TOPICSRISK SOLUTIONS

Insurance solutions for industryIssue 1/2016

Making light work of controlling heavy machineryDigitalisation increases efficiency in the mining industry. And introduces new risks. PAGE 4

Reputation Preparing for a crisis

Infrastructure projects New analysis tool for investments

Paris climate conference Business opportunities for insurers

EDITORIAL

Dear readers,

When people talk about the risks and opportunities of digitalisation, the international mining industry does not immediately spring to mind. But even here the internet, sensor technology and globalisation have long arrived. It is clear that cyber risks will also increase along with the digital advances. These represent a further challenge for the industry and its insurers. Since 2014, both parties have been working together in the non-commercial Mining Insurance Group (report on page 9) not only to improve claims handling and insurance terms and conditions, but also to develop new insurance solutions for the risks of today and tomorrow.

Digitalisation and communication, however, have long belonged together in my opinion. We know that you are reading more and more online, often on your smartphones or tablets. In future, we will thus inform you about our insurance solutions for industry in the online magazine on our website. And as before, you will continue to receive our newsletter at regular intervals. If you have not already signed up for this, please click <here>. I wish you a stimulating read.

Torsten JeworrekMember of the Board of Management of Munich Re and Chairman of the Reinsurance Committee

NOT IF, BUT HOW

ContentsMining 4.0 Many production sites are now monitored and controlled using interactive displays. If the under-lying control systems are una-vailable or only partly functional, severe revenue losses may result.

Page 4

News 2Managing the reputational risk – an insurance solution can help 3

MINING Heavy machines and digtal processes 4The increasingly networked nature of machines and processes comes with new risks. INFRASTRUCTUREProject Risk Rating as an investment tool 14MEAG, Munich Re’s asset manager,uses Project Risk Rating as a key componentin investment decisions.

COLUMN Climate conference in Paris 18With new insurance solutions,many people can now be covered against increasing losses due to weather extremes.

Imprint and preview 19

1Munich Re Topics Risk Solutions 1/2016

HSB Total Cyber™ is a unique bundle of cyber and information security coverages offering broader protec-tion. These include data breach response and liability, identity theft, computer attack, cyber extortion, and network security and electronic media liability – all in one policy.

HSB Total Cyber™ is available through independent agents and bro-kers (pending approvals in some states) and offers commercial cus-tomers a more comprehensive solu-tion to today’s growing cyber risks.

>> Read more at www.munichre.com/HSB/cyber-risk

According to Munich Re’s database, natural catastrophes have almost quadrupled in Australia since 1980 and global warming is projected to intensify the severity of many events. Immense insurance and reinsurance capacity as well as sophisticated risk solutions are required to deal with these changes.

With its latest publication “Expect the unexpected”, Munich Re’s lead-ing experts share their views on the current situation and future outlook regarding natural hazards and risks in Australia and New Zealand.

>> Read more at www.munichre.com/ausnz/natcat

2015, the second year in succession to set a record for global annual mean temperature, was also strongly influenced on a political level by cli-mate change: the breakthrough at the climate conference in Paris gives us reason to hope that climate change can still be slowed to a level where the risks in most regions of the world remain manageable.

Losses from natural catastrophes were fairly low in 2015. The natural “climate oscillation” El Niño had a marked influence on the patterns of weather-related events.

>> You can find more analysis and a comprehensive summary in our new 2015 edition of Topics Geo magazine at www.munichre.com

NATURAL HAZARDS A year of climate change

CYBER RISKSComprehensive insurance for mid-size businesses

AUSTRALIA/NEW ZEALANDExpect the unexpected

Follow us on social media

You can also contact Munich Re on different social media platforms: we are on Twitter, Facebook, Google+, YouTube, LinkedIn and Xing.

Why not follow us and keep up with the topics that are being talked about in the insurance industry? Check out our extensive range of interesting articles and fascinating videos.

Or stay fully up-to-date with live tweets from company and industry events.

>> twitter.com/munichre>> facebook.com/munichre>> youtube.com/user/munichrevideo>> linkedin.com/company/munich-re >> xing.com/companies/munichre >> plus.google.com/

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Munich Re Topics Risk Solutions 1/20162

NEWS

The latest corporate scandals have again shown us that a company’s reputation is key to its success in business.

