The lender's insurance package
Every project financing carries an insurance package: construction all risks, delay in start-up, operational property damage, business interruption, and liability cover. Lenders specify minimum terms, require themselves to be named, and want assurance that proceeds are applied to reinstatement or to debt rather than distributed.
In the Gulf this standard package is routine. Two features deserve attention.
Takaful and conventional cover
Where a financing includes Shariah-compliant tranches, those financiers may require takaful — cooperative insurance structured to be compliant — rather than conventional cover. Capacity in the regional takaful market has grown but is not unlimited for very large risks, which are usually reinsured internationally.
That creates a practical question: whether the takaful operator's reinsurance arrangements are themselves compliant, and whether the lenders have satisfied themselves on the point. This is resolvable, and it takes time, so it belongs in the workstream early rather than in the conditions precedent scramble.
Where a financing carries both conventional and Islamic tranches, the insurance structure must satisfy both sets of lenders without duplicating cover — which usually means a single programme with arrangements that both can accept, rather than two programmes.
Local placement requirements
Several jurisdictions require insurance for domestic risks to be placed with locally licensed insurers, with reinsurance ceded internationally. For lenders this raises the question of the local insurer's own credit and its reinsurance panel. Cut-through arrangements — giving the insured or lender direct recourse to reinsurers — are commonly requested and their enforceability depends on the jurisdiction.
What lenders test
- Whether cover matches the specified package, without gaps at the boundaries between policies
- The credit quality of the insurer and, where local placement is required, the reinsurance panel
- Enforceability of cut-through provisions in the relevant jurisdiction
- Loss payee arrangements and how proceeds are applied
- For compliant financings, the takaful structure and its reinsurance
The practical point
Insurance is frequently the last workstream to be resourced and one of the more common causes of delay at financial close. Where a takaful structure and local placement requirements both apply, the lead time is longer than sponsors expect, and the broker should be appointed early enough to run it in parallel with documentation.
