An Approach for the Assessment of the Maximum Probable Loss for Insurance Purposes

Transcription

1 1. INTRODUCTION An Approach for the Assessment of the Maximum Probable Loss for Insurance Purposes During the last decades, the financing of the construction and maintenance of new motorways in various countries has increasingly been shifted from the state to the private sector, comprising mainly of reputable construction companies acting as concessionaires, being supported by a panel of lenders. Typically, amortization of the relevant construction costs along with the payable interests, the maintenance costs and the anticipated profit are re-gained from the exploitation of the motorway by the concessionaire during the concession period, usually stipulated to years. In the vast majority of the cases, these types of projects involve the rehabilitation and/or modernization of existing road sections and also the construction of entirely new sections, including the execution of significant new structures such as interchanges, tunnels, bridges, earthcuts and embankments. As a rule, the route of these projects is divided into distinct geographical regions or units being occupied by various worksites working almost simultaneously, for the construction period being subjected to specific internal milestones or exclusive sectional time limits. Given that during the rehabilitation works in the existing sections, the traffic flow remains uninterrupted, the concessionaire is entitled to revenue from the toll income already since the commencement of the construction period. The requirement to approximate an upper limit of the loss or damage, possibly to be sustained by any of the parts or structures of a motorway project arising from an accidental peril, has always been a basic element of sound insurance practice. The insured and the lenders will need to fix the ceiling on the cover required as to ensure viability of their financial investment, and so will the insurers in deciding the conditions and extent of cover to grant or retain. 2. PRINCIPAL CONSIDERATIONS Historically, maximum loss assessments range in complexity from highly subjective approaches that rely primarily on the good judgment of skilled and experienced engineers to detailed scientific approaches involving structural analyses, testing and/or probabilistic methods. As a rule, maximum loss assessments related to major construction projects, to which also the motorway construction belongs to, focuses on the consideration of a relatively wide range of factors or perils including both hazardous natural events and man-made incidents that could impact the structural integrity and therefore the operability of the project. As per definition, the concept of the Maximun Probable Loss attempts to quantify the consequences of a major damaging incident such as earthquake, ground movement, storm, flood, explosion, fire, etc. regardless of how this incident has originated. Advance International Technical Loss Adjusters (AITLA) 64, Lyssikratous Street, Kallithea, Athens, Greece Tel.: , Fax: Representation in London, France, Cyprus, Malta, Balkans, Turkey & Latin America s: advance@advancehellas.com & artopoulos@advanceadjusters.co.uk

2 2 The key to understanding the concept of Maximum Probable Loss (MPL), adopted in this approach is the term Probable. Recognizing that even the most suitable design, workmanship and safety measures are subject to Murphy s Law, i.e. if something can go wrong, it will, and always at the most inopportune time, a likely hypothetical defect, omission or inaccuracy of the project individually or in conjunction with an accidental hazardous event, can at any time give rise to a failure resulting in serious material damages and consequential losses. The Maximum Probable Loss is defined as the largest estimated loss arising from a single event or peril, which was assessed with due care, taking into account all distinctive elements of the project and its environmental conditions. Usually, a motorway project stretches over a long distance for its route passing through a variety of terrain with substantial diversity in terms of topography, geology, hydrology and occupation. Because of these circumstances, it is considered essential for the reasonable assessment of the Maximum Probable Loss according to this approach, to define (a) individual subsections along the route on a sequential basis, i.e. earth cuts, bridges, embankments, flat stretches, tunnels etc, and also determine their loss potential to the various perils under consideration. An integral part of this exercise is also the identification of the budgeted values of the individual subsections and their structures along with their evolution during the construction period, the time and costing elements required for their repair or reconstruction in case of a loss or damage as well as the anticipated loss of revenue and/or ALoP as a result of the interrelated eventual traffic interruption and/or possible delay in the completion of the project (b) a scenario or scenarios in which each individual peril occurs under reasonable adverse circumstances impacting each designated subsection or structure being under construction and/or rehabilitation. A further significant aspect, affecting the credibility of the assessment, which also needs to be taken into consideration, is the fact that the risk exposure in a motorway project evolves with the accumulation of the insured values, depending on the progress of the works along the whole length of the project. This in turn necessitates for the consideration of an evolving MPL, to be preferably oriented on the successive internal milestones of the project.

