# Risks and Insurance policies

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Risks and Insurance policies
Münchener Rück Risk Management in Civil Engineering – LNEC Risks and Insurance policies José Luis Montull

Münchener Rück Risk and Insurance Risk: it is not only the contingency or proximity of a damage (hazard), but also each and every contingency that can be subject of an insurance contract (Risk ) ¿quantifiable ? the mathematical product of the probability of a damage taking place, multiplied by the consequences of such damage: R = P x C where: P = Probability of an event C = Consequences of that event

Münchener Rück Risk and Insurance The Insurance is nothing else than a financial transaction by which a party, the policyholder (Insured), through a remuneration (the premium), promises to himself or to a third party a payment or a reparation in case of risk producing damages. The other party (the Insurer) who makes this payment, takes a set of risks, and is able to compensate them according to the statistical laws.

Risks-Matrix The Risks-Matrix: Major Risks. (Example)
Münchener Rück Risks-Matrix The Risks-Matrix: Major Risks. (Example) Risk Probability Intensity Risk Control Clasification Insurable Insurance Policy Absenteeism and productivity decrease Almost sure Moderate Not adequate Extreme No No investment's shortage in I+D, TI, RRHH Possible Severe Not adequate Extreme No No Political inestability Rare Catastrophic Not adequate High No No Theft of goods or money Almost sure Moderate Not adequate Extreme Yes No Manpower costs explosion Probable Moderate Not adequate Extreme No No Specific sectorial risks: manipulation of materials, stress,.. Almost sure Moderate Adequate Extreme Yes Yes Key Executives travelling together Unlikely Catastrophic Not adequate High Yes Yes

Risks Matrix: Major risks.
Münchener Rück Risks-Matrix Risks Matrix: Major risks. INTENSITY negligible Light Moderate Severe Catastrophic M H E E E Almost sure M M H E E Probable L M H H E PROBABILITY Possible L L M H E Unlikely L L M H H Rare L Low Risk Controlled by skilled workers and surveyors. M Moderate Risk Managed by middle staff. H High Risk General Managers attention is required E Extreme Risk The Board must be informed, and a permanent follow up is required.

Risks hierarchy Münchener Rück INTENSITY EXTREME RISK HIGH RISK
MODERATE RISK LOW RISK FREQUENCY

Münchener Rück ¿how do we face the Risk? Retention: establishing enough reserves to overcome the possible losses option 1 Risk option 2 Transfer: negotiating a specific insurance in order to give external coverage to the possible occurrence of a loss.

Retention or Risk Transfer
Münchener Rück Retention or Risk Transfer ¿Retention? Risks with high probability and low consequences. (Risks have to be taken or "self-insured" if they don't affect the financial stability of the company). ¿Risk Transfer? Risk with low probability and severe consequences (it is necessary to establish the limits of “significancy of a risk” for the company, individually and combined).

The Cost of the Risk % on Incomes Münchener Rück Expected Loss Ratio
Costs of the Risk Control Costs of the Financing of Risk Costs of Risk Reduction Unexpected Costs % on Incomes

What happens actually? Feb 2005 “A high number of companies never overcome a major loss, because of not beeing forewarned” “The important thing is not to find out who will pay (usually an insurance company), but to ensure that your business will not be forced to stop, that you will not loose either clients or suppliers and, even, that your competitors will not take advantage of the circumstance to finish off your business.”

Risks clasification Identified and Known  assessable.
Münchener Rück Risks clasification Identified and Known  assessable. Identified and Unknown  because it's difficult to evaluate its consequences. Unidentified and Unknown  surely we will be surprised (development risks).

Particularities of Civil Engineering
Münchener Rück Particularities of Civil Engineering Risks are often 'Unknown' (identified or not), due to: Each project is different from the previous, always showing different elements (ground conditions, climate, workmanship…) Technological development and innovation are steady, both in machinery and in materials Frequently there is non-skilled labour in the lowest levels of the chain Use and maintenance are sometimes not as careful as they should.