Current events and the increasing number of scandals are raising companies’ awareness that the potential for financial loss due to a scandal can be much higher than that caused by property damage, and even by business interruption. This is because today, thanks to the internet and social networks, customers have become part of an observant, critical and powerful community. Reputational risks thus now number among the top ten global business risks (Allianz Risk Barometer 2016), and demand for insur-ance cover for reputational risk is growing.

An insured company has a better chance of surviving a crisis with the lowest possible financial damage. The analysis of the potential risk scenarios with the insurer often in itself leads to an improvement in risk management. If a claim is made, the funds received via the insurance can be used to restore the compa-ny’s reputation. The company is free to decide on the action it needs to take to steer its business model back onto the path to success.

Insurance can also provide relief for a company’s directors, as they have an obligation both to put procedures in place to identify reputational risks and avoid damage, and to ensure that the company is prepared should reputational damage nevertheless occur. In addition to risk management, a crisis communication system and media monitoring, the management should consider insuring against reputational damage.

How is reputational damage quantified?

Leaving the panoply of brand valuation theories aside, reputational damage can be calculated on the basis of the fall in turnover when clients go elsewhere. Since the decline in turnover has a direct effect on a compa-ny’s cash flow, and hence on the funds it has available to repair the damage to its reputation as quickly as possible, it needs finance. Unplanned expenditure and losses have to be funded from reserves or can be covered by insurance. Cover generally encompasses loss of profits together with financial support for crisis management and efforts to restore the compa-ny’s image.

In our solution, the scope of cover and the cover triggers are individually tailored to the company’s needs. We look forward to hearing from you.

>> More information at www.munichre.com/en/reputationalrisks

Protecting reputations: Preparing for a crisis

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OUR EXPERT

Ulrike Raible Underwriteruraible@munichre.com

A look inside the Chilean mine El Teniente, the world’s largest copper mine.

Topics: Mr. Becker, the world market is currently under immense pressure. In the past five years, mining reve-nues have dropped continuously to around US$ 450bn today ...

Günter Becker: The industry did indeed flourish until around 2010. However, the global economic and financial crisis also had a direct impact on the raw material volumes sold. China in particular purchased distinctly less raw material in recent years than previously. 900m tonnes of iron ore were shipped to China alone every year. Aluminium, steel, copper, zinc and lead are used in every motor car; batteries contain cobalt and lead, and the so-called rare earth metals, such as praseo-

dymium and neodymium, as well as tantalum, are needed for smart-phones. As demand for raw materi-als declines, so do their prices on the world market. The impact on bulk goods, such as iron ore, copper and coal, was particularly strong in the past two years. Since 2011, the price of one tonne of raw iron ore has lost more than two-thirds of its value, to roughly US$ 45 per tonne today. Stock values of the major mine oper-ators, such as Glencore, BHP Billiton and Rio Tinto, have likewise declined significantly in recent years.

Even in the mining sector, where heavy machines and nature are the main opponents, processes and machines are increasingly being networked. Mining risks expert Günter Becker and Head of Cyber Solutions Chris Storer talk about new risks for this traditional industry.

Heavy machinery and data bits

MINING

For the companies, that should surely mean that they must now pay even more attention to efficiency and prof-itability. Has safety suffered as a result?

Becker: Safety standards have increasingly been brought into line throughout the world in recent years. However, that is only true of the offi-cial mining sector. Many mines oper-ate illegally. In China, for example, there are probably more than 5,000 official and unofficial coal mines at present. No one there has a complete overview. And we do not really know what is happening there. Although the local companies claim to observe international standards, 600 people still lost their lives in mines last year, according to official reports, and the figure even reached 6,000 annually in earlier years.

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MINING

In May 2014, more than 300 miners lost their lives following an explosion in Soma, Turkey. Surely the aim is to prevent such fatal accidents. What preventive measures are in place?

Becker: The biggest risk in under-ground coal mines is that of explo-sions due to firedamp. Methane gas, also known as coal gas, forms an explosive mixture which can explode with devastating effect in air with a volume fraction between 5% and roughly 15%, when exposed to a suit-able ignition source. Sensors in the workings constantly measure the concentration of methane in the air. Machines switch off automatically as soon as it exceeds 2%.

If an accident occurs nevertheless because the mine operator allows the machines to carry on working, the insurer must prove gross negligence on the part of the mine operator, oth-erwise the insurer must indemnify the resultant property and business interruption loss.

