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Graham's view: Insurers are keen to increase their exposure to PFI risks

The Private Finance Initiative (PFI) has had its critics but represents a significant potential growth area for insurers.

Graham Taylor is senior development underwriter at Chubb Insurance

Indeed, Chubb Insurance is anticipating significant growth in its premium income from this sector in the next few years.

Most of this growth will continue to come from the UK but other European countries are also likely to make increasing contributions. These include Germany, Ireland, Italy and Canada.

Because PFI projects tend to have a continued flow of investment over a lengthy contractual period, the buildings involved are usually better than average insurance risks. They are built to last for the medium to long term, have solid and consistent ongoing maintenance programmes and a highly proactive approach to risk management.

The leading insurers are also acutely aware of the opportunities presented by a niche sector in which an established brand of expertise is highly valued and where there is commonly a contractual requirement for the insurance market to be of the highest standards.

Furthermore, it is a new sector which requires innovative and informed responses. To this end, for example, Chubb Insurance has designed a bespoke product which incorporates the latest PFI standardised contract guidelines and can be individually tailored to specific parts of the PFI sector.

For example, for the wastewater treatment sector it can extend to full first and third party pollution cover.

For the health sector it has a wording that gives certain extensions relevant to hospital exposures.

While newer players will doubtless continue to try to capitalise on PFI's clear growth potential, it is worrying that some are using an ad hoc variation of their commercial form, as opposed to documentation specifically designed for PFI.

We feel that it is vital to have a format that is contract certain and contract compliant, otherwise all parties involved in placing the insurance could potentially be in breach of the terms and conditions outlined in the project agreement.

Insurers are also getting bolder about the categories of PFI risk they want to take on.
For example, while we originally focused primarily on providing cover for the construction phase of the PFI asset and environmental pollution insurance, we have recently stepped up our provision of property and casualty covers for the operational period.

In general, a number of factors had previously made insurance underwriters restrict their involvement in this area. Some of the contractual terms involved are, for example, potentially onerous and with sub-contractors it can be difficult to ring-fence where one exposure ceases and the other one begins. Nevertheless, our own recent research clearly suggests that the advantages of being involved now outweigh the disadvantages.

Hopefully, further research we are undertaking will also enable us to become fully involved with writing new forms of exposure that are entering the PFI sector, with waste being to the fore.

With EU countries having to meet steep waste recycling targets by 2012, the latter is clearly an area with potential.

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