The insurance job

17 September 2001

Carrieann Davies investigates why dam insurance is an important issue, and takes a look at what insurance options are available for dam owners

IN late September 1999, floods submerged large areas in central Nigeria as the country experienced some of its heaviest rainfall in several decades. At the height of the rains, authorities were forced to open the sluice gates of three of the countries’ largest dams, the Kainji, Jebba and Shirio dams, resulting in the flooding of more than 200 villages.

According to press reports, poor transmission from a local radio station meant that many villages received no warning of the danger from the dams. As a result of the floods, 39 people died and tens of thousands more were left homeless.

Following the disaster, local villagers demanded US$16M in compensation from Nigeria’s National Electricity Power Authority. However, the governor of Nigeria State, Abdulkadir Kure, claimed that those in charge of the dams had no choice but to open the gates because with such high water levels there was a danger that the dams could have burst, resulting in an even more critical situation.

Although cases like this are rare, in times where climate change is an important issue, these problems may worsen as heavy rainfall increases water levels of many reservoirs. This is one of the reasons why insurance is becoming an important part of the water power industry.

According to the report Climate Change and Insurance: implications for UK insurers undertaken on behalf of the UK’s Chartered Insurance Institute’s (CII) Society of Fellows, dam failure is a hazard which should be taken into account as far as possible by insurance companies in their flood strategies. The report suggests that climate change will lead to an increased risk of failure of dams in the UK, some of which are 200 years old. It claims that failure can be caused by many factors. For example, climate change could lead to subsidence of the dam foundations, landslip into the reservoir or overtopping due to heavy rainfall.

It is also suggested that an increasing demand for water, coupled with a warmer climate, could also lead to dams being constructed closer to major conurbations. This in turn could raise insurers exposure to liability losses if there is a dam burst or overflow.

The report claims that although the Reservoirs Act 1975 applies to all reservoirs holding or capable of holding more than 25,000M m3 of water – where owners of dams covered by the Act are obliged by law to have them inspected regularly by a civil engineer from a special panel – the law does not specify the details of inspection nor that the results should be published. This often means that the thoroughness of the inspection depends almost entirely on how much the particular dam owner is prepared to pay.

‘Our findings indicate that climate change is here to stay,’ says Dr Andrew Dlugolecki, CGNU director of general insurance development, and leader of the research group. ‘The key issue for us and for society as a whole is how the insurance sector can play a greater role both in managing the effects of climate change and of limiting the risk of adverse climate change in the future. To go on offering the widest cover at the lowest cost to as many people as possible is the aim and we see no reason why that objective should not continue.’

Insurance availability

The benefits of insurance for dams are often emphasised by the insurance industry, but just how available is insurance for the wide range of dams currently in operation throughout the world? Ownership of dams generally falls into two sections: those owned by federal or state governments, electric utilities, or cities that produce power or provide flood control, irrigation, or water supplies, or are used for navigation; and those owned by small businesses which are used for recreation, farming and related purposes.

To investigate the availability of insurance, organisations across the US involved in dam safety were asked by the Federal Emergency Management Agency (FEMA) to provide information about the sources of dam insurance, the availability of comprehensive insurance coverage for the dam itself and the availability of liability insurance for the loss of life and property as a result of dam failure.

The resulting report, Availability of Dam Insurance: A Report to Congress, published in 1999, suggests that insurance for dams owned by state and local governments is readily available. Most governments already insure their facilities using the financial resources of the government.

There is also generally no problem of availability for privately owned and operated dams used for revenue generation, such as those owned by hydroelectric power companies. In fact, the report suggests that nearly all revenue-generating facilities already possess dam insurance for their facilities. This is primarily because these owners/operators have the resources to pay for dam insurance through their revenue generation activities, and have an incentive to maintain such coverage to protect their investment and minimise business disruption costs.

The largest number of dams are small and privately owned, and insurance for the small dam owner is not readily available. According to the report, this is due to the lack of credible probability assessments for dams, meaning insurers are reluctant to cover risks that cannot be assessed with a reasonable degree of predictability. In turn, this leads to the insurer basing premium rates on worst-case scenarios. The small dam owner can then rarely afford this premium rate.

This lack of availability was illustrated during the Spring 2000 session of the New Hampshire Legislature in the US, where a a bill was filed which would require dam owners to submit to the Department of Environmental Services (DES) proof of sufficient bonding or insurance, prior to the construction or reconstruction of any dam to cover reasonable losses for damages that could occur due to failure of a dam. The House Resources, Recreation and Development Committee reported the bill Inexpedient to Legislate (ITL), essentially killing the bill. Based on testimony, it was concluded that insurance is generally not available to private owners on non-revenue producing dams. However, the committee asked DES to continue to monitor the availability of insurance for dam owners in the state to determine if the bill may be appropriate in the future.