Mining accidents aside: a further risk is surely that a deposit is expected to yield more than is ultimately extracted.

Becker: The companies’ aim is always the same: to move only as much earth as is necessary, in the shortest possible time and with max-imum profit. Every year, the world’s biggest gold mining company, Barrick Gold, extracts roughly six million ounces of gold at an average rate of three grammes of gold per tonne of “earth”. Profitability deterio-rates enormously if no more than one or two grammes are recovered, since correspondingly more “earth” has to be moved to obtain the planned yield.

Hence the importance of core drilling in the potential mining area so that the amount of gold contained in a deposit can be predicted as accu-rately as possible. In the so-called Bre-X scandal some 20 years ago, the exploration company Bre-X Min-erals found what was assumed to be one of the largest gold deposits worldwide in the unproven Busang area of Borneo. The rock specimens, however, had been massively and systematically faked.

Screen-based work. Even in a copper mine, many work processes are con-trolled and monitored remotely.

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MINING

Insurance-related risks are different. They concern property damage and the resultant business interruptions. Can you give some examples?

Becker: As the miners say, “it’s dark ahead of the hoe”. You never know what to expect in a mine. Regardless of whether the business interruption is caused by burning machines, rup-tured conveyor belts or other prop-erty damage, the question is always how much saleable raw material could have been mined in that same period of time if operation had not come to a standstill on account of the property loss. Differences of opinion between policyholder and service recipient are inevitable here.

This is where the Mining Insurance Group comes into play ...

Becker: It became increasingly clear that things had to change. When a number of Australian coal mines suf-fered a major loss due to flooding, it was found that the operator had con-cluded insurance policies with more than 20 insurance companies. Their legal advisers fought over every last detail, including whether or not the word “flood” was to be written with an initial capital: an enormous differ-ence in English, and hence also as regards the size of the claim. It took years to settle the claim. In many cases, it was not immediately clear just which losses were actually cov-ered. The Mining Insurance Group has already achieved its first goal: claims handling has been standard-ised and can now be completed more rapidly than in the past. In addition, a standard wording for policies should be available by April 2016 and can then be used for mining throughout the world.

Mr. Storer, mining companies are modern, global enterprises with reve-nues worth billions. Are cyber risks a subject of importance for the indus-try?

Chris Storer: They certainly are. In the past, cyber risks might have been considered less significant in the mining industry than in others, such as the retail, healthcare and the financial sectors, where more per-sonal data is concerned. Yet data protection has long ceased to be the only relevant topic for cyber.

Right now, we are seeing major changes in the way that companies are using data and technology. Min-ing companies are highly complex undertakings with extensive use of technology in their operations. Many operational processes have been dig-italised, from automated production processes to communication with suppliers, service providers and cus-tomers.

This gives rise to new unforeseen risk scenarios with the potential for considerable financial impact: for example if the availability of a mining company’s integrated process con-trol systems were to be seriously impaired. In such a case, it is highly likely that the company would incur a significant loss of revenue.

Can you give some more examples?

Becker: The question is how data are used in the processes. Australia already has fully automated mines in which lorries, conveyor systems and trains are managed by remote con-trol from a distance of more than 2,000 miles. The drilling equipment is automated, lorries with a load capacity of 350 tonnes operate with-out a driver, as do the trains running from the mine to the port. These are version 4.0 mines. All that can hap-pen here is initially a physical (prop-erty) loss. In addition, the mines’ mills are increasingly controlled and serviced by their manufacturers, such as Siemens and/or ABB, from Switzerland and Germany via remote access. No doubt the mine operators are not yet fully aware of the risks which can actually threaten them from the World Wide Web.

The world’s largest trucks are used in mining.

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MINING

Namely?

Becker: When raw material is shipped, the consignee receives an analysis documenting the iron con-tent, for example. If these analyses are rigged and the iron content on arrival at the destination is lower than stated, this would mean a loss of revenue. Another example: what if an outsider were to tamper with the methane gas values recorded in the mine and set the value there to less than 1%? The machines would remain in operation despite the potential hazard, thus consciously accepting the risk of an explosion occurring ...

