Construction Insurance WorkshopBucharest, May 2017

Construction

GrECo JLT Key Facts

Leading insurance brokers and consultants for industry, commerce

and authorities in CESEE with

790employees

54 offices

in 16 countries

20,000 employees

in more than 135 countries

90years experience

78million EUR turnover

600million EUR placed premium

€

2

GrECo JLT Romania

43employees

3offices

21million EUR placedpremium volume

€1995founded

Region North-West Romania

Region West Romania

Region South-West Romania Region South Romania

Region South-East Romania

Region North-East Romania

Region Central Romania

3

Presence in CESEE

Russia

Kazakhstan

Uzbekistan

Lithuania

Latvia

Estonia

UkraineCzech Rep.

Moldova

Poland

Hungary

Romania

Bulgaria

Slovakia

Austria

Serbia

Croatia

Macedonia

Belarus

Slovenia

Bosnia&Herzegovina

Albania

KosovoMontenegro

TurkeyGrECo JLT subsidiaries

Serviced by GrECo JLT

JLT International Network

Georgia

Azerbaijan

Armenia

Kirgizstan

Tadzhikistan

1989 start of expansion to CESEE

790 employees

54 offices

in 16 countries

4

Global Presence over the JLT network

JLT International Network offices

5

Specialty

• GrECo JLT specializes in distinct areas of expertise

• By implementing dedicated industry Practices which an unconditional focus on an industry a unique degree of specialisation is achieved

• This focus provides distinct know how in respect of risks, markets and industry specifics as well as claims handling.

Sport andEntertainment

Communication,Technology and Media

Energy, Power & Mining

Cargo

Transport &Logistics

Construction &Real Estate

Employee Benefits Alternative Risk Transfer

Fine Arts & Specie Healthcare Credit, Political &Security Risks

Aviation

Church Financial Institutions Marine Food andAgriculture

6

Agenda

1. Risk and Risk Management in Construction

2. Insurance

3. Local and international construction insurance markets

4. Insurances in project finance

5. Correlation of coverage with real exposure

6. Criteria for Evaluation of Insurance offers

7. Case Studies / Best Practice

8. Builders associations international

7

Risk and Risk Management in Construction1

8

What is risk?

Risk Capacity

Risk Tolerance

Risk Appetite

9

Risk Management

Risk Identification

Risk Analysis

Readiness to assume risk Risk strategy

Coping with risk(1) Elimination (2) Transfer (3) Insure (4) Reduce (5) Accept

Calculation of Cost of Risk

Risk Controlling

Exposure„What can happen.“

Treatment„What do I do.“

Effect„What does that mean.“

10

The environment in construction

Complexity

Uncertainty

Opportunism

Exposure

Treatment

Effect

11

Coping with risk

• Eliminateproject will not be executed

• Transfercontractual risk transfer, to subcontractor, principal etc. risk allocation in standard construction contracts

• Reducerisk remains but is proactively mitigated risk. Cost of mitigation vs. effect

• InsureRisk remains and is not being transferred, but will be reimbursed if realizes

• AcceptRisk in ist final form will be borne directly

12

Unforseeable.

13

Exposure – What could happen…

To…• The Works• Own Equipment and Machinery• Own Personnel• Third Parties

• Neighbours• Pedestrians• Principal• JV Partner• Employees of other companies

from cause…• Acts of god• Unthoughtfulness• Faulty design, material, workmanship• …

… and who is going tobear the consequence.

14

Insurance2

15

Would you cross a river which is on average 1.3m deep?

