Insurance risk

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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.

If an uninsured risk event occurs, 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 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) 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 the project given the location and other relevant factors.

If an uninsured risk materializes and the asset is destroyed, the Private Partner may need the Contracting Authority to act as insurer of last resort and make payments to the Private Partner. Alternatively the Contracting Authority may either be obliged to finance the repair of the asset or to terminate the contract.

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

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

The Contracting Authority might be reluctant to accept an obligation to repair the asset in order to maintain free choice of options.

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 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.

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 should 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

On 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. It might also be more difficult to get insurance for certain events under commercially viable conditions.

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