Storer: The problem for risk manag-ers is the ability to get their arms around such a complex topic that concerns many stakeholders and touches numerous corners of their organisation. It is important to understand the most critical scenar-ios for their company and analyse the true financial impacts of a cyber inci-dent. This differs from company to company and can have major impli-cations on balance sheets and financing capabilities, through to dealing with regulators and rating agencies. Risk managers need help to assess this.

How exactly does Munich Re help?

Storer: A risk must be understood before it can be transferred via insur-ance. For this reason, we work very closely with clients, as well as our own internal experts such as the Mining Engineers from Günter’s team in order to fully understand how the respective business oper-ates, what the key processes are, and what the most critical risk scenarios are that need transferring. We then develop a bespoke policy with cover-ages and limits tailored towards the clients’ specific needs. Such an exer-cise requires a very close collabora-tion between underwriters, the client and their IT experts.

The unique aspect of cyber, however, is that the risk is as complex as it is individual. Not only must every industry be considered individually: even the risks specific to each com-pany differ considerably. That is why each company must be considered on an individual basis. A standard approach would not work.

OUR EXPERTS

Günter Becker Head of the Mining SectionCorporate Insurance Partner gbecker@munichre.com

Chris Storer Head of Cyber Solutions, Corporate Insurance Partner cstorer@munichre.com

Are cyber risks already included in the policies?

Becker: At present, business inter-ruptions are only covered if a prop-erty loss has occurred. In other words, if a train derails owing to interference via the internet, or a self-driving lorry falls down an embankment, that loss would be insured. We cover these losses, which may be attributable to data manipulation. A completely different situation arises, for example, if the methane gas concentration figures are rigged by outsiders, leading to a business interruption without caus-ing a property loss. We refer to this as a “non-damage business interrup-tion due to cyber”.

Storer: Traditional policies were developed at a time when cyber risks were very different and less relevant to organisations, and they were never intended to specifically respond to such incidents. What is important today is that companies understand their specific cyber risk, and seek coverage that is fit for purpose for their individual enterprise.

That is the only way to ensure that their policies react as intended in the event of a major cyber incident.

8 Munich Re Topics Risk Solutions 1/2016

Digging deeper to improve mining claims resolution

A series of extremely large and complex losses in the mining sector in 2007/2008 and their subsequent difficult resolution sparked the idea of forming an industry-wide initiative to improve cooperation between mining companies, insurance carriers and other stakeholders: the Mining Insurance Group (MIG).

In early 2012, a global broking house invited inter-ested parties from the mining insurance community to investigate ways to make claims negotiations less cumbersome. This initiative attracted the interest of some 70 professionals from all corners of mining insurance to gather in London in late January 2012. Risk managers, insurers and reinsurers, brokers, loss adjusters, lawyers and other service providers entered into two days of open and lively discussion about an appropriate mining insurance product.

Although the interests of individual stakeholders continued – and continue – to differ, all agreed that something had to change. In the very first meeting, a steering group was formed to facilitate the creation of what is now MIG – the Mining Insurance Group.

Mining risks come with their own set of special chal-lenges. Yet traditionally insurers have not dedicated a specific line of business to mining, unlike with oil and gas risks for example. Insurance policies for mining risks have been derived from policy forms for “ordinary” property risks in other industries, with mining-specific addenda endorsed to provide for more – or less – clarity. But product development has clearly failed to hold pace with the needs and risks of this booming industry.

The mining loss events of 2007 and 2008 made this discrepancy painfully apparent. In September 2007, there was a breakdown of a crusher in the processing plant of a copper mine in the Andes. As there was no second crushing facility on the site, the expected downtime for repair and the resultant loss of produc-tion implied a potential loss in the hundreds of millions of US dollars. The mine had multiple owners and sev-eral different insurance carriers. To add to the com-plexity, one of the insureds was hit by flood losses in Australia during the same policy period, in January and February 2008. This drove up the potential for total claims to the range of one billion US dollars.

During the protracted claims settlement process – the most complex claim took until June 2012 to be settled in mediation – the measures employed in claims handling and settlement, stemming from “ordinary property” claims, proved insufficient for complex min-ing claims. Insurance buyers and underwriters alike were very dissatisfied with the expectations on the one side and the deliverables on the other.

MINING

Mining is a sector with its own special set of risks, which were not ade quately handled for a very long time.

