Supertall buildings could provide opportunities for ILS market

The world’s first kilometer high building is set to be finished in 2019, Jeddah’s $1.5 billion ‘Kingdom Tower’, demonstrating the imminent rise of supertall buildings and creating opportunities for the insurance-linked securities market.

In the last four years alone 59 of the world’s 100 tallest buildings have been built and, when Saudi Arabia’s ‘Kingdom Tower’ is completed, the height of the planet’s tallest building would have increased by 100% in just 10 years. So one thing is certain, the time of the supertall building is here, and here to stay.

But it’s the insurance aspect of these mega-buildings that interests us at Artemis, and for projects of this size several reinsurers and insurers often provide complete project insurance. Allianz Global Corporate & Specialty (AGCS) are the leading reinsurer for the Kingdom Tower project and Global Head of Engineering Risk Consultants at AGCS, Ahmet Batmaz, said; “Insurance plays a vital role in evaluating and managing the complex risks of these extraordinary projects. Claims and risk consulting services are particularly important on a construction site with close evaluation of past claims often essential in preventing future claims.”

William Henthorne, Inland Marine Underwriting Manager for AGCS reiterates how often several insurers and reinsurers are required for a project of this size, saying; “On very high value projects, one insurer may not have the available capacity or want to provide the full limits necessary to cover the completed project value. Today’s newest and largest buildings easily exceed $1 billion or more in value.”

Buildings so tall, with an insured value in the billions need to be protected against earthquakes, storm surges, severe weather and terrorist attacks, to name but a few perils – and this is where the ILS, reinsurance and catastrophe bond market can tap into that need for protection.

In fact the catastrophe bond structure could provide a viable mechanism for transferring the peak risks these buildings owners and financial backers face to a market more able to bear them, as well as providing a binary trigger structure which would respond to extreme events causing a building to be severely damaged or destroyed.

Catastrophe bonds could be a perfect structure for protecting supertall buildings against specific risks, such as earthquakes and terrorist attacks. The Concentric Ltd. cat bond transaction in 1999 provides an example of how parametric protection was used to protect a corporate owner of high value real estate.

Concentric was a transaction that provided Disney Land Tokyo with $100 million of protection against earthquake related losses. The deal used parametric triggers meaning that different size quakes in different zones surrounding Disney Land would trigger the bond and cause differing levels of principal loss. So the Concentric deal is a good example of how catastrophe bonds and reinsurance on a parametric trigger basis could be highly suitable for the type of risks associated with insuring the supertall building.

The binary nature of a catastrophe bond coverage would seem a good match for the large, volatile risks that an owner, or financier, of a supertall building would want to protect themselves against. That said, we’re unlikely to see a specific cat bond for a supertall building soon, perhaps as values increase it would become viable. The structure however and triggers could provide lessons for those covering these buildings and of course the collateralized reinsurance market will no doubt assume some level of these risks.

As the demand for insurance and therefore reinsurance protection for these supertall buildings grows the alternative reinsurance and ILS markets will likely participate to a degree in covering them. Investing in high value but remote risks is the domain of the ILS market and as a result the supertall building could be an opportunity for it.

Deals of this nature would also provide investors with an opportunity to further diversify their portfolios. As the 1km and even the prospect of the mile-high building becomes more of a reality, providing cover for supertall buildings could become a feature within the alternative reinsurance market space.