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Construction Insurance WorkshopBucharest, May 2017
Construction
GrECo JLT Key Facts
Leading insurance brokers and consultants for industry, commerce
and authorities in CESEE with
790employees
54 offices
in 16 countries
20,000 employees
in more than 135 countries
90years experience
78million EUR turnover
600million EUR placed premium
€
2
GrECo JLT Romania
43employees
3offices
21million EUR placedpremium volume
€1995founded
Region North-West Romania
Region West Romania
Region South-West Romania Region South Romania
Region South-East Romania
Region North-East Romania
Region Central Romania
3
Presence in CESEE
Russia
Kazakhstan
Uzbekistan
Lithuania
Latvia
Estonia
UkraineCzech Rep.
Moldova
Poland
Hungary
Romania
Bulgaria
Slovakia
Austria
Serbia
Croatia
Macedonia
Belarus
Slovenia
Bosnia&Herzegovina
Albania
KosovoMontenegro
TurkeyGrECo JLT subsidiaries
Serviced by GrECo JLT
JLT International Network
Georgia
Azerbaijan
Armenia
Kirgizstan
Tadzhikistan
1989 start of expansion to CESEE
790 employees
54 offices
in 16 countries
4
Global Presence over the JLT network
JLT International Network offices
5
Specialty
• GrECo JLT specializes in distinct areas of expertise
• By implementing dedicated industry Practices which an unconditional focus on an industry a unique degree of specialisation is achieved
• This focus provides distinct know how in respect of risks, markets and industry specifics as well as claims handling.
Sport andEntertainment
Communication,Technology and Media
Energy, Power & Mining
Cargo
Transport &Logistics
Construction &Real Estate
Employee Benefits Alternative Risk Transfer
Fine Arts & Specie Healthcare Credit, Political &Security Risks
Aviation
Church Financial Institutions Marine Food andAgriculture
6
Agenda
1. Risk and Risk Management in Construction
2. Insurance
3. Local and international construction insurance markets
4. Insurances in project finance
5. Correlation of coverage with real exposure
6. Criteria for Evaluation of Insurance offers
7. Case Studies / Best Practice
8. Builders associations international
7
Risk and Risk Management in Construction1
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What is risk?
Risk Capacity
Risk Tolerance
Risk Appetite
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Risk Management
Risk Identification
Risk Analysis
Readiness to assume risk Risk strategy
Coping with risk(1) Elimination (2) Transfer (3) Insure (4) Reduce (5) Accept
Calculation of Cost of Risk
Risk Controlling
Exposure„What can happen.“
Treatment„What do I do.“
Effect„What does that mean.“
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The environment in construction
Complexity
Uncertainty
Opportunism
Exposure
Treatment
Effect
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Coping with risk
• Eliminateproject will not be executed
• Transfercontractual risk transfer, to subcontractor, principal etc. risk allocation in standard construction contracts
• Reducerisk remains but is proactively mitigated risk. Cost of mitigation vs. effect
• InsureRisk remains and is not being transferred, but will be reimbursed if realizes
• AcceptRisk in ist final form will be borne directly
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Unforseeable.
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Exposure – What could happen…
To…• The Works• Own Equipment and Machinery• Own Personnel• Third Parties
• Neighbours• Pedestrians• Principal• JV Partner• Employees of other companies
from cause…• Acts of god• Unthoughtfulness• Faulty design, material, workmanship• …
… and who is going tobear the consequence.
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Insurance2
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Would you cross a river which is on average 1.3m deep?
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Why insure? Every claim is paid…
1. Offers capacity (money) which would otherwise not exist Prevents ruin
2. Money would otherwise have to be saved for damage Frees up equity
3. Stable insurance premium instead damage/no damage fluctuation Smoothes results
4. Specialized service for claim including legal expenses Outsourcing
Assets (Property) Liabilities & Equity
Fixed AssetsEquity
Current Assets
Long Term Liabilities(Loans)
Current Liabilities
Damage
Survival
Cost of Capital
Stable Results
Economies of Scale
… by somebody‘s balance sheet
Equity
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Major types of insurance
Line of Insurance Example
Damage to the works• Contractors All Risk (CAR)• Erection All Risk (EAR)• Comprehensive Project Insurance (CPI)
Liability• Third Party Liability• Professional Indemnity• Employer‘s Liability
Damage to Machinery• Machinery, Plant and Equipment (CPM/CPE)• Machinery Breakdown
Advance Loss of Profits• Advance Loss of Profits• Delay in Start-up
Surety and Bonds
Political Risks• Contract frustration• Unfair Calling of Bonds
Warranty and Indemnity, Title Insurance, M&A
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Damage to the works | Example #1
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Damage to the works: the insurance contract
Munich Re CAR• Internationally used standard insurance coverage for construction projects
• Published by world‘s largest reinsurer Munich Re decades ago.