9Munich Re Topics Risk Solutions 1/2016

MINING

The final version of the MIG Claims Protocol is characterised by five important features:

– Pre-agreed, neutral loss adjuster – Agreed loss management plan – Inclusion of realistic target times – Transparent communication of issues – Resolution procedure as the “circuit breaker“

A neutral loss adjuster

One of the main improvements to the mining claims process established in the MIG Claims Protocol is the appointment of a pre-agreed, neutral loss adjuster. The loss adjuster is a named individual responsible for facilitating an efficient, transparent and fair dia-logue between the relevant stakeholders, using a pro-ject management approach throughout the entire claims process. The adjuster’s main tools are the use of agreed samples for requests for information and loss management plans as well as efforts by the rele-vant stakeholders to work towards realistic target times for the delivery of their tasks.

One of the parties’ mutual commitments is to inform counterparts early of any significant issues that may evolve during the adjusting process. This should begin with a detailed notification, followed by peri-odic discussions. In the event that the claims process does not progress as envisaged, dialogue between the stakeholders comes to an impasse or the adjustment process stalls, the Claims Protocol sets out a resolu-tion procedure with a neutral third party acting as the “circuit breaker”. Alternative options for dispute reso-lution, such as arbitration, remain open.

Applying the Claims Protocol – as either a binding part of the insurance contract or as a best practice – lowers costs for claim resolution, enhances financial outcomes for all parties and helps to foster sustain-able relationships between the stakeholders. Given these advantages, it is not surprising that the MIG Claims Protocol has already been implemented in insurance programmes for several mining companies.

During the two years between the launch of the initia-tive and the first official Annual General Meeting of the non-incorporated association in February 2014, a consid erable amount of work was put into the two ini-tial objectives: claims handling and bespoke policy wording for mining.

The MIG Claims Protocol

A key aim identified in the early days of the MIG initiative was the introduction of a claims protocol. Generally found in insurance programmes for large and international risks in different lines of business, claims protocols set out a detailed procedure that the stakeholders involved in claims handling should follow.

It was agreed that the protocol should be specifically tailored to mining risks, independent of their size, to overcome challenges including distrust and lack of communication between the stakeholders, lack of transparency, wasted resources due to overreliance on experts, and drawn-out claim resolution. The MIG initiative formed a Working Group for Claims Protocols, led by Munich Re and made up of participants from the different stakeholder groups, including insurance buyers. Specifically, Munich Re’s industrial insurance specialist unit CIP was instrumental in developing the wording and claims protocol.

The Working Group for Claims Protocols identified four guiding principles for best practice claims handling:

– Efficiency – Transparency – Fairness – Mutual cooperation

The Mining Insurance Group (MIG)

The Mining Insurance Group (MIG) is a non- commercial undertaking organised by a committee drawn from professionals with extensive experience of mining risks and claims. It is a cooperative forum enabling ongoing improvements in the underwrit-ing, risk management and claims processes, along with the exchange of views, experiences and dis-semination of knowledge. MIG was established by mining companies, risk managers, underwriters, claims adjusters, brokers and other service providers involved in risk management and insurance-related activities in the mining industry.

>> More information at

www.mininginsurancegroup.com

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MINING

In addition to drafting a claims protocol, developing special policy wordings for mining was also high on MIG’s agenda. Andrew Weare, a member of the wording group, talks about the excellent progress the initiative has made in this area.

Back in 2012, prior to joining Munich Re and whilst still working as a wordings broker, I was asked to get involved in the MIG initiative. In those early stages, I anticipated a protracted and difficult road ahead. After all, how can you expect consensus in a room filled with different underwriters, brokers, insureds, lawyers and adjusters each coming at the issue from their own opposing and self-interested position? One of the first meetings was at Munich Re’s offices in Munich. Back then the wording group was comparatively small, as most attendees had opted for the claims protocol group. But this did not mean that the debate was any less passionate, with each participant eager to unpack a list of issues, recommendations and demands. Despite the obvious differences in perspectives represented, it was clear that this group’s members were all professionals with a common dissatisfaction in the flawed policy wordings that had produced uncertainty of coverage and expensive disputes. The bluster and bombast soon gave way to reasoned debate and the will to work as a team. Such was the hopeful start of a new and influen-tial force in mining insurance wordings.

