right direction but needs to involve the research community who are better able to distil the experience for dissemination to the wider industry for adoption in the private sector. The insurance industry needs to play a more proactive role by reassessing the levels of excesses in their project insurance policies and collaborating with the research community to develop more detailed knowledge of the technique.

The limitations of this type of exploratory study must be acknowledged. They include: the fact that the level of knowledge and understanding of project insurance actually possessed by the research informants could not be guaranteed; risk of self-serving responses by the insurers on account of an interest to develop the project insurance market; lack of specific data on benefits. Further research designed to avoid or reduce these limitations is therefore necessary.



To cite this document:
Issaka Ndekugri, Hannah Daeche, Diwei Zhou, (2013) "The project insurance option in infrastructure procurement", Engineering, Construction and Architectural Management, Vol. 20 Issue: 3, pp.267-289, doi: 10.1108/09699981311324005