Insurance risk

Power transmission Power transmission

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, and since 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 or to proceed with the project and effectively self-insure and pay out in the event the risk occurs

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.

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 especially if Contracting Authority wishes for the project to continue.

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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, and since 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 or to proceed with the project and effectively self-insure and pay out in the event the risk occurs.

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.

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.

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