The Risk in Civil Engineering
Münchener Rück The Risk in Civil Engineering RISK FACTORS (material damages): what do they depend on? a) of Internal origin: b) of External origin: SOURCE CONSEQUENCES Works performance (incl. materiales) Acts of third parties Natural hazards (Acts of God) Project

The Risk in Civil Engineering
Münchener Rück The Risk in Civil Engineering RISK FACTORS (material damages): what do they depend on? a) of Internal origin: on the quality of the project itself (its conception and design), not only regarding the future service's stresses, but also concerning the stresses during the construction phase, as well as the construction method chosen on the approach to the construction works: quality and adequacy of the resources (personnel, machinery, measurement instruments, etc), and on the planning, choice and supply materials and their control, etc.

The Risk in Civil Engineering
Münchener Rück The Risk in Civil Engineering RISK FACTORS (material damages): what do they depend on? b) of External origin: They DO NOT depend, in their origin, on the project and construction works (although in some cases they DO depend with regard to their probability of occurrence -example: acts of third parties-) and, in all cases, they also DO depend regarding the severity of their consequencies –example: flood, earthquake, etc.-)

Example: Risks distribution
Münchener Rück Construction All Risk Example: Risks distribution

Example: Risks distribution 'insurable' Risks 'not insurable' Risks
Münchener Rück Construction All Risk Example: Risks distribution 'insurable' Risks 'not insurable' Risks

Risk's analysis Deterministic analysis
Münchener Rück Risk's analysis Deterministic analysis Based on scientific theories or empiric formulations: identical result if you take the same assumptions for the process (ex.: rust) Probabilistic analysis Based on occurrence probability of different risk's scenarios, estimating their consequences (ex.: flood) Statistical analysis Based on previous experience on existing statistics of losses (ex.: personal accidents at work)

Pilars of insurance activity
Münchener Rück Pilars of insurance activity Sufficient statistical base Financial stability Risks heterogeneity Geographical compensation

Statistical base for the analisys
Münchener Rück Statistical base for the analisys Very difficult to apply to Civil Engineering, due to the analyzed particularities: - projects are all different , - climate conditions influence in each and every case, - heterogeneous coverages - etc. Study of historical losses Number of losses. Date of occurrence and close date. Insured. Location. Description. Branch, guarantee, policy number and insurer. Split of losses's amount: total losses, insured losses, not covered losses. deductibles. pay back from other insurers, pay back from third parties, fees.

Risks distribution Exemple: Construction All Risk
Münchener Rück Exemple: Construction All Risk Risks distribution Losses > € (period 1990 – 2001) SOURCE: Münchener Rück

Engineering Insurance Policies
Münchener Rück Engineering Insurance Policies Annual policies (MB) – Machinery Breakdown (BI-MB) – Business Interruption, resulting from a loss covered under the MB policy (DOS) – Deterioration of Goods (EEI) – Electronic Equipment (CPM) – Contractors Plants & Machinery (CECR) – Civil Engineering Completed Risks

Engineering Insurance Policies
Münchener Rück Engineering Insurance Policies Temporary policies (CAR) – Construction All Risk (EAR) – Erection All Risks (CAR-ALoP) – Advanced Loss of Profit in CAR (EAR-ALoP) – Advanced Loss of Profit in EAR Comprehensive policies (BOT, BOO,..)

Engineering Insurance Policies
Münchener Rück Engineering Insurance Policies Multi-annual policies Decennial (10 years cover) Inherent Defects (2, 3 or more years cover) ....

Engineering Insurance Policies
Münchener Rück Engineering Insurance Policies Special policies Off-shore Risks (Oil-Platforms, Undersea-Pipelines,...) Technological Risks (Manufacturer's Guarantee,...) Space Risks (Moon Shots, Space Stations, ...)