From those early beginnings in Munich, many more meetings have taken place and the wordings participa-tion has grown considerably. Original group members have come and gone, become friends or even switched employers. But as a group, we have retained a collec-tive and growing commitment to our goal of clarity, transparency and certainty in policy wordings, knowing that this is as much desired by insurance buyers as it is by underwriters.

Two years later at the most recent meeting in London, I was happy to be presenting the product of the draft-ers’ efforts. Some months earlier, a group of four under-writers and brokers had been invited to produce a suit-able form based on the ISR Mark IV Policy.

We had locked ourselves away and distilled the wider group’s contributions into the first MIG form with clauses tailored for the Australian mining market.

This slim document is not just a milestone in the work of MIG. It is living proof that diversity of participation and opposing positions can create a forum where industry issues can be fiercely debated, understood and, ultimately, resolved.

The Baralaba Mine, flooded by the Dawson River.

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MINING

Andrew Weare is In-house Counsel in CIP and advises their Mining and Oil & Gas teams on wordings and other legal mat-ters. He has over 20 years of experience in the international insur ance and reinsurance marketplace. aweare@munichre.com

A forum for open dialogue

MIG was an idea founded upon an honest and open discussion of the issues associated with the mining insurance industry and, in particular, buyers’ dissatisfaction with insurers’ response to complex major losses. MIG acted as a “circuit breaker” be tween insurance buyers, sellers and associated service providers, allowing a forum for open dialogue on the issues and acting as an objec-tive mechanism for solutions with all stakeholders having a say.

Despite a largely self-insurance strat-egy, BHP Billiton proudly remains associated with the insurance mar-ket and has made a conscious deci-sion to actively lead, contribute and support the Mining Insurance Group for the benefit of all mining in surance

stakeholders. It fully supports MIG and was an early adopter of the Claims Protocol, which is actively used to adjust losses to their captive and for the insurance placement for their joint venture partners. It also supports the introduction of a stand-ard mining insurance wording, which could be used as an option for insur-ance buyers where cover is intended to be clear and concise.

BHP Billiton is delighted that Munich Re has taken a leadership role in MIG and itself remains committed to MIG’s journey, helping the industry “collaborate, learn and create”.

Matthew Frost is Vice President, Risk Finance at BHP Billiton, the world’s largest natural resource company. He has had a more than 30-year career in insurance and risk management working on three different continents. He is Vice Chairman of MIG.

Dr. Andre Knoerchen heads the New Risk Solutions Team in CIP. Prior to this, he was Head of Claims in CIP, where he was res-ponsible for energy, mining, engineering, casualty and special enterprise risk claims. aknoerchen@munichre.com

OUR EXPERTS

Günter Becker heads the Mining Section in Corporate Insurance Partner (CIP) and has hands-on industry experience as a mining engineer and twenty years’ underwriting experience. He is Chairman of MIG.gbecker@munichre.com

Martina Christ is a legal consul-tant for CIP Claims, specialising in the engineering, energy and casualty lines of business. Since 2009, Martina has worked on some of the largest mining claims in the industry. mchrist@munichre.com

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13Munich Re Topics Risk Solutions 1/2016

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For further information, please contact your Client Manager or go to connect.munichre.com

NOT IF, BUT HOW

Each infrastructure project has its own specific challenges, be it the location, technology, implementation of the construction work, operation, environ- mental conditions or natural hazards.

Easier assessment of risks involved in construction and industrial projects

Munich Re has joined forces with TÜV SÜD to develop a new rating system which makes it possible to assess the risks involved in construction and industrial projects. This product is now a key element of MEAG’s due diligence process. The next step will be to make the product available to a select group of Munich Re clients.

14 Munich Re Topics Risk Solutions 1/2016

INFRASTRUCTURE

MEAG is one of the largest asset managers in the European finance sector and manages nearly all the assets of Munich Re and ERGO. MEAG also manages the assets of non-Group partners and has garnered several asset management awards. In the Munich Re (Group) infrastructure investment programme, know-how from Munich Re’s core business is harnessed to assess the risk of investment opportunities, generat-ing synergies within the Group. Alongside its equity commitments, the Group also provides outside capi-tal. A Group-wide investment volume of up to €8bn is planned for this purpose in the coming years. Due to the long terms to maturity, these investment risks must be analysed and assessed as effectively as pos-sible.

