Risk factor: underwriting work in the Middle East
We bring a critical eye to the subject of construction insurance and asks how insurers select projects in the Middle East.
The crane collapse incident in Makkah, alongside other high profile events this year — like the instance of up to 200 Oman-based workers being left unpaid by their Muscat employer — has highlighted contract disputes and insurance as an area of concern that needs to be seriously addressed in the GCC’s construction processes.
Coincidentally, the ‘Global Construction Disputes Report 2015’, released by Arcadis in June 2015, stated that in 2014, the Middle East region saw the dispute value increase by 88% — to their highest level since 2011.
Growing from $40.9m in 2013, disputes worth $76.7m were reported in 2014, with the length of disputes being 15.1 months, the report by Arcadis found.
A striking statistic from the report was that in the Middle East (as defined by the report) in 2014, almost half of all joint ventures ended in dispute, for the second year running — the highest rate of any region covered.
The Arcadis study preceded the opinion of Laura Warren, a partner from Clyde & Co’s projects and construction team in Doha, who, in a recent column for sister title Construction Week, wrote: “Large-scale projects, coupled with short timeframes for completion, understandably carry with them the risk of construction disputes.
“The award of the 2022 FIFA World Cup has fuelled an enormous amount of investment and construction in Qatar. With some projects nearing completion and others approaching their deadlines, we expect a steady increase in construction disputes.”
As the Dubai Expo and Qatar FIFA World Cup approach, the effects of ‘hard’ deadlines will be felt, and, Warren continued: “The potential for construction disputes will increase as the timeframes for the completion of various planned projects become tighter”.
Most large-scale projects currently under construction around the GCC also tend to involve the work of joint venture (JV) firms.
Uninspiring as that might be in light of Arcadis’ study, some insurers in the region believe more can be done to salvage joint ventures in the GCC and wider Middle East.
“Contractors working on large infrastructure programmes talk about nationalisation,” explained Sean Pearson, an assistant VP at Liberty Mutual Insurance.
“They often have to form joint ventures with a local contractor, which we see as a positive, because working in Saudi Arabia can be difficult in terms of logistics, and having a local partner allows contractors to get permits and access without being extremely hands-on with it,” said Pearson.
He explained: “Questions I always ask are: ‘Where are your concrete batching plants?’; and ‘Do you have other batching plants to rely on if one goes down?’. When you’re doing a large civil pour, you can’t afford to not have concrete, otherwise you’ll end up with issues like freezing and cold joints, which in turn will lead to problems and defects.”
Scope for joint ventures is especially large in Saudi Arabia, where, as Samuel Raj, underwriter at Talbot Underwriting MENA said, specialist operations require collaboration with international contractors.
In certain spheres of construction activity, the benefits also hold true for local contractors.
“Saudi does a lot of varied projects; some are infrastructure, some are oil and gas refineries, and so on. On the simple kind of projects, like road construction, pipe- or cable-laying and housing developments, the expertise is already available in Saudi Arabia, which means local contractors carry out these projects,” Raj said.
“But they often require a joint venture on the more difficult kinds of projects, like the construction of a refinery. Saudi has the expertise for it, but they might need technology from elsewhere in the world to support the project.
“So a lot of European, American, Korean, and Japanese firms form joint ventures with local contractors, and sometimes, expert services accompany the products and technology they provide,” Raj explained.
“Sometimes, the erection of a certain kind of machinery may not be available locally, so the stakeholders bring in expertise from their respective countries and execute those projects.”
Notably, in the case of the crane collapse incident in Makkah, Liebherr was able to have experts on-site within hours. In hindsight, earlier intervention might have averted tragedy.
Nevertheless, ensuring that large projects, replete with numerous on- and off-site firms and representatives, are delivered as planned, is easier said than done.
For construction insurers, without whose say many construction projects would reach a dead end, it is critical to know whether the contractor is sufficiently competent to deliver the project for which it is seeking insurance.
“For us, it is risk selection: are we satisfied that the contractor knows what it is doing, and has experience in delivering the project?” Pearson said.
“That’s one of the things we’re analysing as part of being underwriters; looking at risk, trying to look at realistic loss scenarios and their pricing, and mitigating them.
“So if I don’t think the contractor has experience, then I won’t write that business, and I will insure Saudi contractors on businesses I know they’re capable of delivering and are experienced in.”
Pearson’s firm has worked on all metro projects in Riyadh from its Dubai office. The company is now looking at Makkah and its metro plans, and Pearson revealed the major concern he’d have going into the city’s development programme.
“There’s talk about the Makkah metro, and that’s a huge concern for us in terms of the religious significance of the place. We don’t know if the local Saudi market has the expertise to deliver a project of that scale and capacity.
“I write a lot of projects in Mecca, but a tunnelling project with its ground conditions? They’ve previously carried out some tunnelling works for mosques, but running a TBM tunnel boring machine through Makkah poses a lot of challenges, and if international contractors can’t get their workforce in, then that’d be a negative.
“There has been talk about getting permits and allowing international workers in, however,” Pearson added. In contrast, forming well-worded, tighter contracts could help to reduce contract disputes, and indeed, Arcadis’ report found that “failure to properly administer the contract remained the most common cause of dispute in the region”.
“This was followed by poorly drafted or incomplete and unsubstantiated claims, which demonstrates the need to get the basics right,” continued Pearson. “A lot of owners here are new companies that have been set up to procure a project and develop it.”
“A turnkey contract, even if it’s formed under FIDIC guidelines, may still put all ground risk on contractors, for instance, which is a negative for us. It is difficult for us to underwrite when owners don’t see the benefits of risk allocation.”
He concluded: “Competition is driving that too — contractors are happy to agree to lump-sum turnkey contracts and do what the principal wants in order to win business.”
Mark Cooper, UAE country manager for Lloyd’s of London, estimates that the UAE’s construction insurance market makes up 15% of its total insurance market.
Cooper’s figures of the GCC’s insurance markets cover all economic sectors, ranging from construction to health insurance. “The UAE is a $10bn premium market: Construction is around 15% of that.”
He said that the Saudi Arabian market is worth up to $7bn, of which 75% is mostly medical insurance. It’s hard to say, he opined, exactly how much of the remaining 25% — including property, engineering, marine, and other sectors — might comprise construction insurance.
The size of the insurance markets of Oman, Bahrain, and Kuwait is $1bn each. Samuel Raj of Talbot Underwriting, added that Qatar’s market is worth $1bn or lower.