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) Target policyholder?  each and every company taking part in the construction process (having interests on the construction itself) Owner / Promoter Main Contractor Subcontractors  Policyholders [actually, the 'insured' is the Construction itself]

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) what types of works can be insured?  All kinds of works and facilities Housing and buildings: residential, offices, hospitals, schools, industrial buildings, car parks, shopping centers, stadiums, power stations, etc. Civil works, infrastructures: tracks (motorways, railways, pipelines, tunnels,...), bridges, hydraulic works (dams, water treatment plants,...), weet risks (breakwater, harbours,...), etc.

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) what is/can be included under the coverage?  All works, goods and tools which take part in the construction process or which are adjacent to the construction site: CONST.WORKS: stored goods & materials, works brought on-site as part of the contract (earthworks, foundations, structures and finishing,..) temporary works erected or constructed on-site,... MACHINNERY: cranes, bull-dozers, dumpers, pave-machinery... EQUIPMENT: hand and machine tools, scaffolding, frames, pumps, ... EXISTING PROPERTY: in property or in custody of the insured (susceptible to suffer damages arising from the insured works)

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) SUMS INSURED: The construction work itself (main coverage): total contract value at the completion date  to regularize a margin should be foreseen (long time works) Machinery (optional guarantee):  List with following data: individual values (“new replacement”) identification, technical features manufacture year internal elechtrical and/ormmechanical damage are excluded

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) SUMS INSURED Construction Equipment (optional guarantee): total value of set (“new replacement value”) (a list should be attached) no heavy machinery Existing Property (optional guarantee): "first risk value" (it should be sufficient for the reconstruction or replacement of the damaged goods)

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) SCOPE OF COVER It is an "all-less" policy (all damages are included, but the damages which are specifically excluded) Condition: Sudden and unforeseen physical loss or damage to the property insured, occurred during the period of insurance, in the construction site, due to any accidental cause not specifically excluded

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) SCOPE OF COVER ¿which Risks are actually covered? Risks arising in connection with the execution of the project (unless that ones excluded) Natural hazars ("Acts of God", based on a defined threshold) Risks arising from acts of third parties (unless that ones excluded) CONTRACT WORKS (basic cover) CONSTRUCTION MACHINERY (optional cover) CONSTRUCTION PLANT&EQUIP. (optional cover) EXISTING PROPERTY (opcional cover) THIRD PARTY LIABILITY (optional cover) G O O D S to be C O V E R E D against D A M A G E S

Maintenance cover (optional)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) PERIOD OF COVER Maintenance cover (optional) Main (basic) Cover Before During construction works After const.w. construction works guarantees previous storage completion of works order of commitments with the works (for the main Contractor) inception of works Dowloading material on-site

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) PERIOD OF COVER Maintenance cover (optional) Main (basic) Cover Before During construction works After const.w. Natural hazars ("Acts of God", based on a defined threshold) Risks arising in connection with the execution of the project (unless that ones excluded) Risks arising from acts of third parties (unless that ones excluded)

Civil Engineering Insurance Policies
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) PERIOD OF COVER Special cases (information required) : advanced works (status of works: progress, ...) extensions / delay (reasons, occurred losses) interruptions, suspensions (reasons, status of works, security measures,...) early termination (status of works, occurred losses) phased handover (situation, delimitations)

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) MAIN EXCLUSIONS (1) Conventional exclusions war, armed conflicts nuclear risks expropiation, confiscation penalties (contractual or not) willful misconduct of the insureds or of the technical which are responsibles for the construction works consecuencial losses (indirect losses) documents, cash values

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) MAIN EXCLUSIONS (2) Specific exclusions Gradual deteriorations wear and tear 'normal' effects of climate rust or oxidation Defective design and workmanship (rectification) regarding materials regarding designs , calculations and drawings Deductibles (always have to be borne by the insured)

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) MAIN 'PROBLEMS' Exemple 1 'Normal' effects of climat excluded but... ¿what is 'normal'?