16

Why insure? Every claim is paid…

1. Offers capacity (money) which would otherwise not exist Prevents ruin

2. Money would otherwise have to be saved for damage Frees up equity

3. Stable insurance premium instead damage/no damage fluctuation Smoothes results

4. Specialized service for claim including legal expenses Outsourcing

Assets (Property) Liabilities & Equity

Fixed AssetsEquity

Current Assets

Long Term Liabilities(Loans)

Current Liabilities

Damage

Survival

Cost of Capital

Stable Results

Economies of Scale

… by somebody‘s balance sheet

Equity

17

Major types of insurance

Line of Insurance Example

Damage to the works• Contractors All Risk (CAR)• Erection All Risk (EAR)• Comprehensive Project Insurance (CPI)

Liability• Third Party Liability• Professional Indemnity• Employer‘s Liability

Damage to Machinery• Machinery, Plant and Equipment (CPM/CPE)• Machinery Breakdown

Advance Loss of Profits• Advance Loss of Profits• Delay in Start-up

Surety and Bonds

Political Risks• Contract frustration• Unfair Calling of Bonds

Warranty and Indemnity, Title Insurance, M&A

18

Damage to the works | Example #1

19

Damage to the works: the insurance contract

Munich Re CAR• Internationally used standard insurance coverage for construction projects

• Published by world‘s largest reinsurer Munich Re decades ago.

• Widely accepted by insurers• In some respects not advantageous to insured.

Structured in three sections:• Contract Works• Third Party Liability (optional)• Advance Loss of Profits (optional)

20

Damage to the works … basic pitfalls

• By standardized clauses the coverage can be extended.

• Naturally, the standard clauses do not overly extend the coverage.

• Warranties at the same time restrict cover or impose duties on the insured.

• Not obeying by those duties my void the coverage.

• Entries with a impose some duty on the insured or limit the cover.

21

… example of such an „endorsement“

Insurance premium Insurance coverage Obligations (Hidden) Cost for

complying with obligations22

Damage to the works: what is damage? | Example #2

Example

Steel framed building, roof completed

Cladding partially completed

Dwarf brick wall completed

Incident: Nuts and bolts used are inadequate, the structure collapses entirely.

DE1: all damage excluded

DE2: only dwarf brick wall covered

DE3: steel framework excluded

DE4: only nuts and bolts excluded

DE5: all damage paid but improvement costs excluded

Difference between no coverage and almost

full coverage.

How much premium is justified? Are those decisions taken

consciously?

What cover did you choose?

23

Damage to the works | Example #3

National Arena Stadium Bucharest

• After the inauguration the roof cracked and water has entered the stands

• It is possible that also fire protection measures were neglected during the design

• Investment value: 234 mil EUR

• Value of repairs: not known

Cracks under CAR Insurance.Who has responsibility for design?

Recourse against designer?Consequential financial losses?Extended Maintenance cover?

Designer Owner

Contractor

Designer

Owner

Contractor

24

Third Party Liability | Example #1

• Project: Bridge

• Incident: Collapse

• Cause: under discussion

• Project Value: EUR 7 million

• Damage: depending on bodily injuries

25

Damage to the works | Example #3

Shopping Center / Hotel Moscow

• Inadequately designed pillars stancedthrough the ceiling which collapsed and also killed persons

• Immediate property damage to collapsed areas

• Substantial cost to remedy the defective pillars in the rest of the building which had the same flaw but had no property damage

• Sum insured of designer: neglible

• Claim amount: > USD 10 mn

• Went to Russian courts and ran through all instances twice Design.

Recourse against designer?Consequential financial losses?

26

Third Party Liability

Deductible: Amount, which has to be borne by insured

Self Insured Retention: „Self-insurance“: Insurer will not process claims below that amount

Insured

Insurer Claimant

Coverage for Premium Liability

Indemnity or Defense

27

Third Party Liability | Professional Indemnity

• Insured riskIndemnity for damage as a consequence of professional, acts, errors or omissions (either on claims made or infringement principle)

• ExamplesArchitects, Engineers, Quantity Surveyors, Surveyors, Project Managers

• Example ActivitiesFeasibility Studies, Front end designs, Technical information calculation, Geotechnical studies, Surveying (Quantity and Land)

Design Construction Defects Liability and run-off period

01/16 01/17 01/19 01/xx

Which trigger?Important distinction between “claims made” and “occurrence”.

