Gotthard base tunnel – Six questions about risk management

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Published 06/01/2016

Gotthard base tunnel – Six questions about risk management

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On 1 June 2016, almost 17 years after construction work was first commenced, the Gotthard base tunnel will be officially opened with an inauguration ceremony. Heiko Wannick, a tunnel construction expert at Munich Re, talks about the success factors associated with tunnel projects of this scale.

What were the greatest challenges during the construction work?

First of all, congratulations to Alptransit and everyone involved in completing this unique and groundbreaking infrastructure project!

The project was prototypical in character, with many uncertainties involved. Never before has a tunnel project of such scale been carried out in high-altitude mountains, with extreme challenges for the construction logistics. Due to its length of 57 kilometres, the tunnel was divided up into several separate construction lots. Millions of cubic metres of excavated material had to be removed from different points. In terms of structural engineering, the engineers were faced with the task of coping with overlying bedrock of up to 2,300 metres in height, allowing only a limited number of sample boreholes to be drilled for pre-construction ground investigation. However, it can be said that despite occasional problems, not only during excavation with the tunnel boring machines but also during drill and blast operations, the project, on the whole, was conducted very successfully.

To what must project owners, contractors and insurance companies pay particular attention in tunneling projects?

A very important factor is that the owner has an experienced project management team. The contracts should be awarded to competent contractors that have proven in earlier projects that they are able to carry out such projects in accordance with schedule, budget and quality requirements. Occupational health and safety protection and quality and risk management should meet the highest demands, and already be taken into account during the pre-planning stages.

In addition to this, a proven and fair contract concept between client and contractors is also essential to avoid legal conflicts in the case of variation orders. Some construction companies purposely seek out weak points in the contract wording while preparing their bid. Having been granted the contract on the basis of a very competitive tender price, they try at a later stage to make up their costs by means of countless contractual claims. This strategy is being applied increasingly in recent years, with the result that more and more construction projects are ending up in court.

Some clients try to shift as many risks as possible to the construction companies. This becomes particularly problematic whenever a fixed-price contract is awarded and the ground risk is allocated to the contractor. If unforeseen ground conditions are encountered, as often is the case in tunnel construction, this frequently results in additional costs and delays.

For insurers, it is crucial to ensure that policies are clearly worded and leave no room for ambiguities. The clearer the policy wording, the greater the probability of a correct and fair settlement of claims. Vague or contradictory wordings inevitably lead to uncertainties in interpretations, which, in extreme cases, require a court ruling.

Of course, with such projects, we also make sure the Principles for Sustainable Insurance and associated ecological, social and governance (ESG) factors are adhered to.

How can it be ensured that risk management does not suffer due to tight deadline and budget pressures?

Risk management means that all risks, whether of a technical, financial or political nature, are identified and mitigated as far as possible. A responsible person must also be appointed for each risk identified. This personal assignment is very important, as experience has shown that many losses in tunnel construction occur because no one felt responsible in critical situations and no countermeasures were taken as a result. Most owners and contractors have meanwhile recognised the benefits of a professional risk management concept, and are consequently factoring in the requisite resources during project planning and tender phases.

To what extent does the "Code of Practice for Risk Management of Tunnel Works", developed by the International Tunnelling Insurance Group, an alliance of insurance companies and construction industry representatives, help?

The Code was originally drawn up for the UK Market following a series of major losses in Great Britain; adherence to the directives was binding. Munich Re engineers played a decisive role in its development. However, this narrow interpretation could not be asserted while expanding the code for application in international markets. The Code is now used there as an important guideline for risk management and the project stakeholders generally comply with its provisions. However, there are no sanctioning mechanisms in the event of deviations. The Code's provisions are important as they provide detailed specifications for the risk management process, from the early planning phase to calls for tenders, awarding contracts and the construction work. The project owner has a decisive role to play in this respect, as he is the only party involved in the project from beginning to end. The introduction of the code has led to a greater awareness of professional risk management in tunnel projects.

A premium erosion has taken place in tunnel project insurance. To what should an insurer pay particular attention in such large-scale projects?

Ironically, along with the excess capacities in the insurance market, the premium decline is due to the increasingly widespread application of the "Code of Practice for Risk Management". The resulting improved risk quality falsely suggests that, as an insurer, you can underwrite tunnel projects at rock bottom prices, even with little expertise. Insurance buyers who focus primarily on the price often choose the cheapest provider. Losses nevertheless continue to occur. Inexperienced insurers are often struggling to handle complex cases. Not only is the expertise of the company's own claims manager required, but frequently also a network of external experts to regulate such cases competently.

In addition to adequate pricing and appropriate deductibles, insurers also have to consider the jurisdiction in the respective markets. The higher the legal uncertainty, the greater the risk for the insurer in the case of a claim.

What do you think about the future development of premiums?

The market is continuing on a downward trend; there are no signs of the premium level recovering, at least not in the near future. Whereas a few years ago, roughly 20 companies still insured tunnel projects, up to 50 are competing with each other today. A special feature in insuring tunnel projects is that the policies run for long-term periods but the premiums are paid relatively early. This can lead to "cash flow underwriting", where underwriters maximise their turnover rates while ignoring the risks and the adequate terms and conditions of insurance required. The losses often occur at a much later stage.

In view of the low premiums, it only takes a few smaller claims or some large claims in the portfolio to run up losses. These are then identified late – in some cases too late for taking suitable countermeasures. At Munich Re, we practice active cycle management, that is to say we are prepared to continue to act as the leading insurer at our terms and conditions, but otherwise –given the current market conditions – we will only participate selectively and with reduced shares, if at all. What is decisive for us, in addition to the quality of the risk and the client's risk management, is the extent to which the above-mentioned legal uncertainty plays a role in a market, and how well we can assess the behaviour of the stakeholders. Ultimately, there is no way around a further reduction in our capacity. After all, we know from past market cycles what can happen, in particular in the case of long-term business such as complex large-scale building projects, if the required premium level is undercut on a sustained basis and losses are run up later.

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Expert

Heiko Wannick

Senior Underwriter

Email: hwannick@munichre.com

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