To facilitate decision-making and to help small dam owners gain insurance, FEMA has undertaken a number of initiatives with industry, federal agencies, and the states through the Association of State Dam Safety Officials (ASDSO). They have developed, collected and analysed information on dam performance and failure rates.

A recent report has been valuable in giving owners and operators the data needed to help them determine the vulnerability of water systems in the event of an earthquake. The report Seismic Fragility Formulations For Water Systems has been prepared by the American Lifelines Alliance (ALA), a public-private partnership between the Federal Emergency Management Agency and the American Society of Civil Engineers.

Insurance options

So what exactly is currently available for dam owners looking for insurance? One company that offers a speciality service for privately owned dams operated for non-revenue purposes is Riskplan, an insurance company based in Colorado, US.

According to Diane Darby, president and founder of Riskplan, there is a definite need for insurance in this particular section of the industry. For this reason, Darby undertook a 100-year risk analysis of dams in Colorado to determine what the cost of the risk to insure such dams would be. ‘In other words, was the risk insurable,’ explains Darby.

As a result of the risk analysis, which took three years to develop, Riskplan has designed an insurance programme based on the integrity of the dam structure. The programme includes general liability insurance and workers’ compensation, which will cover the dams in the event of flooding, property damage and personal injury.

However, in order to obtain such insurance, you need to prove that your dam is being kept in a state of good repair.

‘Dam owners looking for insurance really need to have a dedicated budget set aside for maintenance of the structure,’ says Darby. ‘If they are continuing to maintain repairs and comply with the state regulatory authority, then we’re willing to offer them coverage. If they do not maintain their facilities, then we will not offer coverage or we will discontinue coverage.’

Another company that provides dam insurance is NEFO, established in 1989 by a group of Norwegian power plants on the initiative of the Norwegian Electricity Federation. NEFO has, since 1992, been a major insurer of third party liability exposures for Dam owners in Scandinavia. Based on this, NEFO intends to expand further and establish a International Dam Owners Liability Insurance solution, for dam owners in NEFO, named ‘IDOLS’.

In addition to liability coverage NEFO also offers a broad spectrum of insurance within the fields of property damage, business interruption, personal accident, workers compensation and pension insurance. The company currently insures more than 6000 dams.

Risk consulting

For dams operated for revenue purposes, insurance options are available from international insurer Generali. The company claims to work with clients to establish specifically drafted insurance solutions which best suit their needs by developing insurance packages that can go beyond traditional construction and advance loss of profit covers, to also include the transport and operational phases.

According to the company, risk consulting has become more and more a major factor in deciding which insurance package fits the needs of clients.

‘Accurate identification and proper analysis of complex risks, through thorough site inspections, are important in producing precise and realistic technical recommendations,’ says Maurizio Colautti, divisional director of Generali Global Risk. ‘Once agreed, these could significantly improve the risk quality and reduce the frequency and severity of loss.’

The company has extensive experience in insuring both large and small dams. For example, it insured the Al Wahada dam, the largest of its kind ever built in Morocco, during the construction phase.

The earthfill dam, located on the Ouergha river 60km north of Fez is the second largest in Africa after the Assuan dam on the river Nile. It has a crest length of 2600m and a height of 88m, creating behind it a water basin of 123km2. The power station, located at the toe of the dam, houses three Francis turbines producing 82.5MW between them.

Construction started in 1991 and took almost six years to complete, with the dam inaugurated on 20 March 1997. Work on the dam was undertaken by a consortium of contractors comprising two Italian, one Spanish and one Russian company.

The Generali group was able to meet the insurance needs of its client by arranging a contractor’s all risk cover through a local insurer, Royale Marocaine d’Assurances, who then reinsured 79% of the risk through Trieste Head Office and Generali Spain.

A detailed study of the project financing allowed Generali to obtain authorisation from the Moroccan Ministry of Finance to receive premium payment from and to settle claims directly to its client, this being the first time that such authorisation has been given to a foreign insurer. The currency of reference agreed for the policy was for the first time the European Currency Unit.

Among the other services offered to the insured, Generali also successfully implemented and financed a training programme for the local drivers of earth moving vehicles, which had the effect of reducing the numbers of losses under the policy.

Although such services are available, insurance for dams looks set to continue to be a controversial topic. Dam owners can benefit from dam insurance but at the present time it is not widely available, and may prove to be unaffordable.

Until it becomes a truly viable option, the best dam owners can do is continue to ensure the safety of their dams. As Rodney Bridle, former chairman of the British Dam Society wrote in a letter to The Times newspaper in the UK on 15 November 2000: ‘As dams are checked and maintained to withstand extreme climatic and seismic events, it seems unlikely that even the more extreme climate changed weather will pose a great new threat to these structures. If it does, I expect that we will develop the technology to maintain high standards of safety against the new extremes.’
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