Presentation on theme: "Risks and Insurance policies"— Presentation transcript:
1 Risks and Insurance policies Münchener RückRisk Management in Civil Engineering – LNECRisks and Insurance policiesJosé Luis Montull
2 Münchener RückRisk and InsuranceRisk: 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 Cwhere: P = Probability of an eventC = Consequences of that event
3 Münchener RückRisk and InsuranceThe 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.
4 Risks-Matrix The Risks-Matrix: Major Risks. (Example) Münchener RückRisks-MatrixThe Risks-Matrix: Major Risks. (Example)RiskProbabilityIntensityRisk ControlClasificationInsurableInsurancePolicyAbsenteeism and productivitydecrease Almost sure Moderate Not adequate Extreme No Noinvestment's shortage in I+D, TI, RRHH Possible Severe Not adequate Extreme No NoPolitical inestability Rare Catastrophic Not adequate High No NoTheft of goods or money Almost sure Moderate Not adequate Extreme Yes NoManpower costs explosion Probable Moderate Not adequate Extreme No NoSpecific sectorial risks: manipulation of materials, stress,.. Almost sure Moderate Adequate Extreme Yes YesKey Executivestravelling together Unlikely Catastrophic Not adequate High Yes Yes
5 Risks Matrix: Major risks. Münchener RückRisks-MatrixRisks Matrix: Major risks.INTENSITYnegligibleLightModerateSevereCatastrophicMHEEEAlmost sureMMHEEProbableLMHHEPROBABILITYPossibleLLMHEUnlikelyLLMHHRareLLow RiskControlled byskilled workers and surveyors.MModerate RiskManaged by middle staff.HHigh RiskGeneral Managers attention is requiredEExtreme RiskThe Board must be informed, and a permanent follow up is required.
7 Münchener Rück¿how do we face the Risk?Retention: establishing enough reserves to overcome the possible lossesoption 1Riskoption 2Transfer: negotiating a specific insurance in order to give external coverage to the possible occurrence of a loss.
8 Retention or Risk Transfer Münchener RückRetention 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).
9 The Cost of the Risk % on Incomes Münchener Rück Expected Loss Ratio Costs of theRisk ControlCosts of theFinancing of RiskCosts ofRisk ReductionUnexpected Costs% on Incomes
10 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.”
11 Risks clasification Identified and Known assessable. Münchener RückRisks clasificationIdentified and Known assessable.Identified and Unknown because it's difficult to evaluate its consequences.Unidentified and Unknown surely we will be surprised (development risks).
12 Particularities of Civil Engineering Münchener RückParticularities of Civil EngineeringRisks 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 materialsFrequently there is non-skilled labour in the lowest levels of the chainUse and maintenance are sometimes not as careful as they should.
13 The Risk in Civil Engineering Münchener RückThe Risk in Civil EngineeringRISK FACTORS (material damages):what do they depend on?a) of Internal origin:b) of External origin:SOURCECONSEQUENCESWorks performance (incl. materiales)Acts of third partiesNatural hazards (Acts of God)Project
14 The Risk in Civil Engineering Münchener RückThe Risk in Civil EngineeringRISK 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 chosenon 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.
15 The Risk in Civil Engineering Münchener RückThe Risk in Civil EngineeringRISK 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.-)
16 Example: Risks distribution Münchener RückConstruction All RiskExample: Risks distribution
17 Example: Risks distribution 'insurable' Risks 'not insurable' Risks Münchener RückConstruction All RiskExample: Risks distribution'insurable' Risks 'not insurable' Risks
18 Risk's analysis Deterministic analysis Münchener RückRisk's analysisDeterministic analysisBased on scientific theories or empiric formulations: identical result if you take the same assumptions for the process (ex.: rust)Probabilistic analysisBased on occurrence probability of different risk's scenarios, estimating their consequences (ex.: flood)Statistical analysisBased on previous experience on existing statistics of losses (ex.: personal accidents at work)
19 Pilars of insurance activity Münchener RückPilars of insurance activitySufficient statistical baseFinancial stabilityRisks heterogeneityGeographical compensation
20 Statistical base for the analisys Münchener RückStatistical base for the analisysVery difficult to apply to Civil Engineering, due to the analyzed particularities:- projects are alldifferent ,- climate conditionsinfluence in eachand every case,- heterogeneouscoverages- etc.Study of historical lossesNumber 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.
