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KARACHI INSURANCE INSTITUTE RENEWABLE ENERGY –INTERNATIONAL SOLUTIONS TO LOCAL CHALLENGES
31 OCTOBER 2013
Steven Munday ACII
London (Tower Place)
Renewable Energy and Power – International Practice Leader

2. Marsh Global Office Locations2

3. Marsh in Brief… A leader in quality, scale and scope
Global leader in delivering risk and insurance services and solutions to clients
Provides global risk management, advising/consulting/engineering and insurance broking services
Extensive global footprint:
26,000 employees around the world
Serving clients in over 130 countries
A global network of 400+ offices
No.1 among the world’s 10 largest insurance brokers (Business Insurance, 2012)
A wholly owned subsidiary of Marsh & McLennan Companies (MMC)
Present in Pakistan through Unique Insurance Brokers (Pvt.) Limited 3

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Marsh is the leading provider in the provision of Renewable Energy and Power insurance and risk management services to the energy, international power and utilities, and independent power sectors… 4

5. Renewable energy: a specialist field requiring skilled experts
Marsh Renewable Energy and Power Practice Delivering change via a global network of renewable energy specialists
Specialist teams have been set up in London, New York, Hamburg, Netherlands, and Cape Town
Seamlessly dovetails into Marsh’s broader Energy, Power & Utility and Infrastructure Practices
Involved with some of the world’s largest, most complex and often evolutionary projects, through to smaller, local schemes
Supporting a diverse range of project delivery, financing and business models
Working directly with sponsors/developers, manufacturers, contractors, operators, utilities and financiers
Renewable energy: a specialist field requiring skilled experts 5

6. Global Renewable Energy Markets:6
Global Renewable Energy Markets:
A growing demand for insurance and risk transfer solutions
50% increase in renewable energy investment by predicted to double insurance spend in six of the world’s leading renewable energy markets
Annual expenditure on risk management services to reach US$1.5 – 2.8 billion in the same period
3 primary drivers:
Government support and policy incentives/new capital sources.
Technology improvements –reduced costs/ increased efficiency.
Diversification of assets /security of supply as renewables play a growing role in the energy mix
Insurance can mitigate some risks. Robust risk management will therefore be critical in attracting and securing capital investment
Innovative financial and risk transfer solutions and robust risk management will be vital to sustainable industry development
Source: ‘Profiling the risks in solar and wind.’ Bloomberg New Energy Finance and Swiss Re, 2013. 6

7. Pakistan
A Renewable Energy future?

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Pakistan – Onshore wind Good-to-excellent speeds totaling a 340,000MW potential
50,000 MW potential in Gharo- Kati Bandar corridor alone with good infrastructure and grid links 8

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Pakistan – Solar PV Significant PV and thermal potential, on/off grid and water and heating 9

10. Significant potential across the country
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Significant potential across the country
Hydropower
Significant development potential -- 50,000MW -- storage-based and high-head schemes would be more suitable in the north than run-of-river plants to the south
Substantial incentives under the 2002 Power Policy
Tariff petitions accepted and approved through 2011/2012
Solar PV
Significant PV and thermal potential, on/off grid and water and heating
An estimated 5-6kWh (kilowatt hours) m2/day could be harnessed for on- and off-grid power, heating and water and heat projects.
A combined 226MW are currently under letters of intent to develop.
Geothermal
Several sites identified (in theory) for heating, cooling, and power
State estimates a generation potential in excess of 2,000MW
Biomass and waste-to-energy
Alternative energy rather than renewable?
Significant opportunity given Pakistan’s population (e.g. municipal waste volumes)
Est. 35m hectares of marginal/degraded land potentially available for crops
Still in its infancy
2012 saw the first tariff petitions filed for IPP multi-fuel biomass
power plants
Onshore Wind
340,000MW potential for onshore wind - good/excellent wind speeds
Gharo-Kati Bandar corridor: 50GW could capitalise on good infrastructure and grid links already in place
1st significant commercial wind farm, FCCEL 60MW farm at Jhimpir, commissioned; a second wind farm expected online soon
Grid connection issues
Source: Marsh research including ‘State of the Industry Report 2012 (NEPRA), US Department of Energy’s National Renewable Energy Laboratory (NREL), Alternative Energy Development Board, Private Power & Infrastructure Board, Government of Pakistan, and other secondary sources. 10