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) MAIN 'PROBLEMS' Exemple 2 Rectification of defective excluded design or workmanship but... ¿what is the 'defective part'?

Construction All Risk (CAR)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) RISK ASSESMENT: An individual analysis is required for each construction work: configuration and exposition of the construction site (natural hazards, acts of third parties,..) type of works and materials construction method safety measures in the planning costs assesment regarding several scenarios of losses Questionnaire and Application for Insurance

SPECIAL ENDORSEMENT (1)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) SPECIAL ENDORSEMENT (1) To include some additional or extended cover (optional) 001 : SRCC (strike, riot and civil commotion) 002 : cross TPL 003 : maintenance visits 006 : extra costs of acceleration (overtime, night work,..) 007 : airfreight 113 : national transport 116 : contract works taken over or put into service 119 : existing property

SPECIAL ENDORSEMENT (2)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) SPECIAL ENDORSEMENT (2) To delimitate some covers and/or exclusions (some examples) 008 : structures in seismic zones 101 : tunnels, galeries, subsurface structures 104 : dams and water reservoirs 106 : sections 107 : camps and stores 109 : construction material 110 : safety measures (with respect to rain, flood and inundation) 112 : fire-fighting facilities and fire safety on site 121 : piling foundations and retaining wall works

SPECIAL ENDORSEMENT (3)
Münchener Rück Civil Engineering Insurance Policies Construction All Risk (CAR) SPECIAL ENDORSEMENT (3) To exclude directly some usual coverages 009 : damages arising from earthquake 010 : damages arising from flood and inundation 103 : damages in crops, forest and cultures

Civil Engineering Completed Risks (CECR)
Münchener Rück Civil Engineering Insurance Policies Civil Engineering Completed Risks (CECR) Target policyholder?  the owner or the operating company What types of works can be insured?  civil works, infrastructures, with a low fire risk

Civil Engineering Completed Risks (CECR)
Münchener Rück Civil Engineering Insurance Policies Civil Engineering Completed Risks (CECR) SCOPE OF COVER It is a policy that covers "nominated risks" (a risk is covered only if it is referred specifically in the policy):  Unforeseen and sudden physical loss or damage caused during the period of insurance by: Fire, lightning, explosion, impact of landborne or waterborne vehicles Impact of aircraft and other aerial devices or articles dropped therefrom Earthquake, volcanism, tsunami Storm (air movements stronger than grade 8 on the Beaufort Scale) Flood or inundation, wave action or water Subsidence, landslide, rockslide or any other earth movement Frost, avalanche, ice Vandalism of single persons.

BASIS OF LOSS SETTLEMENT
Münchener Rück Civil Engineering Insurance Policies Civil Engineering Completed Risks (CECR) BASIS OF LOSS SETTLEMENT in case of damage wich can be repaired: “the cost of repairs necessary to restore the items to their condition immediately before the occurrence of the damage”(less savage and r.o.d.) in case of a total loss: If the loss occurs within the period stated in the schedule the replacement costs If the loss occurs after the period stated in the schedule the actual value of the insured items immediately before the occurrence of the loss (less savage) -> [deducting a proper depreciation from a)]

Privately Financed Infrastructure Projects and Their Insurance
Münchener Rück Civil Engineering Insurance Policies Privately Financed Infrastructure Projects and Their Insurance PFI Privately financed investments Most important models: BOT Build - operate - transfer BOO Build - own – operate Examples of other models: BLT Build - lease - transfer ROT Rehabilitate - operate - transfer ROO Rehabilitate- own - operate DBFO Design - build - finance - operate

Privately Financed Infrastructure Projects and Their Insurance
Münchener Rück Civil Engineering Insurance Policies Privately Financed Infrastructure Projects and Their Insurance BOT and BOO In both models, a project company builds, owns and operates a plant. BOT: the plant is transferred to a public operator after a period of e.g. 15 years at a low price. BOO: a transfer is not intended.

