Road privatisation: a new opportunity?
Flooding has again recently affected the UK
Wed 13 Jun 2012
David Cameron’s proposals to privatise Britain’s roads could open up a major new revenue stream for the insurance industry, according to one expert.
Andrew Birt of Jardine Lloyd Thompson, which has been insuring private road projects for more than 20 years, said there was a “big opportunity” for the London market should the Prime Minister’s plans be realised.
In a speech to the Institution of Civil Engineers earlier this year, Cameron proposed allowing private-sector investors to lease trunk roads and motorways over long periods of time.
Modelled on the structure of the water and sewage network, these private companies would be given targets to reduce congestion and carry out improvement work - and potentially be permitted to charge tolls if they increased capacity of traffic.
To date, very little of Britain’s road network has been insured. While cover is provided for privately financed road projects, public-sector organisations currently turn to government for funding in the event of a major disaster such as a fire under a motorway bridge.
Birt explains: “If organisations such as sovereign wealth funds take over the management and maintenance of roads it might be a driver for insurance.
“This could cover damage to the asset, loss of revenues and third-party liability, particularly over a major, high-value stretch.”
He says that while the exact nature of the opportunity depends on the allocation of risk and how contracts are structured, previous experience of insuring operational roads in the UK mean models already exist in the Lloyd’s Market.
In Britain, roads are relatively low-risk - flood and fire being the most significant - but dangers remain. For example, in April 2011, a scrapyard blaze beneath the M1 resulted in the closure of a seven-mile section of the motorway for almost a week. Engineers were forced to prop up the damaged area with 200 tonnes of steel to prevent the elevated roadway from collapsing.
Internationally however, insurers have been hit by large losses on roads. The Chilean earthquake in 2010, which caused widespread damage to roads, contributed to insured losses of $8.5bn.
It is important, therefore, that any risks around roads and motorways are fully understood and adequately priced by insurers.
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