The Navigators Group, Inc.

Transcription

1 The Navigators Group, Inc. The Opportunity and Challenges of Underwriting Construction Risks in the Energy and Infrastructure Sectors 2 nd Seminar of Lloyd s in Brazil Stephen Coward President Navigators Technical Risk 20th July /18/2010 1

2 Agenda Introduction What is the subject matter? A quick guide to construction project insurance Construction loss illustrations to give context What are the challenges? Key project information and its worth Essential attributes of a construction (re) insurer The opportunity: What does Lloyd s offer on Brazilian construction projects? The Navigators Group, Inc. 2

3 Planned spending under PAC Clockwise: The Navigators Group, Inc. 3

4 What is the subject matter? An introductory look at construction project insurance Erection all risks (EAR) = Electrical/mechanical projects (nuts & bolts) e.g. power stations, oil refineries, gas processing, industrial plants, pipelines, water /waste treatment and offshore exploration and production installations All risks of physical loss/damage to the contract works Covering all parties associated with project site (Employer, Financiers, Contractors, sub contractors, etc.) Main exposures = fire, explosion, collapse, mechanical breakdown, human error The Navigators Group, Inc. 4

5 What is the subject matter? An introductory look at construction project insurance (2) Contractors all risks (CAR) = dwellings, commercial buildings, roads, bridges, tunnels, dams, sea defences All risks of physical loss/damage to the contract works Covering all parties associated with project site (Employer, Financiers, Contractors, sub contractors, etc.) Main exposures= fire, collapse, landslide, faulty design or materials, storm, flood, human error

6 What is the subject matter? An introductory look at construction project insurance (3) Delay start up insurance (DSU) also known as ALoP Loss of anticipated profit/loan interest repayment (and/or ICOW) arising from an insured delay to the commencement of the business Employer (and financiers) insured, but not contractors Third party liability All insured parties protected against liabilities to others for bodily injury or damage arising out of the execution of project works Let s see what can go wrong some claims examples

7 Run of river hydroelectric scheme inundation of workings Central America

8 Blow down tank for steam turbine under construction vacuum induced collapse

9 Crane collapse at construction site in USA jib falling on site camp caused fatalities

10 Generator Step-Up transformer explosion and fire

11 Deep excavation in Dubai

12 Retaining wall showing signs failure

13 Major failure of retaining wall

14 We wanted a basement car park not a swimming pool!!!!

15 Gas fired power plant nearing completion in USA

16 Gas explosion during pipeline purging widespread damage and loss of life

17 Extensive damage and project delayed several months

18 What are the challenges? Cont/.. Many projects in the infrastructure and energy sectors are highly complex risks, with distinctly individual characteristics Insurance is required for the whole of the project period Complex contractual arrangements Various separate entities working together; sometimes conflicts arise during the life of the project Building sites are inherently dangerous places Profit margins are slim in the construction industry; aggressive tendering process in public and private sectors; cash flow is an important consideration for contractors Insurance risk assessment is often required at tender/pre-bid stage before full plans and specifications have been developed or suppliers identified. Getting relevant information can prove difficult.

19 Cont/ What are the challenges? At the commencement of the insurance many projects elements are yet to be determined even the basics are only estimates e.g. estimated Contract Value, estimated period of construction Risk monitoring and loss prevention is a key part of a successful project. Loss mitigation is also an important element. What went wrong and how to fix it? How to prevent a recurrence on this and other similar projects around the world? Non-renewable business directly impacted by economic cycles. Environmental and political influences are becoming key drivers too. Increasingly ambitious projects lead to greater exposure. Technological and environmental boundaries are being taken to new limits Substantial (re) insurance capacity is required; this capacity has to be sustainable in the long term Underwriting results take several years to develop The Navigators Group, Inc. 19

20 Development of results - an illustration of EAR exposure over time The Navigators Group, Inc. 20

21 Key project information and its worth Underwriting information required What is it? - project features, technical characteristics Who is involved? the parties to the project and their past experience Where is it? location of site, ground conditions, proximity to water How much is it going to cost? the make up of the contract value between its key constituent parts How long will it take to complete? seasonal exposures, length of testing/commissioning phase, lead time for items on the critical path (DSU) And more ? Why it makes a difference? No two projects are the same Premium and deductibles need to be commensurate with expected risk Tailoring coverage to match the exposure Better utilization of capacity. Realistic PML needs to be assessed Loss prevention strategies can be developed with clients The Navigators Group, Inc. 21

22 Essential attributes of a construction (re) insurer Since these are long term policies, the market needs underwriters who provide: A continuing appetite for the risk throughout the project period Adequate engineering resources to provide after sales services; progress monitoring A positive attitude to change after policy inception; project alterations are likely (project plan vs actual activity) A willingness to extend the period of insurance, perhaps long into the future An ability to accept future increases in insured values and the additional exposure ~ Variation orders ~ Unforeseen rise in construction costs, which can be significant ~ Long-term inflation Claims handling capability ~ Technical understanding what went wrong and how to fix it Claims paying ability ~ staged payments, recognising the liquidity of insured parties, long term financial security The Navigators Group, Inc. 22

23 The opportunity: What does Lloyd s offer on Brazilian construction projects? Technical expertise across a range of project types Wide experience drawn from all parts of the world (direct insurance and reinsurance) Reinsurance leadership, including risk management/loss prevention and claim handling capabilities Meaningful facultative capacity from several individual syndicates Competitive pricing Policy/Product innovation: coverage developed from international experience (an alternative to standard Munich Re forms) When the works are completed, the possibility of a smooth transition into operational (re)insurances i.e. property, business interruption Lloyd s unique financial security The Navigators Group, Inc. 23