Privately Financed Infrastructure Projects and Their Insurance
Civil Engineering Insurance Policies Privately Financed Infrastructure Projects and Their Insurance Typical for private financing of infrastructure projects: Sponsors invest only small fraction of the required capital Major funds borrowed from banks Liability of the sponsors in case of increased cost or delay in completion is limited Construction phase particularly critical: Major funds are spent without the project generating cash.

PFI: Finance and Contract Structure
Civil Engineering Insurance Policies PFI: Finance and Contract Structure Host Govern- ment (Principal) Contractor Banks/ Lenders project agreement construction contract loan agreement Suppliers supply contract Project Company shareholders' agreement insurance policy O&M contract Operator Sponsors Insurers

PFI: Finance and Contract Structure
Civil Engineering Insurance Policies PFI: Finance and Contract Structure A Project Company is formed to erect and operate the plant or the infrastruture by means of a network of contract agreements. It often is a stock company. Banks will provide the funds necessary beyond the Sponsors' investments. The Principal, i.e. the initiator of the project, may be the host government, a licencing governmental agency or a public utility. The Principal agrees the project terms with the Project Company. The Contractor and Operator are normally shareholders in the Project Company. The Insurers are vital in view of the limited-recourse financing scheme.

PFI: Flow of Payments (Operating Phase):
Civil Engineering Insurance Policies PFI: Flow of Payments (Operating Phase): Banks Sponsors Interest payments Interest and principal payments Project Co. Price for electricity Payment for fuel, materials and services Principal Suppliers

Typical examples of PFI Projects  large and communal:
Civil Engineering Insurance Policies Typical examples of PFI Projects  large and communal: Commercially used buildings or civil works: - Large public buildings, hospitals - Air ports - Bridges, highways, tunnels Power stations (IPPs) and power distribution Water distribution and water treatment plants

PFI Insurance Requirements:
Civil Engineering Insurance Policies PFI Insurance Requirements: Privately financed projects have a higher need for security. The project partners require a comprehensive insurance cover. The insured for construction and operation is always the project company.

Insurance covers of industrial projects
Civil Engineering Insurance Policies Insurance covers of industrial projects Marine Insurance Erection/Contractor`s All Risk Ins. incl. Liability Cover Maintenance Cover Marine Loss of Profit Contractor`s Plant and Machinery Insurance Guarantee Insurance Advance Loss of Profit Transport Storage Construction/Erection Works Testing Maintenance Operation Fire Ins. and Fire Loss of Profit Machinery Ins. and MLOP Electronic Equipment Ins. Public and Prod. Liability Ins. Workmen's Compensation Insurance

Staged Erection and Insurance Conventional Approach:
Civil Engineering Insurance Policies Staged Erection and Insurance Conventional Approach: (Example of a combined cycle power plant) Erection Tests Commercial operation 1st gas turbine + 200 MW Erection covers Operational covers Erection Tests Commercial operation 2nd gas turbine + 200 MW Erection covers Operational covers Steam turbine + 200 MW / combined-cycle unit 600 MW total Erection Tests Com. op. Erection (All Risks) covers Op. cov.

Staged Erection and Insurance Typical PFI Approach:
Civil Engineering Insurance Policies Staged Erection and Insurance Typical PFI Approach: (Example of a combined cycle power plant) 1st gas turbine + 200 MW Erection Test Commercial operation 2nd gas turbine + 200 MW Erection Test Com. oper. Steam turbine + 200 MW / combined-cycle unit 600 MW total Erection Tests Com. op. Annual operational covers Erection All-Risks cover

LoP insurance for a PFI Civil Engineering Insurance Policies
LoP is an essential cover due to the scarce financial resources of the Project Company ALoP difficult to monitor: Delays in early project stages may have - full impact - partial impact - no impact on the commencement of operation Requires detailed and updated project schedules Constant follow-up with insured and non-insured delays Suppliers Extension intensifies the problem: The EAR/CAR insurer is normally not the manufacturer's local property insurer

LoP insurance for a PFI Civil Engineering Insurance Policies
Time excess: ALoP: 60 days not uncommon, related to the total erection phase Operational LoP cover: days, related to each loss event individually.