21 Risks distribution Exemple: Construction All Risk Münchener RückExemple: Construction All RiskRisks distributionLosses > € (period 1990 – 2001)SOURCE: Münchener Rück
22 Engineering Insurance Policies Münchener RückEngineering Insurance PoliciesAnnual 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
23 Engineering Insurance Policies Münchener RückEngineering Insurance PoliciesTemporary policies(CAR) – Construction All Risk(EAR) – Erection All Risks(CAR-ALoP) – Advanced Loss of Profit in CAR(EAR-ALoP) – Advanced Loss of Profit in EARComprehensive policies (BOT, BOO,..)
24 Engineering Insurance Policies Münchener RückEngineering Insurance PoliciesMulti-annual policiesDecennial (10 years cover)Inherent Defects (2, 3 or more years cover)....
26 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)Target policyholder? each and every company taking part in the construction process (having interests on the construction itself)Owner / PromoterMain ContractorSubcontractors Policyholders[actually, the 'insured' is the Construction itself]
27 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)what types of works can be insured? All kinds of works and facilitiesHousing 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.
28 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)what is/can be included under the coverage? All works, goods and tools which take part in theconstruction process or which are adjacent to theconstruction 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, ...EXISTINGPROPERTY: in property or in custody of the insured (susceptible tosuffer damages arising from the insured works)
29 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)SUMS INSURED:The construction work itself (main coverage):total contract valueat the completion date to regularizea margin should be foreseen (long time works)Machinery (optional guarantee): List with following data:individual values (“new replacement”)identification, technical featuresmanufacture yearinternal elechtrical and/ormmechanical damage are excluded
30 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)SUMS INSUREDConstruction Equipment (optional guarantee):total value of set (“new replacement value”) (a list should be attached)no heavy machineryExisting Property (optional guarantee):"first risk value" (it should be sufficient for the reconstruction or replacement of the damaged goods)
31 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)SCOPE OF COVERIt 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
32 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction 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
33 Maintenance cover (optional) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)PERIOD OF COVERMaintenance cover (optional)Main (basic) CoverBeforeDuring construction worksAfter const.w.construction worksguaranteesprevious storagecompletion of worksorder of commitments with the works (for the main Contractor)inception of worksDowloading material on-site
34 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)PERIOD OF COVERMaintenance cover (optional)Main (basic) CoverBeforeDuring construction worksAfter 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)
35 Civil Engineering Insurance Policies Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)PERIOD OF COVERSpecial 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)
36 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)MAIN EXCLUSIONS (1)Conventional exclusionswar, armed conflictsnuclear risksexpropiation, confiscationpenalties (contractual or not)willful misconduct of the insureds or of the technical whichare responsibles for the construction worksconsecuencial losses (indirect losses)documents, cash values
37 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)MAIN EXCLUSIONS (2)Specific exclusionsGradual deteriorationswear and tear'normal' effects of climaterust or oxidationDefective design and workmanship (rectification)regarding materialsregarding designs , calculations and drawingsDeductibles (always have to be borne by the insured)
38 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)MAIN 'PROBLEMS'Exemple 1'Normal' effects of climat excludedbut...¿what is 'normal'?
39 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)MAIN 'PROBLEMS'Exemple 2Rectification of defective excludeddesign or workmanshipbut...¿what is the 'defective part'?
40 Construction All Risk (CAR) Münchener RückCivil Engineering Insurance PoliciesConstruction 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 materialsconstruction methodsafety measures in the planningcosts assesment regarding several scenarios of lossesQuestionnaire and Application for Insurance
41 SPECIAL ENDORSEMENT (1) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)SPECIAL ENDORSEMENT (1)To include some additional or extended cover (optional)001 : SRCC (strike, riot and civil commotion)002 : cross TPL003 : maintenance visits006 : extra costs of acceleration (overtime, night work,..)007 : airfreight113 : national transport116 : contract works taken over or put into service119 : existing property
42 SPECIAL ENDORSEMENT (2) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)SPECIAL ENDORSEMENT (2)To delimitate some covers and/or exclusions (some examples)008 : structures in seismic zones101 : tunnels, galeries, subsurface structures104 : dams and water reservoirs106 : sections107 : camps and stores109 : construction material110 : safety measures (with respect to rain, flood and inundation)112 : fire-fighting facilities and fire safety on site121 : piling foundations and retaining wall works
43 SPECIAL ENDORSEMENT (3) Münchener RückCivil Engineering Insurance PoliciesConstruction All Risk (CAR)SPECIAL ENDORSEMENT (3)To exclude directly some usual coverages009 : damages arising from earthquake010 : damages arising from flood and inundation103 : damages in crops, forest and cultures
44 Civil Engineering Completed Risks (CECR) Münchener RückCivil Engineering Insurance PoliciesCivil Engineering Completed Risks (CECR)Target policyholder? the owner or the operating companyWhat types of works can be insured? civil works, infrastructures, with a low fire risk
45 Civil Engineering Completed Risks (CECR) Münchener RückCivil Engineering Insurance PoliciesCivil Engineering Completed Risks (CECR)SCOPE OF COVERIt is a policy that covers "nominated risks" (a riskis covered only if it is referred specifically in the policy): Unforeseen and sudden physical loss or damage caused duringthe period of insurance by:Fire, lightning, explosion, impact of landborne or waterborne vehiclesImpact of aircraft and other aerial devices or articles dropped therefromEarthquake, volcanism, tsunamiStorm (air movements stronger than grade 8 on the Beaufort Scale)Flood or inundation, wave action or waterSubsidence, landslide, rockslide or any other earth movementFrost, avalanche, iceVandalism of single persons.
