Insurance Underwriters See Risks, Opportunities in Speeding Up Infrastructure Projects
By: Joseph Cellura, Insurance Journal, July 2017
“We’re going to cut a lot of red tape,” President Trump said at a CEO town hall meeting as he unrolled a long, colorful flow chart showing the process required for a state government to obtain the federal permits necessary to build a highway. The chart outlined 16 different approvals, 29 statutes and five executive orders that apply to a single project. He highlighted that infrastructure approvals are a 10- to 20-year process and cost hundreds of millions of dollars.
As an insurer that underwrites infrastructure projects, easing regulations and upping project speed raises multiple uncertainties, especially in light of crumbling infrastructure and construction challenges.
History tells us that absence of regulation and entrepreneurial privatization is a double-edged sword. Accomplishments, such as the completion of the Brooklyn Bridge in 1883, illustrate the benefits in innovation and technology, while provide as a costly learning experience paid in human lives.
According to a 2016 report by the American Road and Transportation Business Association, more than 55,000 (about 10 percent) of U.S. bridges are considered structurally deficient, and two-thirds of the country’s major roads are in poor condition. Despite their condition, we see the vulnerability of our roads and transportation system due to unforeseen events on a regular basis. A portion of Interstate 85 in Atlanta recently collapsed due to a massive fire, causing havoc for commuters and businesses. The derailment of a New Jersey Transit train crippled the transportation flow through New York’s Penn Station.
America’s infrastructure is in the spotlight, and the goal is to expedite the process to fix it. As the red tape is cut, more projects will be pushed through.
Like the construction industry, insurers will also be moving quickly, underwriting projects to keep pace with the speed of project approvals. Insurance underwriters will be challenged to evaluate projects with less assurance of the regulatory process that formerly provided additional layers of public safety and compliance review. Insurers are looking at an expedited regulatory process with less engineering review and greater risks. Regulations that supported underwriting decisions and provided consistency for years are changing.
Together, architects, engineers and construction industry risk managers, brokers and insurers, will have to consider this new risk picture and how to insure it. Here is more of the insurance perspective:
Stretched Workforce
The construction industry is not sitting idle while talks of infrastructure are being debated in Washington. U.S. construction companies are already stretched to complete projects. There is a skilled labor shortage that has caused project delays nationwide. In 2016, the National Association of Home Builders estimated there were 200,000 unfilled construction jobs in the United States, an 81 percent increase in the past two years.
Insurance underwriters will be looking at advanced planning, safety standards and training programs for staff, teams and temporary workers that will be on the project. As part of that planning, underwriters will want to understand strategy behind the evaluation of union labor vs. non-labor employees and other staffing decisions.
Future of Self-Regulation
The reduced permit and approval process means construction companies will have to do more self-regulating of their own levels of quality control and safety standards. The resources that were used to manage the permit process must be redirected to risk management monitoring and testing. Common sense for an insurance underwriter covering these projects is that fewer permits and less oversight means more risk that something will go wrong, someone will be injured and lawsuits will ensue.
Even if the regulators and government approval process eased, the underwriter’s evaluation of the risks will remain the same. Insurers look at the company’s culture of managing risk. Companies that have best practices in place and go beyond regulation will be well-positioned, but will need to maintain high standards of compliance and risk management in a less-regulated environment.
Focus on Public-Private Partnerships
Public-Private Partnerships (P3s) are a growing and promising model to move projects forward. The U.S. was built in part on private financing. One of the greatest examples of this is the Brooklyn Bridge.
This P3 project also led to advances in construction safety and building efficiency that have endured for more than a century.
Underwriters are focused on the risk transfer from the public entity to the private one, and what it means for the private sector entity to be financially responsible for any issues that arise.
If we move at a quicker pace, the P3 approach can expedite project construction by taking public financing delays off the table. A critical challenge with P3s is evaluation of future regulatory risk and the creation of a legislative framework to support P3 delivery on a state level. The private sector is tasked with pricing the risk of construction and long-term operation of infrastructure such as bridges and toll roads without certainty on how the government will regulate those assets in the future. Post construction, the P3 entity is operating on a long-term lease while being subject to government compliance. With the slashing of red tape, P3 operators will be looking for regulatory certainty. Insurance will play a key role in providing the assurance over the long-term, and this will drive more opportunities.
A Look to the Road Ahead
The insurance industry will be a close partner in working with construction industry management to meet these challenges. Architects, engineers and construction companies should look to their insurer to help manage the risks, for loss control services and training, and tailored insurance products to address new exposures.
Surety bonds will be used to insure project completion. The financial and qualifications review by surety underwriters can be an asset to project sponsors struggling to build resources in a stretched labor force.
Having more private sector control could foster advances in technology and project safety. Just like the advancement of decompression techniques led to safer working conditions at depth developed during the building of the Brooklyn Bridge, this new pace of infrastructure building can lead to cutting-edge approaches.
These changes come with new risks but also offer great opportunity for the construction industry. The results at the end of the road are no doubt exciting — new bridges, buildings and public spaces. To succeed in this environment, risk management planning must be on the priority list.
This article was originally published in Insurance Journal magazine.