• Widely accepted by insurers• In some respects not advantageous to insured.
Structured in three sections:• Contract Works• Third Party Liability (optional)• Advance Loss of Profits (optional)
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Damage to the works … basic pitfalls
• By standardized clauses the coverage can be extended.
• Naturally, the standard clauses do not overly extend the coverage.
• Warranties at the same time restrict cover or impose duties on the insured.
• Not obeying by those duties my void the coverage.
• Entries with a impose some duty on the insured or limit the cover.
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… example of such an „endorsement“
Insurance premium Insurance coverage Obligations (Hidden) Cost for
complying with obligations22
Damage to the works: what is damage? | Example #2
Example
Steel framed building, roof completed
Cladding partially completed
Dwarf brick wall completed
Incident: Nuts and bolts used are inadequate, the structure collapses entirely.
DE1: all damage excluded
DE2: only dwarf brick wall covered
DE3: steel framework excluded
DE4: only nuts and bolts excluded
DE5: all damage paid but improvement costs excluded
Difference between no coverage and almost
full coverage.
How much premium is justified? Are those decisions taken
consciously?
What cover did you choose?
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Damage to the works | Example #3
National Arena Stadium Bucharest
• After the inauguration the roof cracked and water has entered the stands
• It is possible that also fire protection measures were neglected during the design
• Investment value: 234 mil EUR
• Value of repairs: not known
Cracks under CAR Insurance.Who has responsibility for design?
Recourse against designer?Consequential financial losses?Extended Maintenance cover?
Designer Owner
Contractor
Designer
Owner
Contractor
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Third Party Liability | Example #1
• Project: Bridge
• Incident: Collapse
• Cause: under discussion
• Project Value: EUR 7 million
• Damage: depending on bodily injuries
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Damage to the works | Example #3
Shopping Center / Hotel Moscow
• Inadequately designed pillars stancedthrough the ceiling which collapsed and also killed persons
• Immediate property damage to collapsed areas
• Substantial cost to remedy the defective pillars in the rest of the building which had the same flaw but had no property damage
• Sum insured of designer: neglible
• Claim amount: > USD 10 mn
• Went to Russian courts and ran through all instances twice Design.
Recourse against designer?Consequential financial losses?
26
Third Party Liability
Deductible: Amount, which has to be borne by insured
Self Insured Retention: „Self-insurance“: Insurer will not process claims below that amount
Insured
Insurer Claimant
Coverage for Premium Liability
Indemnity or Defense
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Third Party Liability | Professional Indemnity
• Insured riskIndemnity for damage as a consequence of professional, acts, errors or omissions (either on claims made or infringement principle)
• ExamplesArchitects, Engineers, Quantity Surveyors, Surveyors, Project Managers
• Example ActivitiesFeasibility Studies, Front end designs, Technical information calculation, Geotechnical studies, Surveying (Quantity and Land)
Design Construction Defects Liability and run-off period
01/16 01/17 01/19 01/xx
Which trigger?Important distinction between “claims made” and “occurrence”.
Retroactive cover: when the design was actually done.Worst case: no cover at all
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Damage to Machinery
• Insured riskIndemnity for sudden and unforeseen damage to plant, machinery and equipment.
• ExamplesCranes, Earthmoving Equipent, Compacting Machinery, Pile driver, Transformers
• Perils insuredBased on Named perils (only perils which are named are insured) or all risk basis.
• Scope of coverHull coverage: only external cause is insuredMachinery breakdown: also internal breakdown is covered
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Damage to Machinery | Example
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Damage to Machinery | Example
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Advance Loss of Profit
• Insured riskLoss of revenue following an insured property damage under CAR policy
• ExamplesShopping center burns down shortly before opening no or delayed revenues to pay back the financing until reinstated.
