The Navigators Group, Inc.

Transcription

1 The Navigators Group, Inc. Willis 2012 Latin American Energy Conference The Underwriting of Construction Project Risks in the Latin American Energy/Power Generation Sector Stephen Coward President Navigators Technical Risk 10 th October /16/2012 1

2 Agenda Introduction What drives Construction Project Insurance? A basic outline of EAR/TPL/DSU coverage Construction loss illustrated What are the challenges for insurers? Key project information; the importance of information and sifting out what s relevant Beneficial Value to Underwriters and all stakeholders Attributes of a healthy construction market Project completion and taking into use The Navigators Group, Inc. 2

3 Introduction Relevance to Latin American market: Growth in oil and gas-related economies Increased demand for reliable/affordable electricity Environmental awareness and political pressure for reduction in harmful emissions and cleaner fuels Public & Private sector investments in new infrastructure projects, including energy related projects The Navigators Group, Inc. 3

4 Introduction (2) Construction project insurance is required because: Large scale, high capital value and complex projects require risk transfer to the (re)insurance market, and these typically require the capacity of specialist international carriers e.g. US, London market, European underwriters Responsibility for care of the works and obligations to insure are specified in the Building Contract; multiple insureds, with differing insurable and financial interests Banks are risk averse - where limited recourse finance is provided, lenders want evidence of robust insurance coverage as substitute collateral, with their interests protected Employer led arrangements are preferred; it allows information and risk awareness to flow from one phase to another, i.e. Construction Operational: DSU BI Construction project team to provide plant familiarisation and operational training to the Operational team The Navigators Group, Inc. 4

5 A basic outline of construction project insurance Erection all risks (EAR) = Electrical/mechanical projects (nuts & bolts) e.g. oil refineries, gas processing plants, power stations, other industrial plants, pipelines, water /waste treatment All risks of physical loss/damage to the contract works including temporary works Covering all parties associated with project site (Employer, Financiers, Contractors, sub contractors, suppliers for their on site activities, etc.) Main exposures = fire, explosion, collapse, mechanical breakdown, human error, transit Sum insured = Final Contract Value (FCV) and provisions for debris removal, extra expenses The Navigators Group, Inc. 5

6 A basic outline of construction project insurance (2) 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 Coverage trigger = indemnifiable event(s) under EAR policy Multiple interruptions possible but only a single delay, single deductible and indemnity period apply Third party liability All insureds protected against liabilities to other parties for bodily injury or damage arising out of the execution of project works

7 EAR Exposure over time The Navigators Group, Inc. 7

8 Significant Clauses & Exclusions Defective design, workmanship and materials (e.g. LEG2/96, LEG3/06) Policy Excesses/Deductibles Inventory losses War, terrorism Non-vitiation, policy invalidation provisions Provision for extensions to the period of insurance Adjustment of premiums based on Final Contract Value (FCV) The Navigators Group, Inc. 8

9 Compressor damage on a petrochemical plant contractor opened external transit casing with a welding torch! The Navigators Group, Inc. 9

10 Explosion after weld failure during pneumatic testing single fatality, multiple injuries and severe project delay The Navigators Group, Inc. 10

11 Gas explosion during pipeline purging widespread damage and loss of life The Navigators Group, Inc. 11

12 Extensive damage and project delayed several months The Navigators Group, Inc. 12

13 Tank lift-off during commissioning poor procedures The Navigators Group, Inc. 13

14 What are the challenges? Most projects in the energy sector 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 Energy project sites are inherently dangerous places Profit margins are slim in the construction industry; aggressive tendering process; cash flow is an important consideration for contractors Insurance risk assessment and pricing are often required at tender/pre-bid stage before full plans and specifications have been developed or suppliers identified. Getting relevant information is a key to long-term success but can prove difficult to obtain. However, there is a positive trend on the international stage for brokers to propose Construction Underwriting Reports at an early stage The Navigators Group, Inc. 14

15 What are the challenges? (cont d) 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? Increasingly ambitious projects can 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 well-informed and sustainable in the long term The Navigators Group, Inc. 15

16 Key project information and its value to underwriters Underwriting information required What is it? - project features, technical characteristics, technology being used Who is involved? the parties to the project and their past experience in this type of work Where is it? location of site, ground conditions, proximity to water, layout of site 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 And more ? Supplementary information when DSU is required Note: Location of risk and distance from suppliers Lead time for items on critical path ; alternative suppliers Flexibility of programme what are the possibilities for completing the works out of sequence? Are financiers providing third party progress monitoring? Can this be linked in with similar activity by reinsurers? Natural catastrophe exposures impact on normal supply services/demand surge (key materials, shortage of expert labour and overburdened infrastructure) Need for cooperation from Contractor (although they are not insured for DSU) Consider additional exposure to denial of access, customers/suppliers risks The Navigators Group, Inc. 16

17 The value of underwriting information Why it makes a difference? No two projects are the same Premium and deductibles need to be both competitive and commensurate with expected level of risk Tailoring coverage to match the exposure Avoids surprises (and potential disputes) further down the road Better utilization of capacity. Realistic PML needs to be assessed Loss prevention and Quality Management possibilities can be developed with insurers based on their wide experience Future changes (variations, extensions) can be handled from a position of knowledge Facilitates smooth transition into Operational Insurances The Navigators Group, Inc. 17

18 Attributes of a healthy construction market An understanding of the exposures that are being assumed A continuing appetite for the risk throughout the project period Adequate engineering resources to provide after sales services, progress monitoring, lessons learned from other projects A positive attitude to change after policy inception; project alterations are inevitable (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 Similarly, brokers need to be committed to service the business (underwriting and claims) over time. Commissions and fees need to adequately reflect the work involved The Navigators Group, Inc. 18

19 Project completion and taking into use Defined in the contract specification Achieved to the reasonable satisfaction of the main parties (Employer/Contractor); one party may have a commercial interest in accelerating or delaying completion Handover may be done in phases, e.g. Line A six months completed ahead of Line B Taking into commercial use prior to project completion (and handover) can be problematic Handover from Contractor to the Employer (Owner) move from Project Construction/DSU Insurance to Operational Energy/Business Interruption Annual Insurance The Navigators Group, Inc. 19