Key risk factors and insurance considerations for garden village and new neighbourhood projects

WHAT ARE THE KEY FACTORS THAT AFFECT THE RISK AND INSURANCE CONSIDERATIONS OF A GARDEN VILLAGE AND NEW NEIGHBOURHOOD PROJECT?

Long delivery period

Garden village and new neighbourhood projects are normally delivered over an extended period of time, possibly decades. Housing is usually developed in this way to assist with build cost investment and infrastructure delivery will match the completion of the residential units. Insurance is not a static marketplace and premium pricing is dynamic. There are well recognised insurance market cycles, driven by the availability of underwriting capacity, that swing between hard and soft phases. Fixing insurance arrangements during either these phases can be disadvantageous to either the insurer or the insured, and is therefore unlikely to be possible or advisable.
Construction has been evolving rapidly in recent years. Advancements in construction technology are delivering faster, safer and more cost-effective projects. These developments are fundamentally changing the construction risk landscape. This reduction in the fundamental risk cost is yet another reason why long-term insurance solutions are not currently appropriate for garden village and new neighbourhood projects.

Multiple project types

Garden village and new neighbourhood developments are a composite of many individual project types. These range from the more straightforward erection of individual dwellings to complex civils and infrastructure projects. These more technically challenging elements might include additions to or interfaces with major transport or rail infrastructure, social infrastructure such as health or education facilities, retail and commercial units, as well as services and utilities for all of the above.
The risks associated with each of these projects differ and the insurance market approaches the various project types with different underwriting techniques. Insufficient distinction between these project types will result in the project incurring additional and unwarranted risk transfer costs as the insurers will rate the entire capital value based on the greatest risk type.

Multiple procurement methods

In our experience, garden village and new neighbourhood projects will encompass a number of procurement types. For example, the development of residential housing will normally be delivered by a housebuilder, typically funded from sales and/or balance sheet. This will vary significantly from major infrastructure projects, such as those involving transport interfaces, which may be part funded by the developer and local authority. Finally, commercial or retail developments may follow a more traditional project financed approach. The variety of these procurement methods dictates that one insurance model for all project elements will not be appropriate or cost effective. For example, the delivery of residential housing may be best insured under the housebuilder’s annual insurance programme, whereas a project financed commercial building may require lender mandated ring-fenced insurances, which also protect the revenue stream in the event of late delivery consequent upon damage in the construction period.
The insurance strategy for a garden village and new neighbourhood development must be flexible enough to cater for this variability in procurement method, or else additional unnecessary cost will be incurred without delivering value.

Multiple delivery partners

The broad spectrum of project type and procurement method invariably leads to considerable variability in contractor size and specialisation. Minor infrastructure works could be delivered by firms of a very different scale to major transport infrastructure interfaces or residential housing. Each different contractor will have an insurance programme with different coverage, limits and excesses. If the developer is relying on the contractors’ insurances for the project, a clear understanding of this patchwork of coverage is critical from an assurance perspective. It may also be prudent for the developer to seek some form of overarching protection to fill the gaps arising from inconsistencies in the contractors’ insurance programmes.