46 BASIS OF LOSS SETTLEMENT Münchener RückCivil Engineering Insurance PoliciesCivil Engineering Completed Risks (CECR)BASIS OF LOSS SETTLEMENTin 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 schedulethe replacement costsIf the loss occurs after the period stated in the schedulethe actual value of the insured items immediately before the occurrence of the loss (less savage) -> [deducting a proper depreciation from a)]
47 Privately Financed Infrastructure Projects and Their Insurance Münchener RückCivil Engineering Insurance PoliciesPrivately Financed Infrastructure Projects and Their InsurancePFI Privately financed investmentsMost important models:BOT Build - operate - transferBOO Build - own – operateExamples of other models:BLT Build - lease - transferROT Rehabilitate - operate - transferROO Rehabilitate- own - operateDBFO Design - build - finance - operate
48 Privately Financed Infrastructure Projects and Their Insurance Münchener RückCivil Engineering Insurance PoliciesPrivately Financed Infrastructure Projects and Their InsuranceBOT and BOOIn 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.
49 Privately Financed Infrastructure Projects and Their Insurance Civil Engineering Insurance PoliciesPrivately Financed Infrastructure Projects and Their InsuranceTypical for private financing of infrastructure projects:Sponsors invest only small fraction of the required capitalMajor funds borrowed from banksLiability of the sponsors in case of increased cost or delay in completion is limitedConstruction phase particularly critical: Major funds are spent without the project generating cash.
50 PFI: Finance and Contract Structure Civil Engineering Insurance PoliciesPFI: Finance and Contract StructureHost Govern-ment (Principal)ContractorBanks/Lendersprojectagreementconstructioncontractloan agreementSupplierssupplycontractProject Companyshareholders'agreementinsurancepolicyO&M contractOperatorSponsorsInsurers
51 PFI: Finance and Contract Structure Civil Engineering Insurance PoliciesPFI: Finance and Contract StructureA 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.
52 PFI: Flow of Payments (Operating Phase): Civil Engineering Insurance PoliciesPFI: Flow of Payments (Operating Phase):BanksSponsorsInterestpaymentsInterest and principalpaymentsProject Co.Price forelectricityPayment for fuel, materials and servicesPrincipalSuppliers
53 Typical examples of PFI Projects large and communal: Civil Engineering Insurance PoliciesTypical examples of PFI Projects large and communal:Commercially used buildings or civil works:- Large public buildings, hospitals- Air ports- Bridges, highways, tunnelsPower stations (IPPs) and power distributionWater distribution and water treatment plants
54 PFI Insurance Requirements: Civil Engineering Insurance PoliciesPFI Insurance Requirements:Privately financed projects have a higherneed for security. The project partners require a comprehensive insurance cover.The insured for construction and operationis always the project company.