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Advance Loss of Profit Timeline
This is when the project should have been completed without damage.
The loss of revenue (fixed costs plus profit) during this period will be
covered by the insurance.
Works begin. Insurance, too.
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Surety and Bonds
• Insured riskA surety bond is an undertaking from an insurance company (Surety) to pay a specific sum to a beneficiary on certain specified conditions, such as company insolvency or contractual default.
• ExamplesBid bond, Performance Bond, Advance Payment Bond, Maintenance Bond
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Surety and Bonds
COLLATERAL DEPOSIT 100% MATERIAL GUARANTEE > 120%
CASH GUARANTEE (Retaining from invoices)
SURETY BONDS
PROMISSORY NOTES
LETTER OF GUARANTEE ISSUED BY BANKS
CASH 100%
Frozen AssetsBusiness Development
Banks Insurance
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Surety Bonds Comparison
Presume UNCONDITIONAL PAYMENT at Beneficiary’s request.
DOES NOT PROTECT the Guaranteed against the unfair calls of the Beneficiary.
The relationship between the Guaranteed and the Guarantor is based on COUNTER
INDEMNITY.
Presume that the PAYMENT IS CONDITIONAL TO the existence of a default/ breach of contract,
proved by the Beneficiary.
PROTECTS the Principal (Contractor) against the unfair calls of the Beneficiary.
The relationship between the Principal and the Surety is based on Principal’ creditworthiness –
essential element in underwriting activity.
LETTERS OF GUARANTEE ISSUED BY BANKS
BONDS
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Performance bond/design fault
Artificial entertainment lake in Calafat
• After 3 weeks from the inaugurationthe lake dried up
• Investment value: 300.000 EUR
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Performance bond
Sibiu – Orastie highway
• 8 months after the highway wasopened to public, there were cracksand bumps in the road, mainly due towater infiltration
• Value of investment: 150 mil EUR
• Value of repairs: 2 mil EUR
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The kind of CEN risks faced by investors has
changed
I950’s - 1970’s: the risk of direct expropriation and nationalization was
higher.
Today: CEN risks are more indirect and subtle:
• breach of contract• revocation of a
concession• cancellation of a
license
Political Risks
• Insurable risks
Confiscation, Expropriation, Nationalization (CEN)
Political Violence
Currency Inconvertibility
Non-Honoring of Sovereign Guaranty or Payment Obligation
Breach of Contract (Arbitration Award Default)
Unfair Calling of Bonds (bid bonds, performance bonds, etc.)
Medium-Term Trade Credit Insurance for Private Buyers
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Warranty & Indemnity Insurance, Title Insurance
• Warranty & Imdenity Insurance (Mergers & Acquisitions)A seller-side policy covers the seller for its own innocent misrepresentations; a buyer-side policy covers the buyer against the seller’s misrepresentations (innocent or otherwise). The buyer claims directly against the insurance policy and does not have to seek recourse against the seller.
• Title insuranceThe title to a piece of property is the evidence that the owner is in lawful possession of that property. Title insurance protects real estate owners and lenders against any property loss or damage they might experience because of liens, encumbrances or defects in the title to the property.
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M&A Transation Insurance
Sale and Purchase Agreement (SPA)
Seller provides
• warranties and• indemnities
relating to the targetM&A Insurancescover financial
losses of buyer orseller
arising frombreach of warranties
and indemnities
BuyerSeller
Target
Warranty & Indemnity
Tax LiabilityEnvironmentalIntellectual
PropertyLitigationBuy-Out
Proven liability of seller for breach of contract
All insured risks up to the sum insured (max. purchase
price)
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Title insurance
Cathedral Plaza Bucharest - 19 floors business tower
• In January 2013 the Court decided irrevocably that the municipality must issue a document requiring the demolition of Cathedral Plaza building performed without a legal building permit
• Investment costs: 60 mil EUR
• Demolition costs: 14 mil EUR
42
Project Life Cycle and Insurances
Design Construction Defects Liability
Operation
Professional Indemnity
Contractors All Risk (CAR/EAR) Extended Maintenance
Third Party Liability
Advance Loss of Profits … continued
Extended Maintenance
Employer‘s Liability
Machinery Insurance / Equipment
Political Risk insurance
Transport Transport
Property Insurance
Third Party Liability Operation
Business Interruption
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Project Finance
Ris
kin
Ter
ms
of
Var
iab
ility
an
d p
oss
ible
def
ault
Financing available
Underinsured project
Adequately insured project
44
International and local construction insurance markets3
45
Reinsurance / Atomisation of risk
Insured #1 Insured #2 Insured #3 Insured #4
Insurer (RO) Insurer (RO) Insurer (RO) Insurer (DE)
Reinsurer(DE)
Reinsurer(UK)
46
Global insurance market outlook
The global insurance market grew by 5.7% in 2015 to reach a value of $5,006 billion.
