Why Aren't Large Infrastructure Projects Insured?

[SFBruin]

This is a question that I've wondered the answer to for a long time, but: With seemingly every major transportation project going over budget in my birth state (California), and the obvious agency problem between agencies (no pun intended) and contractors, why wouldn't state governments engage a third party to handle the financing of infrastructure projects?

For instance, instead of spending agreeing to spend $2 billion on a subway line (or $60 billion on a high speed rail line), a transit agency could spend $2.5 billion on a contract with an insurer, who would then sign a separate contract with a contractor.

This way, if there were cost overruns, the insurer would be liable, and if things came under or near budget, the insurer would profit. The insurer's competitive advantage would likely be that they have better lawyers than does the transit agency.

Obviously, no system is perfect, and the free market would invariably find a way to exploit this system too, but it seems like at least a step in the right direction to me.

Am I wrong?

[Will O' Wisp]

The short answer is that there isn't an insurance company alive willing to take on that liability.

The longer answer is that what you're describing is essentially a fixed-price contract. The actual construction on most large infrastructure projects is actually done under fixed-price contracts. Most of the cost inflation you see comes before that, during the permitting/environmental phase. No contractor is going to take on liability for a project at that stage, cost estimates will still be all over the place.

Contrary to popular belief, private companies don't have better lawyers or some magical organizational efficiency. They just make the local munis take on the cost liability during the riskier stages of development. And the local munis have to accept it, since otherwise no one will take on the risk at all and nothing will get built.

[10023]

^ This.

I would add that, conceptually speaking, what you suggest doesn’t really make sense anyway. Insurance is essentially a cost of capital transfer business, as is any kind of underwriting (e.g. for stock or bond issuances). Insurance against unforeseen risk works by pooling risk and by transferring risk to the party that has the biggest balance sheet, cheapest access to capital and greatest capacity to bear the risk. Generally the best examples of this are governments, which have the ability to raise money through taxation. Now one could argue that the largest insurance companies are now better capitalized than the most shaky municipalities, but only at the extremes and only if one assumes that those munis get no state/federal bailouts. Even the very largest private companies self-insure in many instances (against certain risks) because their own cost of capital is low enough that it doesn’t make sense to pay an insurer’s premiums.

[Obadno]

Not to totally derail the conversation but in certain ways infrastructure projects are insured via things like, self insured retention funds, Bonds, builders risk policies and municipalities and counties do purchase P&C insurance etc.


But what you are talking about is basically a contract bond.

https://www.suretyplace.com/bonds/co...nd-definition/

I am an insurance broker, if you have a medium-large size company that needs insurance in north America please message me directly, I have to buy a lot of xmas presents.

[SFBruin]

Originally Posted by Will O' Wisp

Most of the cost inflation you see comes before that, during the permitting/environmental phase. No contractor is going to take on liability for a project at that stage, cost estimates will still be all over the place.

Oh, I didn't realize that.

I could see why a private company wouldn't want to insure a project like that.