Project Risk Rating – An established part of risk assessment

The rating service developed by TÜV SÜD and Munich Re is an excellent supplementary risk assess-ment tool which has been available to MEAG since October 2014. “Our team is well occupied at present,” says project manager Franz Vogt. “Rating has become an important part of the analysis. Coupled with external certification expertise and a structured assessment process, Munich Re’s internal risk experi-ence supports sound investment decisions. Mean-while, we too are becoming more experienced, and can optimise processes and enhance the content.”

There is a regular flow of feedback from the ordering party – the internal Munich Re unit Asset Liability Management (ALM) – and MEAG, the client. This feedback is then channelled into the product’s further development. It is fascinating to observe just how var-ied Munich Re’s internal know-how is: the assessment of a port, for example, is based, among other things, on the empirical know-how of a sea captain.

Gernot Löschenkohl, Senior Consultant with ALM, emphasises: “Project Risk Rating is an innovative product with considerable potential. For its core busi-ness, Munich Re has at its disposal a heterogeneous pool of experts with extensive operational know-how. As a result, individual risks can be described swiftly, interdependent relationships pinpointed and their impacts mapped out beyond the bounds of the indi-vidual project. These findings allow our clients to reach more effective investment decisions.”

The range of risks is considered as a whole and made transparent to the user

Each infrastructure project has its own specific chal-lenges. Be it the location, technology, implementation of the construction work, operation, environmental conditions or natural hazards: depending on the framework conditions of the individual contract, these aspects can sometimes have a significant impact on the risk profile of the various investment options. This highlights the importance of an all-embracing risk analysis and calls for an exhaustive rating process.

The transparent presentation and assessment of the main risks involved also make it easier for MEAG to form a swift opinion and arrive at a definitive appraisal of the investment risk.

“The findings obtained from Project Risk Rating help us to quantify various assertions in documents acquired from external sources and to transform these into stress scenarios. This permits more precise analysis of a project’s sensitivities,” explains Thomas Bayerl, Head of Infrastructure Debt at MEAG.

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INFRASTRUCTURE

MEAG invests in infrastructure

MEAG has invested in renewable energies since 2010, and in infrastructure since 2012. In both areas these have been equity investments to meet the long-term payment obligations in Munich Re’s core business, and to pursue diversification and optimise returns. In 2014 MEAG established a dedicated team for infra-structure third-party capital, which is headed by Thomas Bayerl.

The capital market segment renewable energies/ third-party capital is handled systematically by the same team that is responsible for equity investments in this segment. When assessing the risks involved in its transactions, MEAG benefits from the know-how of insurance experts at Munich Re and from Project Risk Rating, which is presented here. To date, approxi-mately €2bn of the target volume of €8bn has been invested in infrastructure/renewable energies.

>> More information at www.meag.com

+ -

Dipl.-Ing. Franz Vogt Construction engineer, Project managerProject Risk Ratingfvogt@munichre.com

Leveraging expertise

In the rating process, experts from Munich Re and TÜV SÜD analyse and assess technical risks, execu-tion, environmental risks and natural hazards, as well as macroeconomic and microeconomic aspects. Since infrastructure projects are, by their nature, highly individual, suitable experts are selected from the two companies for each project. Unlike conven-tional assessments with their compartmentalised approach, here, communication between all the parties involved has proven one of the most valuable features of the rating process.

How are investment projects assessed with Project Risk Rating?

Overall assessment of the projects in a Project Risk Rating process allows investors to compare the respective projects and make decisions in keeping with their individual risk appetite.

OUR EXPERTS:

Gernot Löschenkohl Senior Alternative Investment Manager gloeschenkohl@munichre.com

Source: Munich Re

Sample report

Granted Denied

Rating

Certification

To assess a project, the six risk containersare classified according to a risk rankingsystem with seven levels (bars). If theoverall ranking is positive, the project isawarded a certificate with four possiblelevels. The certificate’s ranking is repre-sented by stars.

PPP Courthouse

PPP Roadproject

LNG Export Facility

Hydro Power Plant

Sea Lock

Container Port

Hydro Power Plant

PPP Roadproject

PPP Roadproject

Best in class: Very low probability of project failure under excep-tional circumstances

Very good:Low probability of project failure under exceptional circumstances

Good:Very low probability of project failure under nor-mal circumstances

Acceptable:Low probability of project failure under normal circumstances

16 Munich Re Topics Risk Solutions 1/2016

INFRASTRUCTURE

All-around view of six risk areas

Macroeconomy

Economists identify the political and economic risks specific to the country concerned. Our accumulated socio-empirical data are also applied here.

