Posted in News on 20 Jun 2022

The decline in infrastructure has long been an issue in the US. In March 2021, the American Society of Civil Engineers (ASCE) provided an illustration of just how bad things were in its ‘Report Card’ on the nation’s infrastructure, giving the US an overall grade of C-.

The score was elevated slightly by America’s railways achieving a B grade (‘good to excellent condition’), but 11 of the 17 infrastructure categories in the report received grades in the D category (‘mostly below standard’). The ASCE suggested that US infrastructure requires USD 2.6 trillion in funding over the next ten years to be brought up to what it sees as an acceptable standard.

Biden’s infrastructure bill

Thankfully, in November 2021, Joe Biden’s USD 1 trillion dollar infrastructure bill was finally written into law. In the next five years, the plan will invest USD 550 million of that funding into infrastructure projects all across the country. The plan includes:

- USD 110 billion on major infrastructure projects like roads, railways and bridges. The ASCE suggests that 43% of the nation’s roads are in poor or mediocre condition.

- USD 55 billion on water infrastructure. On average, The ASCE estimates a water main is breached every two minutes and 6 billion gallons of treated water are lost every day.

- USD 66 billion on railway improvements, including new high-speed passenger services.

- USD 39.2 billion on other public transport projects, including modernizing and extending bus services.

- USD 25 billion on the nation’s airports.

- USD 11 billion on transportation safety, including replacement of cast iron and bare steel gas pipelines under roads. 

- USD 100 billion on building new schools and upgrading existing ones.

- USD 65 billion for new high-speed internet connections in places that need them, most commonly in rural locations.

The government also plans to subsidise internet connections and related technologies for people on the lowest incomes.

In addition, USD 73 billion will be spent on clean energy – repairing or replacing energy grid infrastructure, increasing renewable energy generation, and building infrastructure to support more use of electric transport. A further USD 21 billion will be spent on clearing up industrial waste and pollution linked to brownfield sites and old mines or gas wells. And finally, a pledge to spend USD 47.2 billion on climate resiliency, and helping infrastructure withstand climate change impacts such as droughts, flooding and wildfires.

Jobs, growth and risks

The White House claims that passing the bill will create about 2 million jobs per year, with multiple industries feeling the short and long term benefits. In a research note published in September 2021, ING estimated the initial USD 550 billion would bring a 7% boost in spending on construction in the US, per year, over the next five years. This increase in construction will boost demand for materials, including aggregates, cement, asphalt and steel. Those smaller businesses operating in multiple industries should also benefit from increased demand for their products and services, as more new infrastructure projects appear and need to be managed and maintained. 

But an increase in business activity doesn’t come without an increase in risk. The pandemic has already had an impact on costs and supply of materials and new projects going online will only exacerbate the problem. This can also have a costly knock-on effect to risks related to contracts.

Delays, problems and overruns are par for the course when it comes to the biggest infrastructure projects. Whether it’s through supply chain issues, poor administration and communication, or unexpected events such as extreme weather, avoiding overrun on these projects is almost impossible. So there’s a need to use risk management and insurance to help prevent or minimise the financial and reputational impact.

Also, despite the climate resilience measures outlined within the bill, increased construction activity will likely cause a negative environmental impact. Environmental campaigners have criticized an emphasis in the bill on investment in the development of carbon capture projects, rather than focusing all efforts on reducing overall carbon emissions. Any business involved in – or insuring a business that’s involved in – activities that could be characterized as carbon intensive, could face reputational risks that could damage its ability to find insurance or even attract and retain customers, investors and employees.

The value of expertise

Back In December 2020, underwriters working in the London marketplace participating in a Lloyd’s of London webinar were optimistic about helping US businesses working on infrastructure projects. They suggested that clients and brokers would benefit from early engagement with specialist underwriters, to outline risk management profiles and strategies.

However, they also highlighted a range of risks that should always be under consideration when arranging cover for infrastructure projects. These include well-understood risks related to fire and water damage, or use of timber frame construction methods. As well as risks linked to the use of newer technologies, such as those related to renewable energy and storage. They also stressed the need for businesses to consider the interconnected nature of risks, for instance, supply chain disruption, extreme weather events and infrastructure failures often come hand in hand, and can severely delay or even derail a project altogether.

The London market has historically been very good at managing large, complex risks local insurance markets might otherwise struggle with. The breadth of coverage can be better, and specialist lines around things like environmental risks, or supply chain risks are easier to source. Those industries that the US government will be counting on to do a lot of the heavy lifting in the coming years, like construction, deal with a range of risks throughout the project lifecycle. Having connections in the London market will make navigating those issues smoother.

The collaborative nature of the market is always bringing new innovations to the table, for example, we’re seeing more US construction businesses using cross-laminated timber (CLT), which is driving conversations in the London market – enough firms are now using these materials and enough data is there to price the risk. More often than not, the London Market is usually the place where these conversations and solutions first find their feet.

Insurance companies and brokers in the London market can play an important role in helping businesses finding it difficult to obtain insurance for risks linked to fossil fuel or other carbon-intensive activities. The key for clients hoping to use the London market is a demonstration of a partnership approach with their insurers. That means starting their renewal process early, being fully transparent with previous losses or ‘near misses’, and having a robust approach to identifying and mitigating risks internally.

The infrastructure plan is a major step for the US as it aims to ‘Build Back Better’ after the pandemic, and will no doubt bring significant benefits to businesses, citizens and communities across the US. And the London insurance market has a key role to play in helping Biden’s ambitious projects come together.

 

 

References

1. ASCE Report Card for America’s Infrastructure: https://infrastructurereportcard.org

2. ibid

3. ibid

4. ING US Construction Outlook 2022: https://think.ing.com/articles/us-construction-outlook-2022-the-year-of-consolidation-and-rebalancing

5. Outline details of Tuesdays with Lloyd’s December 2020 webinar on the US Construction Market: https://www.limestreetguide.com/event/tuesdays-wht-lloyds-virtual-roadshow-us/