Construction equipment is a valuable asset for a construction project. Sushant Sarin elaborates on the importance of contractor plant and machinery (CPM) insurance in construction equipment segment.
India's economy is big and is getting bigger. The construction industry is the second largest industry in India after agriculture. Nearly all of the infrastructure sectors present excellent opportunities, with roads and highways, ports and airports, railways and power standing out as bright spots, with staggering sums of investment planned. Liberalisation of government regulations and a deliberate strategy on the part of the Indian Government to promote infrastructure spells opportunity for engineering and construction companies.
There are various reasons to invest in India. For example, India is one of the world's fastest growing economies - and the growth expected to continue at 7-7.5 per cent despite the global downturn, few restrictions on foreign direct investment (FDI) for infrastructure projects, tax holidays for developers of most types of infrastructure projects, some of which are of limited duration, and opening up of the infrastructure sector through PPPs.
With government's increased focus on programs like smart city mission, Pradhan Mantra Awas Yojana, industrial corridors, etc, the growth may exceed expectations. As per recent article by Research and Markets, the construction industry in value terms is expected to record a CAGR of 15.7 per cent to reach $738.5 billion by 2022.
By 2025, construction market in India is expected to emerge as the third-largest globally and construction output is expected to grow on an average by 7.1 per cent each year.
Construction equipment growth trend Construction industry majorly comprises three segments: Real estate construction which includes residential and commercial construction; Infrastructure building which includes roads, railways, power etc; and Industrial construction that consists of oil and gas refineries, pipelines, textiles etc. Each of the segments would require small to large equipment. A residential high-rise itself requires tower cranes, utility equipment, concrete mixers, excavators, batching plant, etc.
The construction equipment industry had hit a rough patch during the three years FY13-FY16 when infrastructure and road building activities were subdued. Demand for construction machinery remained bogged down pushing back utilisation of production capacities to 45 per cent, a far cry from the current 75 per cent utilisation. In the present landscape, optimum capacity utilisation is expected to be achieved over the next 3-4 years.
In the Union Budget 2018-19, the Government of India has given a massive push to the infrastructure sector by allocating Rs 5.97 lakh crore ($92.22 billion) for the sector.
The construction equipment industry is today pegged at $4.3 billion in value with the Feedback Business Consultancy report forecasting industry volumes to spike up to over 1,20,000 units by 2021 growing at a CAGR of 20 per cent. The current industry volumes are close to 75,000 units. Policy changes in the infrastructure segment are expected to boost the equipment industry to an estimated $7.5 billion by 2020.
Almost all major construction equipment companies across the globe have established presence in India either as joint ventures with Indian companies or as independent entities. Similarly, on the demand front, the Indian consumer has realised the importance of value proposition rather than money, thereby shifting the demand curve towards value driven products, more importantly quality services. Key players in the fray are Tata Hitachi, Kobelco, Hyundai, Case New Holland, and JCB with most of the machinery sporting a local content of 60-70 per cent. However, some international players continue to import a larger component basket.
Importance of insuring equipment
As a contractor, daily life on the job involves using multiple types of plant and machinery. With this come many different risks and opportunities for error while working with potentially dangerous equipment. One false move could result in disaster - and a hefty bill to repair or replace damaged or destroyed equipment.
Contractor plant and machinery (CPM) insurance is designed to protect the equipment from theft, vandalism and physical damage but not including general wear and tear. The insurance coverage is also designed to protect equipment stored in multiple places, as is typical of the contracting industry. For example, today, an excavator used for excavation for basements of a high rise towers in a city, next month it may be used for excavation to erect a pump house on the banks of a river for a lift irrigation project. Though used only for excavation, the location and type of project would differ and so would the hazards it would be exposed to.
Each contractor needs plant and machinery insurance, mainly because of the nature of the contracting business - jobs involve high-risk activities and the use of costly plant and machinery. Projects could easily result in damage to plant or equipment during usage due to various factors, or they could be the target of theft or vandalism. Having coverage could mean the difference between business being able to continue smooth operation and having to close its doors during unforeseen maintenance, or permanently, due to financial loss.
CPM policy protects the equipment used by contractors on the job from everyday damage by sudden physical and fortuitous accident.
Opportunities and challenges
As mentioned earlier, India is a growing market. The increase of projects, increase in equipment used for the same which provides new base for the insurers. Earlier, in the construction equipment, the large ones were mostly imported second-hand machinery due to the uncertain conditions of projects and high cost involved in importing new equipment. Lack of skilled workforce to operate and maintain these equipment leads to breakdown and toppling of equipment that damage the equipment/structures. This is also applied for new equipment available locally.
However, with industry and market evolving, the contractors are focusing on having licensed operators and also on training the operators on maintaining the same. This is good for insurer's confidence on the contractor plant and machinery segment. This will in turn help in reducing comfortable terms and pricing for the contractors. The challenge lies in the part of creating awareness in contractors on the insurance program. It is an ongoing process.
With very old equipment still being used post their operating life cycle, certain equipment are still used which the insurers are skeptical to underwrite.
Support from OEM with respect to parts, repair and replacement is very critical. The relation between OEM and insurers is still emerging due to which there is a lot of difference in opinion. The co-ordination between OEM and insurers will help in easing customer issues when a claim occurs.
Need of awareness
Commercial contractors equipment insurance is a broad-ranging policy designed to cover damaged or missing contracting equipment. A contractor's insurance policy can extend beyond simply covering equipment such as removal of debris, additional custom duty, express freight etc. One of the major tasks for insurer is to create awareness among the financiers, and agents dealers who are generally the first point of contact for the customers.
Currently, the CPM premium component in engineering insurance is 4.09 per cent which is expected to be approximately 10 per cent in the next five years.
Sushant Sarin is EVP - Commercial Lines & Reinsurance, Tata AIG General Insurance Co.