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

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 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.

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 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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