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Challenges for the Emerging Renewable Energy Industry in Pakistan and beyond
Natural Catastrophe –Earthquake/Flood (Aggregations)
Riot Strike and Civil Commotion
Sabotage & Terrorism
Site Access /Landslips
Existing grid reliability and capacity
Finance – availability, cost of and security
Availability and access of sufficient cranes
Developing technology
Chinese contractors (International experience) and language barriers
Skilled labour/ workforce issues
Turnkey or Multi-contracting 11

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Securing Infrastructure Project Financing A minefield of information requirements
Project Description
Capital Investment
Project Schedules
Environmental Impact
Financing
Financial Projections
Legal Documentation
Proposed ownership structure and sponsor information
Legal status of project and status of government approvals (e.g. exemptions/advantages, licenses/ permissions required, proposed measures/actions that could affect the project)
Project’s anticipated economic contributions (e.g. foreign exchange, employment, technology transfer etc.)
Project site, including legal agreements for land use rights
Civil works and buildings
Major and auxiliary equipment
Project Management
Pre-operating requirements and costs
Contingencies (physical) and escalations (financial)
Initial working capital requirements
Contracting and purchasing procedures to be used
Local/foreign manpower and technical expertise required at the planning stage
Construction, start-up, operations
Expenditures
Funding (including timing of funds needed during project implementation)
Regulatory compliance
Description of environment impact
Health and safety issues
Total cost of project (e.g. details on major items of fixed assets and working capital)
Background statement on all sponsors and participants, showing their financial or other interest in the project construction, operations, and marketing
Capital structure:
Proposed debt/equity structure
Equity: shareholder structure, long term plans (stay private/go public), quasi-equity (subordinated debt)
Debt: long-term debt/working capital, domestic/foreign, desired terms and conditions, funding sources already identified
Overrun/standby arrangements
Projected financial statements including cash flows
Clear statement of all assumptions
Sensitivity analyses under different scenarios like interest rate risk etc.
Net Present Value (NPV), Internal Rate of Return (IRR) and payback period of the project.
Joint venture agreements (if applicable)
Articles of association
Government approval documents/concession/business license
Land certificate/red line map
Mortgages, if any
Loan agreements
Major contracts including off-take agreements, supply agreements, technical assistance agreement, management agreement
Source: State Bank of Pakistan 12

13. International Insurance Markets
Status

14. The International Insurance Market:
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The International Insurance Market:
London
London insurance market total premium exceeded £50 billion in 2012
Comprising of:
Company sector: £24.2 billion
Lloyd’s: £25.5 billion
Property made the most significant contribution to the company sector (>25% of gross income and taking into account the contribution of the marine Protection & Indemnity (P&I) Clubs)
Liability and marine business each represented 17%
Professional lines and motor accounted for 12% each
London premium +8.6% on 2011
Source: International Underwriting Association (IUA) as reported in 14

15. Home to six of the 10 largest insurers
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The International Insurance Market:
Dubai International Financial Centre (DIFC)
DIFC continues to grow as one of world’s top international financial centres
862 active registered companies with a DIFC presence:
322 regulated
539 non-regulated companies
over 90 retailers
30% are from the Middle East, 10% from Asia, 41% from Europe, 16% from North America and 3% from the rest of the world (as at March 2012)
Operates mainly as a wholesale insurance market
Home to six of the 10 largest insurers 15

16. Innovative Solutions from Marsh
MAR Product Suite

17. Marsh/Unique Advantage
MAR Model Wording
Base wording tailored by Project Team for your Project
Broadest in market scope
Market and Lender approved
Contractual Risk Management
Organic Project Premium modelling
Unique and Marsh London working together
Your Competitive Advantage? We think so. 17