What do the Banks ask for in a PFI ?
Civil Engineering Insurance Policies What do the Banks ask for in a PFI ? a) the Project Company shall obtain the widest possible insurance cover from the market, b) the banks' or lenders' interests shall be included, c) payment of indemnity shall be made to the banks or their trustees, d) all rights of recourse against the banks shall be waved, e) disregarding any right to refuse indemnity to the Project Company for any breach of conditions, the indemnity shall be paid to the banks including any loss of profits.

In PFI, beware of terms which aim at:
Civil Engineering Insurance Policies In PFI, beware of terms which aim at: an invalidation of policy conditions which would release the insured project contractor from the usual obligations, a direct claim or direct influence of a party outside the insured project contractors or principal executing the works, the imposing of obligations on the insurers towards the banks.

However, Civil Engineering Insurance Policies
PFI: Breach of Contract / Vitating Act in case of a Multiple Insureds Policy No indemnification of the violating party Other insureds to be indemnified for their direct loss Recourse against violating party not to be waived However,  No indemnification of the banks

PFI: Multiple Insureds Clause (London Engineering Group)
Civil Engineering Insurance Policies PFI: Multiple Insureds Clause (London Engineering Group) "In the event of any vitiating act committed by any one or more insured parties, the lenders shall not be entitled to any indemnity under this policy for or arising from loss or damage in respect of which insurers are otherwise no longer liable to indemnify..."

PFI: Who has an Interest in Insurance?
Civil Engineering Insurance Policies PFI: Who has an Interest in Insurance? The Principal Host Government The Banks Indirectly Indirectly The Project Company (manufacturers, site contractors, operators included) Project Insurances

Insurance from a single source
Civil Engineering Insurance Policies Insurance from a single source Desirable for the Project Company No interfacing problems from one risk phase to the next Comprehensive insurance scheme requested by the banks from the beginning However, Covers traditionally underwritten by different markets and branches Manufacturers, suppliers, hauliers, operators may engage their own insurers or brokers Local insurers normally more engaged in operational than erection covers

Insurance / Reinsurance Arrangement:
Civil Engineering Insurance Policies Insurance / Reinsurance Arrangement: Project Company Intermediary Project insurance Package Policy Direct Insurer P. Bond Mar. M-BI CAR/EAR+BI MB/CECR+BI F F-BI op. TPL Reinsurer Credit Marine Engineering Fire Liability

Inherent defects Civil Engineering Insurance Policies CAR/EAR
Münchener Rück Civil Engineering Insurance Policies Legal protection covers Mortgage default Homeowners Liability (TPL) CAR/EAR Loss of Rent “One-stop shop” Real estate wrap-up protection A&E Liability NatCat Inherent defects Fire Contractor insolvency Vandalism Residual value insurance Bonds Accident covers

Is it necessary an insurance ?
Münchener Rück Civil Engineering Insurance Policies Different treatement of damages by inherent defects in buildings in european area Is it necessary an insurance ? ‘Property‘ or ‘Liability‘ insurance ? voluntary or mandatory insurance ?

Civil Engineering Insurance Policies
Münchener Rück Civil Engineering Insurance Policies Decennial insurance in Europe Mandatory Insurance Sweden and Finland ? Voluntary Insurance In developpment U.K. Holland Benelux France Italy Spain Portugal Greece Turkey

Civil Engineering Insurance Policies
Münchener Rück Civil Engineering Insurance Policies Example 1: France => mandatory ‘dual’ insurance system indemnification Prom./User ‘DO’ Cía. A Perito Experto Recurso ‘DO’ DL DL DL Cía.Aseg. X DL Cía.Aseg.Y Contractor X Liability share on damages between X and Y (CRAC) Contractor Y