Retroactive cover: when the design was actually done.Worst case: no cover at all

28

Damage to Machinery

• Insured riskIndemnity for sudden and unforeseen damage to plant, machinery and equipment.

• ExamplesCranes, Earthmoving Equipent, Compacting Machinery, Pile driver, Transformers

• Perils insuredBased on Named perils (only perils which are named are insured) or all risk basis.

• Scope of coverHull coverage: only external cause is insuredMachinery breakdown: also internal breakdown is covered

29

Damage to Machinery | Example

30

Damage to Machinery | Example

31

Advance Loss of Profit

• Insured riskLoss of revenue following an insured property damage under CAR policy

• ExamplesShopping center burns down shortly before opening no or delayed revenues to pay back the financing until reinstated.

32

Advance Loss of Profit Timeline

This is when the project should have been completed without damage.

The loss of revenue (fixed costs plus profit) during this period will be

covered by the insurance.

Works begin. Insurance, too.

33

Surety and Bonds

• Insured riskA surety bond is an undertaking from an insurance company (Surety) to pay a specific sum to a beneficiary on certain specified conditions, such as company insolvency or contractual default.

• ExamplesBid bond, Performance Bond, Advance Payment Bond, Maintenance Bond

34

Surety and Bonds

COLLATERAL DEPOSIT 100% MATERIAL GUARANTEE > 120%

CASH GUARANTEE (Retaining from invoices)

SURETY BONDS

PROMISSORY NOTES

LETTER OF GUARANTEE ISSUED BY BANKS

CASH 100%

Frozen AssetsBusiness Development

Banks Insurance

35

Surety Bonds Comparison

Presume UNCONDITIONAL PAYMENT at Beneficiary’s request.

DOES NOT PROTECT the Guaranteed against the unfair calls of the Beneficiary.

The relationship between the Guaranteed and the Guarantor is based on COUNTER

INDEMNITY.

Presume that the PAYMENT IS CONDITIONAL TO the existence of a default/ breach of contract,

proved by the Beneficiary.

PROTECTS the Principal (Contractor) against the unfair calls of the Beneficiary.

The relationship between the Principal and the Surety is based on Principal’ creditworthiness –

essential element in underwriting activity.

LETTERS OF GUARANTEE ISSUED BY BANKS

BONDS

36

Performance bond/design fault

Artificial entertainment lake in Calafat

• After 3 weeks from the inaugurationthe lake dried up

• Investment value: 300.000 EUR

37

Performance bond

Sibiu – Orastie highway

• 8 months after the highway wasopened to public, there were cracksand bumps in the road, mainly due towater infiltration

• Value of investment: 150 mil EUR

• Value of repairs: 2 mil EUR

38

The kind of CEN risks faced by investors has

changed

I950’s - 1970’s: the risk of direct expropriation and nationalization was

higher.

Today: CEN risks are more indirect and subtle:

• breach of contract• revocation of a

concession• cancellation of a

license

Political Risks

• Insurable risks

Confiscation, Expropriation, Nationalization (CEN)

Political Violence

Currency Inconvertibility

Non-Honoring of Sovereign Guaranty or Payment Obligation

Breach of Contract (Arbitration Award Default)

Unfair Calling of Bonds (bid bonds, performance bonds, etc.)

Medium-Term Trade Credit Insurance for Private Buyers

39

Warranty & Indemnity Insurance, Title Insurance

• Warranty & Imdenity Insurance (Mergers & Acquisitions)A seller-side policy covers the seller for its own innocent misrepresentations; a buyer-side policy covers the buyer against the seller’s misrepresentations (innocent or otherwise). The buyer claims directly against the insurance policy and does not have to seek recourse against the seller.

• Title insuranceThe title to a piece of property is the evidence that the owner is in lawful possession of that property. Title insurance protects real estate owners and lenders against any property loss or damage they might experience because of liens, encumbrances or defects in the title to the property.

