Taking advantage of a global capital glut
February 10, 2016 by David Bowcott
Multiple economic factors are converging globally to create one of history’s greatest gluts of capital. Much of this capital is looking for a home where it can make a return. With government quantitative easing programs supplementing economic growth, negative interest rate environments emerging every day, and concern over accuracy of pricing in the traditional investment markets, we are witnessing massive growth in the world’s capital, and much of it remains under deployed.
What does this mean for you, and the management of risks on your construction projects? Well, the capital is becoming aggressive in finding new asset classes that it can deploy into in the hopes of making some level of return. When the low-risk investment options provide negative interest rates as we see in some jurisdictions, the desperation to find a positive return, with low risk, grows exponentially. We have witnessed the growth of new asset classes over the past several years – in fact we have all been touched, in one way or another, by one of those new investment classes – the infrastructure investment asset class or P3s. Over the past decade there have been massive amounts of capital entering the insurance market place looking to backstop the world’s risks in order to find that elusive positive return, ideally with low risk. The growth in catastrophe bonds has been tremendous as more and more large pools of capital back stop major global weather and geotechnical events (floods, earthquakes, hurricanes, ice storms, etc.). In addition to those catastrophic events that same capital is deploying through insurance vehicles to insure the non-catastrophic risks including those faced within the construction and infrastructure segment. The result has been an unprecedented soft market within the insurance industry.
Not only are insurance terms and conditions on traditional lines of cover improving for the insured, the number of risks that can be insured is also increasing. There has been a significant amount of innovation within all industries the insurance sector serves, several of which have been developed for the construction industry. The following represent a brief list of some of those innovations:
• Liquid surety
• Broader builders risk or course of construction covers
• Expansion in subcontractor default insurance covers
• Weather insurance
• Migration of defect cover into the North American market place
• Coverage for output specifications
• Supply chain insurance
The number of risks that can be insured on a construction project, throughout that project’s lifecycle, is astounding in comparison to the market place 20 years ago. The ability of contractors and owners to more efficiently manage project risk has never been better, and this granular risk management is being recognized by stakeholders beyond the contractor and owner community – the debt – and this creates tremendous value for the project.
The sheer volume of available capital globally is creating unprecedented access to risk finance solutions. Knowing this is important, but knowing where to access this competitive and creative capital is more important. Traditional sources of insurance capital (New York, London, Bermuda and Singapore) are being challenged by new insurance hubs emerging in regions where the returns on traditional investments are at their lowest. Knowing this is vital and knowing how to access these regions is critical. Once you have access to these new sources of risk finance capacity, you need to ensure the capital is mobile and deployable into the regions you have operations.
You need to be aware of all of the risk finance solutions available, not only domestically, but globally too. Make sure you have the right partners/vehicles to access this capital, and finally work internally to better identify and quantify granular risks impacting your project to balance the risks you retain against the risks you transfer.
David Bowcott is senior vice-president, national director of large/strategic accounts at AON Reed Stenhouse Inc.
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