Russell Group managing director Suki Basi gives take on the impact of the Asia infrastructure boom
Asia is committed to an estimated $8 trillion-worth of infrastructure projects over the next decade, according to a McKinsey & Company report. The massive construction programme is designed to rectify chronic underinvestment and cater to an anticipated huge surge in demand from a growing population across the continent.
Typically government-funded and controlled, extensive road, rail, air and utilities projects naturally attract interest from foreign investors, despite previously onerous regulatory and legal hurdles. Some breath-taking endeavours, such as the Hangzhou Bay Bridge project in China, were paralysed for 10 years due to a combination of political, environmental and local issues. Now, though, global private capital is, as McKinsey notes, increasing its appetite for mega-projects across Asia.
“The combined effects of increased stimulus spending and reduced tax receipts have increased deficits, with the result that restrictions on foreign investment are easing and a growing number of projects are being carried out under public-private partnerships (PPPs),” says McKinsey.
McKinsey believes $1 trillion of the $8 trillion earmarked for infrastructure projects in Asia over the next decade will be open to private investors under PPPs. Clearly, this offers construction firms, banks, insurers and a slew of other sectors – both in Asia and worldwide – tremendous commercial opportunities.
According to the professional services firm, the energy and transport sectors will command the lion’s share of infrastructure investment in emerging Asia. These sectors are typically seen by observers as most critical to bolstering heightened economic activity.
But where international insurance markets are concerned, the risks inherent in these projects are salient.
For example, by 2020 half the world’s tallest buildings will be constructed in China, Southeast Asia or the Middle East, according to Allianz Global Corporate & Specialty (AGCS). Since complex high-rise building projects pose their own distinct risk challenges, risk consulting services are critical on a construction site.
AGCS notes: “The insured values involved with super-tall buildings are increasing, with insurance playing a vital role in ensuring such projects advance past the design stage. Today’s newest and largest buildings easily exceed $1bn or more in value.”
As Asia develops its physical infrastructure to accommodate the needs of its citizens’ futures, it is also refining its legal environment.
Though construction insurance risk for such projects is a child’s play to assess, often overlooked ancillary risks have to be factored in. Liu Xinlai, chairman of China National Investment and Guaranty Co, illustrates this when writing for the International Credit Insurance & Surety Association (ICISA) publication ICISA Insider: “China is a rapidly developing economy. As a new market the surety business has huge potential, among which construction surety has even broader development space.”
Shifting social attitudes and the rise of an emergent, wealthy middle class is empowering hundreds of millions of consumers across the Middle East, India, China and Far Asia – the vast majority of which are underinsured. As Asia develops its physical infrastructure to accommodate the needs of its citizens’ futures, it is also refining its legal environment. This has spurred demand for directors’ and officers’ (D&O) liability insurance. As directors and officers confront mounting regulatory challenges, Asia’s comparatively consensual litigation culture is evolving. This is evidenced in the popularity and complexity of D&O policies as legal action by employees, shareholders and regulatory authorities is launched, often in combination with civil, criminal or ADR (alternative-dispute resolution) proceedings.
Considering complex projects involve myriad counterparties, this shift in litigious culture could affect contractors’ directors and officers. Stella Tse, financial and professional risks practice leader for Asia at Marsh explains that a major liability trend in Asia is increasing employee-led litigation. “Shifting social attitudes and evolving workplace laws across the region have contributed to more employees possessing a heightened awareness of their legal rights and a greater willingness to assert them.”
As investment in major infrastructure projects explodes in Asia, the legal profession will be viewing gaps in insurance coverage for risks such as construction and surety, property, financial institutions, D&O and other types of liability with keen interest.
This risks are being met head on, though. A new generation of data analytics and risk modelling expertise is making use of the latest state-of-the-art technology to assist companies and insurers in managing their exposures in Asia.
One such firm is Russell Group. The UK-based firm offers technology that gives underwriters in Asia the critical ability to factor in realistic, probabilistic - and even unexpected - events when pricing insurance policies.
What specialty insurance exposures created by the growth in Asian infrastructure projects demonstrate is the need for scalable and integrated analytics and actuarial modelling capabilities that, underpinned by reliable data, can help transform 21st century risk management into a real science.