55 Insurance covers of industrial projects Civil Engineering Insurance PoliciesInsurance covers of industrial projectsMarine InsuranceErection/Contractor`s All Risk Ins.incl. Liability CoverMaintenanceCoverMarine Loss of ProfitContractor`s Plant and Machinery InsuranceGuarantee InsuranceAdvance Loss of ProfitTransportStorageConstruction/Erection WorksTestingMaintenanceOperationFire Ins. and Fire Loss of ProfitMachinery Ins. and MLOPElectronic Equipment Ins.Public and Prod. Liability Ins.Workmen's Compensation Insurance
56 Staged Erection and Insurance Conventional Approach: Civil Engineering Insurance PoliciesStaged Erection and Insurance Conventional Approach:(Example of a combined cycle power plant)ErectionTestsCommercial operation1st gas turbine+ 200 MWErection coversOperational coversErectionTestsCommercial operation2nd gas turbine+ 200 MWErection coversOperational coversSteam turbine+ 200 MW /combined-cycle unit600 MW totalErectionTestsCom. op.Erection (All Risks) coversOp. cov.
57 Staged Erection and Insurance Typical PFI Approach: Civil Engineering Insurance PoliciesStaged Erection and Insurance Typical PFI Approach:(Example of a combined cycle power plant)1st gas turbine+ 200 MWErectionTestCommercial operation2nd gas turbine+ 200 MWErectionTestCom. oper.Steam turbine+ 200 MW /combined-cycle unit600 MW totalErectionTestsCom. op.AnnualoperationalcoversErection All-Risks cover
58 LoP insurance for a PFI Civil Engineering Insurance Policies LoP is an essential cover due to the scarce financial resourcesof the Project CompanyALoP difficult to monitor:Delays in early project stages may have - full impact - partial impact - no impact on the commencement of operationRequires detailed and updated project schedulesConstant follow-up with insured and non-insured delaysSuppliers Extension intensifies the problem: The EAR/CAR insurer is normally not the manufacturer's local property insurer
59 LoP insurance for a PFI Civil Engineering Insurance Policies Time excess:ALoP: 60 days not uncommon, related to the total erection phaseOperational LoP cover: days, related to each loss event individually.
60 What do the Banks ask for in a PFI ? Civil Engineering Insurance PoliciesWhat do the Banks ask for in a PFI ?a) the Project Company shall obtain the widestpossible 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 anybreach of conditions, the indemnity shall be paid to the banks including any lossof profits.
61 In PFI, beware of terms which aim at: Civil Engineering Insurance PoliciesIn PFI, beware of terms which aim at:an invalidation of policy conditions which would release theinsured project contractor from the usual obligations,a direct claim or direct influence of a party outside the insuredproject contractors or principal executing the works,the imposing of obligations on the insurers towards the banks.
62 However, Civil Engineering Insurance Policies PFI: Breach of Contract / Vitating Act in case of a Multiple Insureds PolicyNo indemnification of the violating partyOther insureds to be indemnified for their direct lossRecourse against violating party not to be waivedHowever, No indemnification of the banks
63 PFI: Multiple Insureds Clause (London Engineering Group) Civil Engineering Insurance PoliciesPFI: 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..."
64 PFI: Who has an Interest in Insurance? Civil Engineering Insurance PoliciesPFI: Who has an Interest in Insurance?The PrincipalHost GovernmentThe BanksIndirectlyIndirectlyThe Project Company(manufacturers, site contractors,operators included)Project Insurances
65 Insurance from a single source Civil Engineering Insurance PoliciesInsurance from a single sourceDesirable for the Project CompanyNo interfacing problems from one risk phase to the nextComprehensive insurance scheme requested by the banks from the beginningHowever,Covers traditionally underwritten by different markets and branchesManufacturers, suppliers, hauliers, operators may engage their own insurers or brokersLocal insurers normally more engaged in operational than erection covers
68 Is it necessary an insurance ? Münchener RückCivil Engineering Insurance PoliciesDifferent treatement of damages by inherent defects in buildings in european areaIs it necessary an insurance ?‘Property‘ or ‘Liability‘ insurance ?voluntary or mandatory insurance ?
69 Civil Engineering Insurance Policies Münchener RückCivil Engineering Insurance PoliciesDecennial insurance in EuropeMandatory InsuranceSweden and Finland ?Voluntary InsuranceIn developpmentU.K.HollandBeneluxFranceItalySpainPortugalGreeceTurkey
70 Civil Engineering Insurance Policies Münchener RückCivil Engineering Insurance PoliciesExample 1: France => mandatory ‘dual’ insurance systemindemnificationProm./User‘DO’ Cía. APerito ExpertoRecurso‘DO’DLDLDL Cía.Aseg. XDL Cía.Aseg.YContractor XLiability share on damages between X and Y (CRAC)Contractor Y
71 Many thanks for your attention! Münchener RückMany thanks for your attention!José Luis MontullMünchener Rück