A Munich Re spokesperson told Carrier Management via email that the product will eventually be offered globally. For now, Munich Re will begin with smaller sized projects involving select clients in various countries and continents in order to fine-tune the coverage and gather experience, the spokesperson said.
In essence, the new coverage indemnifies unexpected increases in construction costs, with the idea of helping government and investors manage the risk of future cost overruns.
Munich Re is developing its coverage with RIB Group, a Stuttgart-based IT company that produces process-related software products for the construction industry. Clients include the construction companies, the public sector, architectural offices and engineering companies, according to RIB’s web site.
The Munich Re spokesperson said that “there are no comparable solutions to date” combining information technology and insurance for the construction industry. Up until now, unexpected cost overruns in building projects have been considered uninsurable, the spokesperson said.
The product combines virtual planning, using RIB software, with physical coverage for cost overruns. Munich Re said the software enables a “virtual construction” phase where the user can see all processes, interfaces, time aspects and costs. That information then forms the backdrop of the insurance coverage, but gives more certainty to that coverage at the same time, having established many possible outcomes before construction even starts.
“The core principle of the IT-based solution is to provide a maximum of transparency in the design and execution of construction projects in order to mitigate the risk of an unplanned increase in construction costs,” RIB Software CEO Thomas Wolf explained in a statement. “It will help governments and investors to manage the risk of cost overruns in the future.”
Munich Re, in its announcement of the deal, noted that unplanned construction cost hikes can add 20 percent to 30 percent to the overall project building cost, a factor that can scare away investors because of the uncertainty.
A novel insurance product that fills a coverage gap could be a significant shot in the arm for Munich Re. The reinsurer reported a 5 percent drop in net profit in the 2014 first quarter, and a 2.7 percent drop in gross written premiums to $18 billion. The company blamed the results on a strong euro versus the U.S., Canadian and Australian dollars in the first three months of the year. Munich Re and its reinsurance rivals are also dealing with heavy competition from pension funds and other alternative capital investors. That trend is driving down reinsurance prices.