- Credit risk — Capital markets
This chapter discusses the importance of project insurance. Financiers take an onerous approach to insurance in project finance transactions, requiring a comparably more robust insurance programme than would be adopted in a project that is financed on balance sheet alone. This reflects the fact that until the project company has established a reliable revenue stream, it will have a low level of capitalization and be highly leveraged. The primary function of insurance is to act as a risk transfer mechanism. In return for a known cost (the premium) the uncertainty associated with both the frequency and severity of loss is transferred to the insurer. The discussions cover insurance programme design, project company control, the breadth and scope of the insurance programme, legal and commercial influences on procurement, and insurance risk itself and lenders’ clauses.