Risk Control and Claims Handling on Advanced Loss of Profits Insurance (ALOP) (WGP63 (2009)) IMIA Conference Istanbul 2009
Project Group Neil Clutterbuck, Allianz Engineering (Chairman) Eric Brault, AXA Corporate Solutions Nigel Chapman, Clyde & Co Brian Fearnhead, Allianz Engineering Silvio Fischer, Partner Re Winrich Krupp, Munich Re Stefan Meyer, XL Insurance Peter O Neill, Charles Taylor Adjusting Ugo Pino, Datta Vittoria Pino Oliver Stein, Gen Re
Agenda Introduction Market Results Financial & Economical Factors Considerations Basic Requirements Coverage of Claims Issues Additional Consideration Example Claims
Introduction The essential objective of ALOP / DSU cover is to insure the risk of the loss of opportunity to earn revenue following an indemnifiable incident as insured by the underlying construction and projects material damage insurances ALOP = Advanced Loss of Profit DSU = Delay in Start Up
Market Analysis 1) Demand: - Demand for ALOP covers has increased significantly over the last 10 years from 539 to 1176 risks { Power generation plant from 11% to 27% on total - Major Sectors Building Construction Risks Industrial Process Plants 2) Frequency: - 6.5% of all ALOP risks suffered a loss - Industrial process plants, power plants and civil engineering risks contributed significantly - Building construction risks show lower frequency 3) Average Claims cost: - Average claims cost varies significantly by industry sector: - Building construction risk = 9.4m - Industrial process plants = 8.0m - Power Plants = 6.3m - Food Industry = 2.6m
Financial Analysis Risks per Industry class Percentage of claims per Industry Key Findings: Claims volumes broadly mirror risks volumes, with the exception of the Building Construction sector where frequency appears much lower
Summary Table For the period 01.01.1980 to 13.12.2008 Currency values = Euros Industry Group Building Construction Industrial Process Plants No of Risks ALOP Sum Insured Claims Frequency Loss Amount 100% Ground Up Average cost of claims 317 14,618,373,925 1.5% 46,999,124 9,399,824 150 21,543,714,910 12.6% 151,857,674 7,992,509 Civil Engineering 119 9,633,554,742 11.7% 53,799,694 3,842,835 Food Industry 30 947,199,826 6.6% 5,228,179 2,614,089 Wood Industry 21 566,712 528 23.8% 22,376,681 4,475,336 Metal Industry 55 4,260,441,581 1.8% 2,573,549 2,573,549 Mining 51 3,334,363,076 3.9% 11,593,320 5,796,660 Other 48 2,314,149,428 4.1% 6,010,540 300,527 Paper Industry 62 2,310,888,421 3.2% 10,250,734 5,125,367 Power Plants 323 31,145,197,705 7.7% 156,289,837 6,251,593 Totals: 1,176 90,674,596,143 6.5% 466,979,330 6,064,666 Implications: Wood Industry has the highest claims frequency and Building Construction the highest average cost of claims.
Financial and Economic Factors 1) Privately sourced funding has been a significant driver behind: - PFI (Private Finance Initiatives) - DBFO (Design, Build, Finance, Operate) - PPP (Private Public Partnerships) - Speculative Developments funded by Banks 2) The Global recession has a significant impact on demand & supply of funding - Economy at a virtual halt with growth as its worst rate in 60 years - Standstill in lending and freezing of credit markets - Collapse of stock markets - Volatility in Global exchange rates and commodity prices - Collapse in private & commercial property values 3) The shift in economic (and political) power from West to East e.g. China and India, over the last decade is expected to be long term 4) Development of emerging countries infrastructure and materialism has caused volatility both in raw materials and energy costs
Financial and Economic Factors 5) Major Global economies have kick-started the economy out of recession by injecting reserves or borrowed money to fund major infrastructure projects 6) Current funding measures will undoubtedly regenerate the construction insurance market including ALOP risks 7) In this climate insurers need to be aware of: - Risk transfer from lenders to insurers - Banks as joint insureds - Loss payee clauses - Multiple insureds (employer, contractor, lenders etc) - Impact on risk due to economic volatility - Financial peaks and troughs on world commodity demands and prices - Interest rates and currency fluctuations on world trading - Moral Hazards / recessionary related claims
Considerations: Basic Requirements Project Management Early underwriter, surveyor & adjuster involvement Transparency Access to planning software & understanding of project s critical path Regular monitoring of progress & analysis of delays from indemnifiable & non indemnifiable causes Loss Notification Importance of swift notification of any loss / delay In the event of a loss, it is critical that: adjuster is on site to agree & monitor actions to be taken & their progress look for ways to reduce delays / loss e.g. repair vs replace additional shift working air freight temporary repairs consider use of economic I.C.O.W clauses
Considerations: Different Cover Types 1) No two risks are ever the same 2) Understanding the business plan 3) Understanding the financial model on which the project and its financial returns are anticipated 4) Determine the type of cover and the selection of an appropriate sum insured e.g. - Advanced loss of gross profit - Advanced loss of revenue or rent - Advanced loss of Bank interest and loan repayment schedules 5) Consider the effects of policy extensions, e.g. - Denial of access - Specific operations and the use of specialised construction plant - Suppliers extensions 6) Agree to an indemnity period, sum insured and the time exclusion which is: - Adequate for the risk - Reflects the exposure and ultimately the EML 7) Consider effects of policy extensions and their impact - Removal of debris - Developing plans for remedial work - Re-design/re-work and alterations to specifications - Availability of components and materials - Lead in times and delivery of replacement parts
Example Claims Large Refinery EAR / ALOP claim following damage to pipe rack and collapse of adjacent water tank ALOP issues: - Closing delay period as much as possible - Conflicting interests of insured / contractor - Incentivisation considered Waste Treatment plant EAR / ALOP claim following damage during testing of injection pipes in a biogas fermenter ALOP issues: - Damage to pipes during testing requiring replacement (c. Euro 5m). - Injection pipes were defective in design. - Damage only to the faulty part itself. - Full design cover (D.E.5) also triggered an ALOP loss. - Difficulties determining indemnity period for repair vs non-indemnifiable redesign time.
Summary 1) Access to information paramount 2) Crucial for close working relationship between all parties 3) Understand underlying Material Damage covers & clauses applicable 4) Understand both the business & financial model and ancillary related contracts 5) Marrying up the covers to the contract to reflect the sum insured, indemnity periods and time exclusions