The compound annual growth rate of the market in the period 2011–15 was 4.5%.
47
Global insurance market (engineering)
Source: IMIA
3623 3680 3873
3689 3787 3636
992 1027 1108303 262 223
0,00
1.000,00
2.000,00
3.000,00
4.000,00
5.000,00
6.000,00
7.000,00
8.000,00
9.000,00
10.000,00
2013 2014 2015
US$
Mil
MB, BE, LoP CAR, EAR, ALOP EEI IDI
48
Global insurance market (engineering) – cont.
• Market capacity: 4.000 MUSD
• Annual premium: 1.500 to 2.000 MUSD (~0,04% of total global market)
• Incurred losses:
• 2009 > 2.100 MUSD
• 2010 > 2.200 MUSD
• 2011 > 2.300 MUSD
• 2012 > 2.660 MUSD
• There is an upward trend in the scale of individual power losses. For example, in 2001 the largest three claims were US$13 million, US$11 million, and US$7 million; more than 10 years on, in 2014, the scale of claims had risen dramatically to US$233 million, US$70 million, and US$55 million
Source: Munich RE
49
International engineering insurance market - losses
Source: Munich RE
50
International engineering insurance market (losses) – cont.
Source: IMIA
51
Romanian insurance market outlook (2016)
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• AG – Non-life insurance• AV – Life insurance
+10%
Source: FSA
53
Source: FSA
• A10 – MTPL• A3 – MOTOR HULL• A8 – PROPERTY INSURANCE
Romanian insurance market outlook (2016) – cont.
Local insurance market – status & trends
• Insurance class A9 is includingconstruction insurance, machinery & equipment andagriculture insurance
• We estimate the constructioninsurance market at ~10 mil EUR
• The insurance market is soft – low premiums
• Most of the insurers follow Munich Re wording with ”local input”
• Local capacity could go up to 30 – 40 mil EUR, depending on the size of the insurer
Source: FSA
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Evaluation of Insurance offers4
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Adequacy of insurance covers
• Standardized insurance covers will often fail because they insufficiently adressthe risk
• Tailoring insurance to requirements / demands does not necessarily make it more expensive.
• Contractors‘ focus is on the operational aspects, insurance often comes late in the process.
• Price vs. Costs: Insurance covers may seem cheap, but come at a high cost in case of damage.
?
Premium Protection
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What would you choose?
Contractor‘s All Risk Insurer One Insurer Two
Sum insured 20.000.000 RON 20.000.000 RON
Maintenance 003 Maintenance Visits 004 Extended Maintenance
112 Fire Fighting Included Excluded
114 Serial loss Included Excluded
Designer‘s Risk Clause 115 MunichRe DE 5
107 Camps and Stores Included Excluded
108 Plant and Equipment Included Excluded
109 Construction Material Included Excluded
Deductible 10% of claim min 1.000 RON 10.000 RON
Premium 20.000 RON (0,0010 on TCV) RON 24.000 (0,0012 on TCV)
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Builder‘s Associations International5
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Exemplary Overview
Country Chamber Take on insurance
HU National Federation of Hungarian Building Contractors Recommendation of broker
TR The Turkish Contractors Association, The Turkish employer’s association of construction industries
Workshops on risk and insurance
FR Federation Française de la construction, SYNTEC ingénierie for the architect et engineering companies FPI
Excess Liability fo architects and engineers
CZ Association of Building Entrepreneurs of the Czech Republic, Association forInfrastructure DevelopmentCzech Chamber of Certified Engineers and Technicians Active in Construction
Framework contract for PI
AU Master Builders Association Captive Broker
RU SRO Self regulating organisation
ES AGERSIGREA
Workshops and seminars
IT Cmb, Cooperativa Muratori e Braccianti di Carpi, Consorzio Nazionale Cooperative Produzione E Lavoro Ciro Menotti, C.M.S.A., Cooperativa Muratori Sterratori ed Affini, Cme, Consorzio Imprenditori Edili
Risk placing and Claims handling over preferred broker
JP Japan Road Contractors Association, Japan Construction Machinery and ConstrucitonAssociation, The Japan Institute of Architects, Association of Structural Engineers
PI Coverage
59
Spotlight: Australia
• MBA Insurance Services is owned by seven of the Master Builder Associations around Australia. Results / profits are injected back into the Building & Construction Industry.
