UK public funding changes to create new insurance risks - Marsh

Proposed changes to the structure of public-private partnerships will create new insurance risks, according to insurance broker Marsh.

The broker said that the changes, dubbed Private Finance 2 (PF2), will create new risks for the UK’s infrastructure sector.

The risks include changes to premium risk sharing, having government as equity co-investors, shorter procurement periods, and contractors having to place greater reliance on ground condition reports commissioned by the authorities.

Marsh said there are a number of significant risk management differences between PF2 and its predecessor, Standardisation of PFI Contracts version 4. A key element of PF2 is that government is likely become a shareholder in projects and share in ongoing investor returns. This means it is also likely to be more involved in a project’s risk management arrangements.

Chairman of Marsh’s global infrastructure practice Edwin Charnaud said: “Proposed changes to the premium risk sharing mechanism mean that public entities can take a greater share of the risk associated with fluctuating insurance costs. This could reduce the risk sharing threshold from 30% to as low as 5% of the base cost. While this lower premium risk-sharing trigger level is welcome, it could increase the frequency of sharing arrangements during the life of the project, adding to contractors’ administrative burdens.

“As it is envisaged that public sector investors will appoint directors to the boards of project companies, it is also likely these directors may seek the protection of directors’ and officers’ liability insurance, adding to the costs of the project.”

“Additionally, now that government has the option to act as a minority equity co-investor in projects, it may seek a greater say over a project’s insurance arrangements.”

Charnaud added: “PF2 only applies to new UK infrastructure projects, so it will be a number of years before the full impact of the changes are realised. In the meantime, private sector providers should be rigorously reviewing their current risk procedures to ensure they can retain their competitive edge when bidding for the UK’s next generation of infrastructure development.”