So what is the difference between a local insurance company and the reinsurers, in contract work insurance?
First, let’s understand the basic principle. An insurance company buys risks, and is limited in the scope of the risk it is allowed to take on, this is to avoid reaching a situation of being unable to pay off its obligations in extreme cases.
If we illustrate this with a simple example, then the intention is that a certain insurance company cannot insure at the same time four projects that each cost a billion NIS, in order not to reach a situation where in the event of a catastrophe (for example an earthquake) that affects all of them, it will not be able to pay the cost of the damages. Basically, every company has an annual “budget” that it must not exceed; each company according to its size and financial strength, and according to the restrictions imposed on it by the regulatory oversight bodies in Israel.
So what are we doing? Turning to reinsurers. These are large insurance companies abroad, mainly in Europe, that have deep pockets, and are ready to take part of the burden in case of damage, in exchange for a part of the premium received from the customers in Israel, and under underwriting conditions that are usually stricter than the local market.
Not every project requires the insurance company to make a special request to the reinsurers (commonly known as facultative insurance). Each company buys a “contract”, essentially a bank of policies (commonly known as facility insurance), and within this framework it can make a more flexible underwriting as it sees fit, and only in projects that meet certain conditions.
As mentioned before, each insurance company has restrictions according to the terms of its contract with the reinsurers. Classic cases are projects that include the construction of high-rise buildings, work in the vicinity of groundwater, buildings with at least four basement floors, and more, where the Israeli insurance company turns to the reinsurers with a request to create an individual policy according to the terms of the project, which naturally leads to stricter and more expensive underwriting conditions than insurance in the local market.
A key factor is the maximum exposure value in the event of a catastrophic fire or earthquake, and it is important to check at a preliminary stage how the risk in the project is spread. For example, in a NIS 300 million project that includes ten similar buildings that do not share basement floors, the maximum exposure is equivalent to the construction of a single building, and the insurance amount still meets the contract conditions of the local insurer.
On the other hand, a project worth NIS 100 million, which includes three buildings above shared basement floors, is considered one risk area worth all the works in the project, and will likely be re-insured, depending on the scope of the local insurer’s contract.
As an Insured, I would prefer to leave the project with an Israeli insurance company that knows the Israeli construction industry, the relevant Standards, the required safety procedures, and is also connected to information sources from which one can get an impression of the quality of the Insured before issuing the policy, but as we mentioned above, there is not always a choice.
Even in the survey preparation phase, it is important to understand the possible division in terms of fire and earthquake risks, and to emphasize it in the report, in order to give the local insurance company and the consultant or insurance agent the appropriate tools to understand how to insure the project.
It should be noted – Not in every project where the risk can be divided, can reinsurance be avoided; it must be checked during the preparation phase of the contract insurance survey whether the project is carried out within the framework of some government program, such as a “Tenant Price” or “Reduced Price”, where there is usually a contractual requirement to insure the entire project with one policy. We have also encountered cases where there was a demand from the financing body (investment fund/lending bank) to insure the entire project as one piece and the insured could not avoid reinsurance.
In summary, while it might be preferable to insure projects with local companies due to their familiarity with the local industry and regulations, reinsurance is often an essential aspect of managing large-scale or high-risk projects. The decision to involve reinsurers depends on project specifics, contractual obligations, and the insurance company’s capacity.