60
Spotlight: Russia and SRO
• From State Licensing to Self Regulation: Under the Russian laws, self regulating is a type of activity that is performed by entrepreneurs. It is aimed to develop and install the rules of their activity and control compliance of the installed rules. One of the types of self regulating organization is a construction SRO, members of which are the parties that operate in the construction business.
• Construction SRO must have compensation fund which is formed in the amount of not less than one million Rubles (about 32 000 USD ). In case the construction SRO requires its members to insure their general liability, the amount of compensation fee decreases to not less than 300 000 Rubles (about 9 500 USD) per single member.
• Not complying with the requirements of the SRO means loosing the permit to conduct construction works.
61
6
62
Current structure
Company A
Liab
ility
CA
RCompany B
Liab
ility
CA
R
Company C
Liab
ility
CA
R
Company D
Liab
ility
63
TPL Excess Layer
TPL: Excess Coverage
Liab
ility
CA
R Liab
ility
CA
R
Liab
ility
CA
R
Liab
ility
• Excess TPL contract with a fixed attachment point (amount from which there is coverage)
• Example: Sum insured RON 100 Mio in excess of RON 2 Mio
• Premium based on turnover
• Structure: obligatory or facultatively
Company A
Company B Company C
Company D
64
TPL: The multiplier
Liab
ility
CA
R Liab
ility
CA
R
Liab
ility
CA
R
Liab
ility
• Excess TPL contract which multiplies the sum insured based on the existing sum insured.
• Example: Sum insured multiplied by 3, min RON 2 Mio max RON 15 Mio
• Premium based on turnover
Company A
Company B Company C
Company D
65
CA
R
CA
R
CA
R
CAR Framework: The bundling
Liab
ility
CA
R Liab
ility
CA
R
Liab
ility
CA
R
Liab
ility
• Framework contract CAR only accessible to members of the association
• By bundling purchasing power economies of scale and diversification realize, driving down premium
• Also large losses will not immediately have impact
• Premium based on project volumes, initial setup depends on claims history and scope of cover
• Cover can also adress things which are not available on local market by using specialized markets, such assubcontractor default and consequential expenses for the contractor
Company A
Company B Company C
Company D
66
CAR Subsidiary cover
CAR Framework: The subsidiary cover
Liab
ility
CA
R Liab
ility
CA
R
Liab
ility
CA
R
Liab
ility
• Framework contract CAR which exists in the back for all projects which have been insured separately, even if elsewhere
• By setting up this solution a harmonized, extended coverage is obtained.
• Focused on large losses it offers broad coverage.
• Premium based on project volumes or fixed premium on total structure
Company A
Company B Company C
Company D
67
Weather and parametric covers
• Adverse weather conditions can severely impact the construction industry‘s performance
• Conventional covers require a damageto get reimbursement from insurance
• Parametric covers pay if a certaincondition is met. Similar to option / future on financial markets.
• Examples: average temperature overan extended period of time, precipitation, heat.
68
Multumim pentru atentie!
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confidentiale. Aceasta prezentare si continutul sau nu pot fi folosite, traduse, distribuite, copiate sau modificate electronic fara acordul expres al grupului GrECo. Distribuirea catre o terta parte nu este
permisa.
Discussion
What is my position on rating of insurer,
deductibleand insurance coverage