Buying a house or an apartment is one of the biggest investments in a person's life. In the event of structural damage – or worse still, collapse – it is very difficult to identify the wrong-doer in the complex network of parties involved in a construction project. Can the insurance industry help close this protection gap? Inherent Defects Insurance (IDI) provides financial indemnification to help owners rebuild their home or public buildings, if damaged by an inherent structural defect. In addition, IDI proactively helps improve construction quality right from the beginning due to regular engineers-led inspections to check works during the construction phase.
With booming economies and an ever growing population, the future of real estate development in Asia is very promising, but how about construction quality? Recent events like the collapse of the Indonesian Stock Exchange or the Taiwan Earthquake have drawn public attention to building construction standards.
Modern IDI system originates in France. It came as the result of a compulsory 10-year liability insurance as stated in the French Civil Code and is one of the many important blocks of the French housing warranty system. IDI comes along strong regulatory involvements and logically differs from country to country according to the law.
In 2009, Japan's government enforced a compulsory residential warranty insurance scheme after a scandal reported in 2005, where an architect had falsified design data in more than 70 building projects in order to save construction costs. Japan's IDI exactly matches the local legal framework and is aligned to 'The Act for Secure Execution of Specified Housing Defect Warranty Liability', through which a compulsory financial secure measure against defect is set up for developers.
China's IDI market is currently growing fast, with many possibilities after decades of long internal studies. A compulsory IDI scheme was launched in Shanghai - the financial center of China - in late 2016. Since then, a number of discussions have taken place between provincial government bodies and (re)insurance companies, based on the Shanghai model.
Besides China and Japan, similar stories are shaping across Asia. For instance in India, a trial IDI scheme is under discussion and will come alive soon. It will be an exciting IDI market based on India's population and economy size.
Taking into account the regulatory framework for IDI's product design, different IDI products are expected in Asia. Each of them will pose new challenges to the insurance industry. First, IDI covers structural defects of construction, so the underwriters shall be familiar with construction practices, defects definitions, repair methods and costs in a specific country. Second, to deal with such a strong regulated insurance product, the underwriter needs to have strong insight of the construction practices and associated regulations in the specific market. Last but not least, IDI is a long-term policy and reserving and claims handling requires a strong reinsurance financial commitment. The capability to provide localized IDI service is the key to develop an IDI portfolio.
Swiss Re has been in Asia since 1913 with strong involvement in various Asian countries. The recently established Swiss Re Asia Pte. Ltd shows SR promise to Asia. Our well-established global knowledge network combined with strong local insights enables SR to provide tailor-made regional insurance products. Swiss Re Global Engineering is future ready to support the development of IDI in Asia.