18. MAR Product Suite Seamless cross-class product suite
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MAR Product Suite Seamless cross-class product suite
Innovative single policy wordings with harmonised terms and definitions designed to respond to project lifecycle risks
Policies include cover for:
Marine transit, including associated delay in start up
Contract works, including associated delay in start up
Property damage and machinery breakdown, including associated business interruption
Contract works and operational third party public and product liability 18

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Innovative Solutions from Marsh MAR Product Suite: Seamless cross-class wordings 19

20. So…Competitive Advantage? …Our clients think so !!!
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So…Competitive Advantage? …Our clients think so !!!
Marsh London has been involved in 30 Financial closes in last 18 months and has in excess of USD 10bn of Renewable Assets under it’s control.
Marsh currently provides risk and insurance services for in excess of 30,000MW of onshore wind
Leading from the front in solar; recent flagship projects include:
210 MW solar thermal powers in Africa, including largest concentrated solar power (CSP) project outside of North America and a project boasting the largest commercial thermal storage capacity, 9.5 hours, for a solar power plant of this class
Extensive experience with biomass, bioethanol/diesel
Involved in a number of key and Innovative geothermal solutions. 20

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De-Risking Project Risk can be complex !!! Risks vary according to technology, application, project, or country…
Construction and operational risks – asset/revenue/liability
Marine
Weather resource risks – wind volatility/irradiation
Trade credit and insolvency
Surety bonds and guarantee
Political risks
Environmental risks
Professional indemnity risks
Performance guarantees
Decommissioning risk 21

22. Solar PV Typical Project risks22

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Understanding and mitigating project lifecycle risk Interfacing with project financiers and advisers and the role of Marsh
Lifecycle risk: the changing risk profile as a project passes through planning, design, construction and into operation
Opportunity to manage risk efficiently decreases as the project lifecycle advances
Inherent risks are challenging with far reaching consequences for every stakeholder
Divergent approaches to risk allocation and mitigation can delay completion
Projects undertaken on a partnership basis often complex, large and long- term undertakings
Structured finance is increasingly common
Marsh can facilitate clients in the timely implementation of an effective risk management strategy and in understanding the magnitude of risk as it relates to the project size and complexity
Marsh’s Renewable Energy and Power and Practice works closely with colleagues in our Infrastructure and Private Equity and Mergers & Acquisition Practices to understand the challenges and risk profile of all stakeholders throughout the project
Marsh can assist in reviewing and offer guidance on project agreements, and advise on contractual risk allocation and insurance
THE RENEWABLE POWER PROJECT LIFECYCLE 23

24. Contractual Risk Allocation
PROJECT
COMPANY
CONTRACTOR
OPERATOR
SPONSORS
OFFTAKER
SUPPLIER
AGENT
Supply
Agreement
Offtake
Security
Trust Deed
Sponsor Support
Shareholder
Implementation/Licence/
Concession Agreement
Operation and
Maintenance Agreement
Construction
Contract
CONTR
ACTOR
Sub
contracting
EPC and O&M
HOST
LAND OWNER
Project’s
PRINCIPAL
LENDERS
Loans

25. Contractual Risk Management
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Contractual Risk Management
The accurate drafting of liability, indemnity and insurance clauses in project contracts is critical but is becoming increasingly complicated with the move towards a multi-contracting approach. Marsh can assist clients by liaising with contract lawyers, banks and other advisers in the project process. 25

26. Lenders Requirements

27. Lenders’ Insurance Requirements
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Lenders’ Insurance Requirements
Lenders want to protect and guarantee their investment
Generally engage with an International Lenders Insurance Advisor to provide independent diligence on the proposed solutions, how they conformance with provisions of financing agreements (tendency for legal parties to get involved).
Will relieve themselves of as much risk as possible
Conservative view that does not take into consideration
What coverage is available in the current insurance market
What is economically viable (but is this the owner’s perspective?)
Have onerous contractual expectations which may clash with insurers’ interests

28. The Lenders’ Wish List of Insurance Clauses the list is not exhaustive
Naming of Finance Parties
Insurance validity
No changes without Lenders’ consent
Loss payee clauses
Set-off of outstanding premium
Non-vitiation
Primary of cover
Role of Security Agent / Liability of premium payment
Notices of cancellation, suspension, invalidation
Cut through / Direct payment / Assignment clauses
Adequacy of information

