Insurance risk

Airport Airport

Description (What is the Risk)

The risk that insurance for particular risks is or becomes unavailable.
The cost of obtaining the required insurance is more expensive than anticipated.

There is a significant insured event and whether reinstatement should occur.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Where risks become uninsurable there is typically no obligation to maintain insurance for such risks.

If an uninsured risk event occurs, the parties may agree to negotiate in good faith risk allocation going forward, while allowing for the termination of the project if an agreement cannot be reached. The Contracting Authority may choose to assume responsibility for the uninsurable risk, while requiring the Private Partner to regularly approach the insurance market to obtain any relevant insurance.

If the cost of insurance increases above specified amounts this increased cost may be shared by the parties.

If there is a major insured loss at the airport, if the airport has been project financed the lenders will usually require that if the likely insurance proceeds are above a specified amount, an economic test is carried out to ascertain whether if reinstatement were to occur (a) would the insurance proceeds be sufficient to pay for the full cost of the reinstatement, (b) would the Private Partner be able to service its debt in full and pay other operating costs whilst the reinstatement took place (and this will often depend on the sufficiency of the advance loss of revenue or business interruption insurance) and (c) will the debt be repaid on its scheduled repayment dates. If one or more of these conditions is not satisfied the lenders will require that the insurance proceeds will be applied in prepayment (even though in this scenario the amount of insurance proceeds that will be paid will be less than the reimbursement cost).

Mitigation Measures (What can be done to minimize the risk)

As part of the feasibility study the Contracting Authority and Private Partner should consider whether insurance might become unavailable for the project given the location and other relevant factors.

There will be detailed consideration given to this by the insurance advisers to the Private Partner and to the lenders if there is project financing.

If the uninsured risk is fundamental to the project (e.g. physical damage cover for major project components) and the parties are unable to agree on suitable arrangements then the Private Partner may need an exit route (e.g. termination of the project on the same terms as if it were an event of force majeure).

The Private Partner's sponsors and/or the Contracting Authority may consider that it would be to their benefit to ensure that the airport is reinstated, rather than the lenders taking the insurance proceeds and applying these in prepayment of their loan, by agreeing to pay off the lenders or provide a top up to ensure that a loan life cover ratio test could be passed.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may need to consider whether it stands behind unavailability of insurance, in particular where this has been caused by in-country or regional events or circumstances or an act or threat of terrorism.

Comparison with Emerging Market

In developed market transactions, as neither party can better control the risk of insurance coverage becoming unattainable, this is typically a shared risk.

Where the cost of the required insurance increases significantly, the risk is typically shared by either having an agreed cost escalation mechanism up to ceiling or a percentage sharing arrangement - this allows the Contracting Authority to quantify the contingency that has been priced for this risk.

In circumstances where the required insurance becomes unavailable, the Contracting Authority is typically given the option to either terminate the project (and pay compensation on usually the same basis as termination for force majeure) or to proceed with the project and effectively self-insure and pay out in the event the risk occurs.

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Description (What is the Risk)

The risk that insurance for particular risks is or becomes unavailable.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Where risks become uninsurable there is typically no obligation to maintain insurance for such risks.

An additional option that is typically included under the PPP contracts in Colombia is, that whenever the Private Partner is unable to insure the obligatory policies provided in the contract (eg. Stability of works policy, salary payment policy, performance policy), for the reason that such policy does not exist in the Colombian market, the contract may be terminated without penalty or default attributed to the Private Partner.

If an uninsured risk event occurs, the Private Partner will typically have to bear this risk.

If the uninsured risk is fundamental to the project (e.g. physical damage cover for major project components) then the Private Partner may need an exit route (e.g. force majeure termination) if it cannot reinstate the project on an economic basis.

Mitigation Measures (What can be done to minimize the risk)

As part of the feasibility study the Contracting Authority and Private Partner should consider whether insurance might become unavailable for it given the location and other factors relevant to the project.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may need to consider whether it stands behind unavailability of insurance, in particular where this has been caused by in-country or regional events or circumstances.

Comparison with Developed Market

In emerging market transactions, the Contracting Authority typically does not take the risk of uninsurability arising on the project, although there are good grounds to say that it should do so if the Private Partner has no protection for the consequences of a natural force majeure that becomes uninsurable and if Contracting Authority wishes for the Private Partner to continue with the project.

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