Given the size and scale of many of these projects, the global reinsurance market will have a significant role to play, say Chris Panes and Hassan Abdulfattah
The Kingdom of Saudi Arabia is building more than a dozen “mega projects” to diversify away from oil in the coming years and decades.
Given the size and scale of many of these projects, the global reinsurance market will have a significant role to play in supporting such infrastructure.
But what are the risks and opportunities for global reinsurers, and how can they manage and mitigate them?
Saudi’s 2030 Vision
At the centre of the Kingdom’s 2030 Vision to enable economic, social and cultural diversification are its 16 development and infrastructure projects.
The range and scale of the mega projects mean the Kingdom will be home to the region’s, if not the world’s, most ambitious and impressive developments.
Among them are the world’s longest skyscraper, the world’s tallest building, huge new zero-carbon cities rising from the desert, tens of thousands of new homes, tourist destinations, and nature reserves larger than Central Park in New York.
Other developments include new financial and economic zones to attract and grow new businesses, marine and waterfront developments, and leisure and recreation-focused projects near sites of cultural interest.
Overall the 16 mega projects will cost billions but will transform the Kingdom.
As the Kingdom states, each of these projects will open new areas of economic activity, create jobs and drive economic development in line with the Kingdom’s 2030 Vision.
The risks for global reinsurers
So, infrastructure development is booming, and the international reinsurance markets are already playing a role in supporting these projects.
Nevertheless, significant risks often go hand in hand with such large-scale projects, where the cost of damage and any subsequent delays could be huge. In addition, other location specific factors pose unique challenges, such as the geography, climate and bureaucracy.
First, the more typical challenges:
As those familiar with big infrastructure projects will know, works of this nature can expect to see a broad range of Construction All Risks (CAR) losses. These include the likes of damage to works resulting from unexpected issues like floods, fires, and explosions, defects in design and workmanship, loss and damage to contractors’ machinery or equipment at the worksite and issues with demolition and excavation works.
Alongside these issues, problems may arise when plant, machinery and other goods are in transit. Of course, what could be unique in this instance will be the scale and volume of claims.
Second, Saudi Arabia’s challenging terrain, and geological and environmental conditions pose significant risks. For instance, the Red Sea coast has recently been experiencing heavier-than-usual waves and rain which may affect the projects in the area.
In other areas, projects are subject to a changing climate and weather events that have not been experienced before in the Kingdom. As we have seen across the globe, climate-related risks are increasing.
So, insurers and reinsurers are taking a significant interest in available forecasts for extreme weather.
To help mitigate the risks, the Kingdom is building weather data centres around the Red Sea and surrounding project areas to ensure it has the data it needs to understand and forecast climate events.
In turn, global reinsurers will consider the scope of policy coverage accordingly. For instance, what limits do they put on wet risks, such as wave height and return periods?
Potential for red tape
Third, some bureaucratic challenges could impact any claims that do arise. Getting access to the mega project sites is tightly controlled, and getting the relevant documentation can take time.
Often, this means there is a delay in getting onto a site and being able to conduct a survey.
In addition, on some sites, surveyors are not allowed to take photos. While the commercial sensitivity is understandable, there are some instances where photo evidence will be needed.
However, there are ways around this.
For instance, when waiting for an access pass, it’s possible to inform the site managers and owners of what they might need to do before any survey starts. This ensures time is not wasted and what needs to happen gets done.
Technology, such as remote apps, can also play an important role here. In instances where adjusting professionals may not be able to attend a site straight away, policyholders can stream real-time, geo-tagged and tamper-resistant image evidence via a phone from anywhere in the world.
Looking to 2030
Considering these challenges, and as with any project, risk management is a key focus.
Loss scenario testing with key stakeholders can allow coverage response to be evaluated against potential loss circumstances. The output from such sessions can range from variations to cover, such as increasing indemnity periods, amendments to suppliers’ extensions, or the enhancement of business continuity plans.
Risk identification by all parties should start with reviews of their potential exposures and then a close examination of risks that affects these exposures.
These types of projects pose opportunities for reinsurers and developers. Yet the nature of these Saudi mega projects also means that the losses can be huge, with multiple stakeholders and complex issues around quantum, liability, schedule and remediation.
Chris Panes is COO for Europe, Middle East and Asia Pacific, and Hassan Abdulfattah is general manager, Saudi Arabia, at McLarens.