29. Naming of Finance Parties & Validity
Acknowledgement of interest, waiver of subrogation
Insurances remain valid (non-cancellable) for project period (Except for non-payment of premium
Written notice of 60 days prior to cancellation
Provision for change in insurer due to down grade in security
No amendments to policy without Lenders’ prior consent
e.g. reduction to limits, increase in deductibles
Clauses acceptable to underwriters, provided they do not amend the rights of an insurer to change the policy in response to material change in risk
e.g. extension beyond pre-agreed terms, cessation of works etc.

30. Set-off of Outstanding Premium
Loss Payee Clauses
Lenders will wish to be named as a loss payee under the policy
Sometimes only in respect of claims in excess of a certain threshold
Loss Payee Clauses variations:
Simple: pre-agreed destination for claims settlements
Complex: requirement for counter signatures etc.
Set-off of Outstanding Premium
Related to Loss Payee Clauses
Seeks to avoid outstanding payments being set-off claims settlements
Clause is difficult to achieve
Unless some other provision made to settle unpaid premium

31. Non-vitiation Definition of vitiate:
to impair; to make void or voidable; to cause to fail of force or effect; to destroy or annul, either entirely, or in part, the legal efficacy and binding force of an act or instrument.
Lenders will seek Non-vitiation clause so that the acts of another will not render the insurance void as to the Lenders’ rights
Some debate on the application of this clause; can cause extreme delays.
Accepted versions in form of amended LEG Multiple Insurance Clause

32. Primacy of Cover
In the event of multiple policies, or overlap of policies, the Project insurance programmes to trigger first
Generally doesn’t pose a problem to insurers, provide that, where contractors are required to purchase insurance, the other insurance is consider primary.
Various versions of this clause exist
Need to select and apply most appropriate clause early into the financing document
Role of Security Agent / Liability for Premium Payment
Inclusion of statement defining role of the Security Agent
Inclusion of provision whereby Finance Parties can pay premium, but not held liable for it
Both items generally acceptable to insurers

33. Cut-through Clauses
Where an insurance placement is reinsurance driven (i.e. where majority of the risk is transferred to a specific project related reinsurance policy)
Provides direct payment (usually premium and claims)
Allows the insured (and Lenders) direct access to the reinsurance contract
Problematic to insurers as there is potential that they might be called upon to pay a claim twice
Generally refused by the construction market. Prefer reinsurance assignments (where legal)

34. Notice of Assignments
Lenders will ask for assignment of principal’s rights, title and interest to the Lender. Clause will also request from insurers that:
They will pay / give notices as directed in the Notice
The policy is in full force & effect
No other Notice of Assignment has been received
Strong market resistance to any assignment document that seeks to amend the policy, modify it or introduces undertakings that are contrary to the policy wording.
Modified acceptance of Notice of Assignments – falling in 2 camps:
Asks insurers to confirm that they have received all relevant information to evaluate risk
Intention is to weaken / nullify insurers’ position should they later wish to refute claims on grounds of non-disclosure

35. Lessons Learned ?
Get an insurance advisor appointed in the early stages
There are substantial project advantages to appointing the same insurance advisor as transactional broker.
Consider insurances as part of the financial planning, don’t leave until the project is underway
Owner Controlled Insurance Programme is always preferred by Lenders as the most robust and bankable insurance solution.
Insurance Advisor has to have good local understanding/representation supported by International solution.

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12/5/13 36

37. APPENDICES

38. Marsh in Pakistan 3838 Correspondent office in Karachi 38
Legal name: Unique Insurance Brokers (Pvt.) Limited
Address: Oceanic House, 1st Floor, 6-E, Street 11, Phase V Ext, DHA, Karachi, Pakistan
Phone: / 4
Fax:
Country Head: Asad ur Rehman Khan
Number of offices: 1
Number of employees: 25
Web:
Source: Marsh Emerging Markets Factbook 2011 38

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Marsh Ltd. is authorised and regulated by the Financial Conduct Authority for insurance mediation activities only.
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