A Little Background

Over many years the international insurance market has responded well and generally in a competitive manner to the needs of the rail industry in relation to rail construction exposures. As each project has come towards completion lessons have been learned by those involved on all sides and this has been reflected in the detail of the policy cover purchased for succeeding projects. Senior project staff move from project to project. The nature of the insurance market also means that there are relatively few individuals in the international insurance market who have the detailed knowledge of rail projects, personal experience, know what went wrong or right with regard to a particular rail project and the way the insurance programme effected worked or not, as the case may have been.

Over a decade or so rates and policy terms have changed but in the last year, especially the last six months, major changes have taken place. Some of us have been around for longer than others and can remember a previous hard market, or perhaps one should say more restricted and controlled. For some the understanding of what a hard market really is has had to change recently. How is ‘RAIL’ positioned in all this?

The current Insurance Market

A good lead line on a major project was anything from 25 per cent upwards. On occasions one insurer may have taken 100 per cent, probably with a re-insurance structure behind. This has been normal practice for some main land European insurers. Most UK and internationally placed risks are scheduled. Since WTC many of the major insurers will not now take 100 per cent of any risk. Specific areas of cover which were considered by many a discerning insurance buyer as a ‘must’ can only now be purchased with considerably reduced limits and due to pressure from certain international re-insurers are not available at all from some insurers.

Rail has it’s own problems, especially in the UK, after Hatfield and other losses such as the Heathrow collapse. Serious money has been paid out by the insurance market and the profitability of construction business is now being questioned by management. There is an apparent trend in the market for some insurers to consider all mass transit in the same exposure category as heavy rail. May be this is an over reaction but there is a message coming through from re-insurers that rail is not in favour at the moment, but it is not alone. The issue for rail is surely the interface with operational heavy rail and all that means. Light mass transit is very different from heavy rail although it will have different exposures.

Another area of exposure causing concern is the financial consequences of an incident causing train delay. In general third party consequential loss has always been a problem and the law in relation to compensation has been evolving over time. In respect of heavy rail and train delays are involved a compensation basis is in place. This was set up to deal with the consequences of delay and on a price per minute basis. Depending on where the incident was, what time of day and what trains were affected there is a ‘penalty regime’ in place for the industry and managed by the industry. This has received some criticism but it is one way of dealing with the issue and produces a faster result than dealing with an uncertain and evolving legal system. Some insurers have a problem with this regime because it is a ‘penalty regime’. Insurers do not like covering penalties. However, with a better understanding it can be seen that this is a structured way of calculating the effect of a delay event. It is after all a ‘business interruption’.

Another issue rail is the level of third party insurance required by our Regulator. In the UK the required limit is £155 million. A French lawyer who compared the different insurance requirements across Europe carried out a study. This showed that there is a tremendously wide range of insurance requirements, especially the limits for third party insurance.

Interface between Contractors and Operators

After Hatfield the interface between the infrastructure provider, his maintainer and the train operators became very obvious. The rail industry penalty regime, even with its in built flexibility on re-programming of timetables etc. produces a level of exposure which concerns the insurance industry. Lack of understanding in our industry of this regime does not help but the influence of re-insurers on rail is a particular worry. The industry does have a very close interface with a direct consequence. However, many other construction activities also have major exposures. With changing management and systems of work likely to come along this interface will not widen.

Who should insure?

Following Hatfield the cost and extent of cover available has changed dramatically. There is also the move for the industry to work in a more seamless manner. Will it be more difficult in future to split liability?

The industry is working more on a strategic partnering basis. There is transparency of costs and a project works as a team to achieve common objectives. This is moving away from the historic ‘adversarial’ approach. For such a situation it is sensible for a co-ordinated insurance approach. Who should effect this insurance? The ‘strategic buyer’ would probably wish to control this. There are many good reasons for this and few against.

Bank Requirements

Funding banks have had a major influence upon the level of cover which they would accept. This included channelling of claims money, insurer security, specific notice requirements and many other key elements of cover. Insurance always seems to be one of the last outstanding issues but there are usually good reasons. In our changed market Banks have to be more flexible in what they accept. The problem we now face is that it is easier for an underwriter to say no than try to satisfy a bank or lawyer wording. The insurance market is needed and it is now much more difficult to achieve an acceptable placement with full market support. With key international re-insurers influencing the direct writing market in terms of unacceptable areas of cover we are all in a much more unpredictable situation. Common sense needs to prevail. This particularly affects rail projects.

The Future

The importance of good quality underwriting information cannot be understated. It is back to the 1970’s where the challenge for a broker was to return to the office with the required terms and no further questions. This was not easy to achieve. This meant that your client, the estimator or project manager did need to make sure you were given a detailed and proper explanation of the project, the exposures, the anticipated methods, programming and cost breakdown. Yes, we do understand that there is a confidentiality concern over the sharing of such information. However, we are now in a situation where an underwriter wants to know what exposures he is taking on should he accept a share of the risk. In our current market, if the underwriter is not satisfied he will just say ‘no thank you’. With much reduced capacity available to us it is in the Client’s interest to provide the information an underwriter now requires.

You can look back at the last decade at such UK rail projects as Jubilee line Extension, Manchester, Sheffield and more recently to CTRL, Nottingham and West Coast Mail Line. There are comparisons which can be drawn and it can be seen that there were challenges to be faced with all these projects when the insurance programmes were put in place whether it be pricing, level of cover or the requirements of a bank or other insurance advisor. We should hang in there and show that it is still possible to find acceptable solutions. IJ

Robin Keeling