3 3 3. METHOD STATEMENT In line with the above considerations, the method statement adopted in this approach encompasses the following steps:- 1. Breakdown of the route into a chain of distinct subsections or parts in a sequential basis, whose individual lengths may vary depending on the type of works, geology, topography and occupation of the area. Assignment of toll stations to which the defined subsections belong to. 2. Identification of the budgeted value of the various works scheduled to be carried out in each subsection on the basis of the relevant breakdowns provided for in the contract and the rates contained in the bill of quantities. Preparation of a flow chart indicating the accumulation or evolution of the corresponding values with strict reference to the exclusive sectional time limits specified in the concession contract. 3. Categorization of the perils to be insured, i.e. earthquake, fire/lightning, flood/storm/frost, land movement/subsidence/landslide, impact/explosion, malicious act etc. 4. Examination of the loss potential of each subsection/structure in respect of each individual peril and also cumulative at any given internal milestone or critical stage of the project. 5. Identification of the subsection/structure of the project with the highest loss potential within a specific exclusive time limit, to be considered as the special focus area or item of the project to which the evolving MPL(1,2 n) shall refer to. 6. The evolving MPL for each exclusive time limit or internal milestone of the project is defined as the quotient (%) between the above mentioned highest loss potential and the calculated cumulative one for all subsections comprising the whole route at the given stage of the project. The corresponding monetary value of the MPL is derived as the product between this quotient and the overall budgeted value applicable to the specific stage of the project. 7. The maximum monetary value of the calculated evolving MPL s along the entire length at any given internal milestone of the project is considered as representing the effective or actual MPL to be taken into consideration.

4 4 4. RISK ANALYSIS AND ASSESSMENT OF THE LOSS POTENTIALS For the assessment of the individual loss potentials relevant to each peril and sectional time limit of the project, the general form of the risk equation is used by applying an approach similar to that adopted by the U.S. Department of Transport, Federal Highway Administration for bridge and tunnel security, as follows:- Where, R = O x V x I O = Occurrence This factor is hazard oriented and changes with the nature or type of the peril under consideration (i.e. earthquake, flood, land movement etc). In the context of this approach, the Occurrence factor approximates the likelihood and severity of each individual peril affecting the project or part thereof at a given stage of the works. Input into this factor typically comes from the engineering analysis and the susceptibility of the wider area of the project to the peril under consideration (environmental conditions) as well as of the technical characteristics of the project including the design issues and the operational security measures. V = Vulnerability In the general form of the risk equation, Vulnerability is an indication of the susceptibility of a specific item or part of the project to sustain damages as a result of its anticipated structural response to the impact of each particular peril when acting with the maximum probable magnitude or severity, historically recorded in each individual geographical region or section under consideration. Input into this factor typically comes from the engineering analysis and expertise. I = Importance This is an inherent characteristic of a given item or part of the project and not a hazard. In principal, Importance is the same for any hazard. This factor is an indication of the maximum probable consequence affecting both the integrity of a specific item of the project as well as its availability for operation & exploitation in the event this part is damaged or temporarily unavailable due to the occurrence of a single hazardous event. Input into this factor typically comes from the analysis of engineering and financial aspects relevant to the execution of repair works including the removal of debris, anticipated loss of revenue (suspended toll stations) for the duration of repairs etc.

5 5 The risk analysis underlying the assessment of the loss potentials according to the previous formula involves the examination of a relatively large number of input data including but not limited to the consideration of the (a) geological and hydrological conditions, geotechnical characteristics and topography of the ground and their variations along the route of the project (b) identification of the type, return period and magnitude of natural hazards typical for each geographical region or section of the project (c) preliminary designs, method statements, quality control procedures and safety measures in respect of the implementation of key structures such as major interchanges, bridges, tunnels, earth cuts and embankments (d) differentiated exposure or susceptibility of such key structures to the identified natural hazards or common man-made hazards, depending on the stage of their completion (e) suitable damage scenarios based on experience gained from the engineering practice and the dealing with similar losses in the past, together with the reasonable approximation of the corresponding costs and time periods required for their reinstatement (f) anticipated financial loss in case of the temporary closure of any critical section, being in the immediate vicinity of a given key structure of the project supposed to have been damaged. In general terms, the rating of the factors O, V and I is based on a differentiated approach as indicated below:- O : application of a scale 1 5 for the likelihood of a specific peril to occur, whereas 1: very low ( 20%) 2: relatively low ( 40%) 3: moderate ( 60%) 4: high ( 80%) 5: significant ( 100%) V : application of a scale for the assessment of vulnerability of any given structure or part of the project to each of the perils under consideration I : approximation of the importance of each structure by computing the participation of its (a) materialized value to the overall value of the works, implemented at any critical stage of the project and (b) individually expected toll revenue to the overall anticipated toll revenue of the project.