Engineers and insurance experts analyse the risk portfolio of a construction or industrial project on the basis of six risk containers and their respective interactions.

Technology

Industrial plants are checked by engineers and insurance experts according to the high standards of western industrialised nations.

Execution

Risks associated with project man-agement are analysed in detail by construction experts.

Natural hazards

Geoscientists assess the project’s exposure to natural hazards on the basis of available geo risk data.

Environment

Environmental engineers assess the project’s potential impact on the environment and the resultant risks on the basis of western environmen-tal standards.

Microeconomy

Business plan, market environment and contract law are scrutinised by business experts.

PROJECT RISKS

17Munich Re Topics Risk Solutions 1/2016

COLUMN

Prof. Peter Höppe, Head of Munich Re’s Geo Risks Research/Corporate Climate Centre phoeppe@munichre.com

Climate change

COP21 – Let’s make the most of the new opportunities

of just under one degree Celsius, will intensify, so more vigorous adapta-tion efforts are required.

From our perspective, a further aspect that must be seen in a very positive light is the fact that Article 8 of the Paris Agreement now officially recognises insurance solutions as an important part of the adaptation pro-cess. For example, the already opera-tional pool solutions to cover losses from extreme weather events in poorer countries – such as the African Risk Capacity (ARC), the Caribbean Catastrophe Risk Insurance Facility (CCRIF), and the Pacific Catastrophe Risk Assessment and Financing Initi-ative (PCRAFI) – are seen as useful and extendible approaches.

It is now up to us insurers to breathe life into the new opportunities that have emerged. As a globally operat-ing reinsurer, we understand better than anyone the very different regional hazard situations, how they are changing, and the vulnerabilities involved. Managing risks – including those posed by climate change – is part of our core business. After Paris, the door is now open for us to con-tribute our expertise and help to achieve a meaningful increase in people’s resilience to the unavoidable consequences of climate change. Let us make the most of this oppor-tunity!

In many respects, 2015 was very much a climate year. It gave us a new global temperature record fuelled by a strong El Niño, signifi-cantly exceeding the previous record of 2014. It was almost as if a further compelling argument was being presented for the climate negotiations. Throughout the year, suspense built up, accompanied by some extremely ambitious expecta-tions, as we moved towards the climate summit in Paris. It was clear to everyone that a failure like that of 2009 in Copenhagen would signal the end of the UN-led negotiation process – and this had to be avoided at all costs.

Back in June in Elmau, the G7 coun-tries had laid solid foundations by reaffirming their commitment to restrict global warming and make support payments to developing countries. However, a new feature was agreement on a five-year project that will enable an additional 400 mil-lion people in developing countries to protect themselves against increasing losses from extreme weather events in the form of insurance solutions. This initiative sent out a clear signal: that we take the problems faced by people in developing countries very seriously and are prepared to take responsibility for emissions. In my opinion, this gesture had a positive effect on the atmosphere at the negotiations, which have frequently been affected by the conflicting interests of the countries responsible for climate change and those that suffer most from it.

Further enabling factors included the superb organisation of the confer-ence by the French hosts, and the excellent management of the negoti-ations by the French Foreign Minis-ter, Laurent Fabius. A breakthrough was finally reached, not least thanks to the positive mood that prevailed, which inspired goodwill in many countries that would otherwise have tended to block proposals. I believe that the result of the climate summit is the best possible outcome that could be achieved at the present time. What’s more, with the target of holding global warming to “well below two degrees Celsius”, an even stricter limit was set than originally planned. Yet certain risks remain from the Paris Agreement: the indi-vidual countries still have to ratify the agreement; there are no sanctions if the voluntary reduction targets are not met; countries can opt out of the agreement.

400 million people can now protect themselves against losses from extreme weather events. And we also need to be very clear about one thing: even if all the prom-ises are kept, and the reduction tar-gets are tightened after five-year review periods, climate change can-not be stopped. Yet Paris represents a breakthrough. It has considerably improved the opportunities to limit climate change within a framework that is still manageable for most countries. The effects, however, which have become already detecta-ble with the current global warming

Munich Re Topics Risk Solutions 1/201618

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