6 6 5. NUMERICAL EXAMPLE The example which follows, originates from one of two actual cases in which this approach has already been applied for the assessment of MPL, involving international contractors, insurers and lenders. For obvious reasons, we avoid mentioning in this paper any specific details or names given that the captioned project is still under execution. The overall length of this project is given to some 365 km out of which some 80 km already fulfill the requirements of a modern motorway, however needing certain improvements. The remaining 285 km of the route principally follows the alignment of existing country roads therefore necessitating major reconstruction activities involving inter alia a significant number of new structures (tunnels, bridges, earth cuts, interchanges, embankments, MMS and toll stations etc). The construction period is stipulated to 72 months being subjected to 3 main internal milestones, i.e. 20 months, 50 months and 72 months. Comprehensive engineering risk analysis of the particulars of the project and its environmental conditions, by applying the individual steps previously elucidated in this paper, resulted in the detailed assessment of the loss potentials for all subsections and structures along the entire length of the route, extracts of which are presented in the appendix. The boxes marked with red in the yellow columns in these sheets, indicate the sections or structures of the project advising the maximum loss potential in respect of the various perils under consideration in each of the critical milestones of the project. In line with the previously mentioned definitions, these subsections or structures are seen as the corresponding focus areas of the project in which the evolving MPL shall refer to.

7 7 An overview of the outcome of this exercise is presented in the following table:- RISK ANALYSIS RESULTS ESTIMATION OF MAXIMUM PROBABLE LOSS (MPL) Issues 1 st Critical Stage (20 months) 2 nd Critical Stage (50 months) 3 rd Critical Stage (75 months) Monetary Value 1,420,647,336 2,637,779,156 2,826,846,755 of reference (1) Overall Loss Potential for this Stage 28, (scoring) 42, (scoring) 43, (scoring) Dominating Item I 2.12/Embankment II/21, Tunnel T 26 II/21, Tunnel T 26 Dominating Peril (2) Flood, Storm, Frost Earthquake Earthquake Score for this Item 1, , , and Peril (2) (1) Construction cost and expected toll revenue relevant to this stage (2) Any one occurrence MPL 1: 1,524.40/28, = 5.40% equivalent to 1,420,647,336 x 5.40%= 76,753, MPL 2: 2,105.40/42, = 4.94% equivalent to 2,637,779,156 x 4.94%= 130,306, MPL 3: 1,872.00/43, = 4.27% equivalent to 2,826,846,755 x 4.27%= 120,706,356.44

8 8 As it may be seen from this table and as a result of the engineering risk analysis (a) the dominating peril in the first 20 months after the commencement of the project is flood/storm focusing mainly on item I 2,12 (embankment) of the project. Taking into consideration the anticipated accumulation of values/progress of the works at that stage, the assessed MPL, relevant to this internal milestone is calculated to 5.40% of the overall budget corresponding to 76,753,971 (b) with regard to the 2 nd and the 3 rd internal milestones, instead, the dominating peril becomes the earthquake in either cases applicable to item II/21 (a 4 km long twin tunnel), for the corresponding MPL being identified to 4.94% and 4.27%, but for the relevant monetary values involved to explosively increase to 130,306,290 and 120,706,356 respectively, as a result of the significantly higher progress of the works during the interim period. From the above it becomes evident that the highest value for the evolving Maximum Probable Loss emerges during the construction period of the motorway, the corresponding critical period being approximately 50 months following commencement of the Concession works for the actual PML being calculated to 4.94% or to the monetary value of 130,306,290.

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