40

M&A Transation Insurance

Sale and Purchase Agreement (SPA)

Seller provides

• warranties and• indemnities

relating to the targetM&A Insurancescover financial

losses of buyer orseller

arising frombreach of warranties

and indemnities

BuyerSeller

Target

Warranty & Indemnity

Tax LiabilityEnvironmentalIntellectual

PropertyLitigationBuy-Out

Proven liability of seller for breach of contract

All insured risks up to the sum insured (max. purchase

price)

41

Title insurance

Cathedral Plaza Bucharest - 19 floors business tower

• In January 2013 the Court decided irrevocably that the municipality must issue a document requiring the demolition of Cathedral Plaza building performed without a legal building permit

• Investment costs: 60 mil EUR

• Demolition costs: 14 mil EUR

42

Project Life Cycle and Insurances

Design Construction Defects Liability

Operation

Professional Indemnity

Contractors All Risk (CAR/EAR) Extended Maintenance

Third Party Liability

Advance Loss of Profits … continued

Extended Maintenance

Employer‘s Liability

Machinery Insurance / Equipment

Political Risk insurance

Transport Transport

Property Insurance

Third Party Liability Operation

Business Interruption

43

Project Finance

Ris

kin

Ter

ms

of

Var

iab

ility

an

d p

oss

ible

def

ault

Financing available

Underinsured project

Adequately insured project

44

International and local construction insurance markets3

45

Reinsurance / Atomisation of risk

Insured #1 Insured #2 Insured #3 Insured #4

Insurer (RO) Insurer (RO) Insurer (RO) Insurer (DE)

Reinsurer(DE)

Reinsurer(UK)

46

Global insurance market outlook

The global insurance market grew by 5.7% in 2015 to reach a value of $5,006 billion.

The compound annual growth rate of the market in the period 2011–15 was 4.5%.

47

Global insurance market (engineering)

Source: IMIA

3623 3680 3873

3689 3787 3636

992 1027 1108303 262 223

0,00

1.000,00

2.000,00

3.000,00

4.000,00

5.000,00

6.000,00

7.000,00

8.000,00

9.000,00

10.000,00

2013 2014 2015

US$

Mil

MB, BE, LoP CAR, EAR, ALOP EEI IDI

48

Global insurance market (engineering) – cont.

• Market capacity: 4.000 MUSD

• Annual premium: 1.500 to 2.000 MUSD (~0,04% of total global market)

• Incurred losses:

• 2009 > 2.100 MUSD

• 2010 > 2.200 MUSD

• 2011 > 2.300 MUSD

• 2012 > 2.660 MUSD

• There is an upward trend in the scale of individual power losses. For example, in 2001 the largest three claims were US$13 million, US$11 million, and US$7 million; more than 10 years on, in 2014, the scale of claims had risen dramatically to US$233 million, US$70 million, and US$55 million

Source: Munich RE

49

International engineering insurance market - losses

Source: Munich RE

50

International engineering insurance market (losses) – cont.

Source: IMIA

51

Romanian insurance market outlook (2016)

52

• AG – Non-life insurance• AV – Life insurance

+10%

Source: FSA

53

Source: FSA

• A10 – MTPL• A3 – MOTOR HULL• A8 – PROPERTY INSURANCE

Romanian insurance market outlook (2016) – cont.

Local insurance market – status & trends

• Insurance class A9 is includingconstruction insurance, machinery & equipment andagriculture insurance

• We estimate the constructioninsurance market at ~10 mil EUR

• The insurance market is soft – low premiums

• Most of the insurers follow Munich Re wording with ”local input”

• Local capacity could go up to 30 – 40 mil EUR, depending on the size of the insurer

Source: FSA

54

Evaluation of Insurance offers4

55

Adequacy of insurance covers

• Standardized insurance covers will often fail because they insufficiently adressthe risk

• Tailoring insurance to requirements / demands does not necessarily make it more expensive.

• Contractors‘ focus is on the operational aspects, insurance often comes late in the process.

• Price vs. Costs: Insurance covers may seem cheap, but come at a high cost in case of damage.

?

Premium Protection

56

What would you choose?

Contractor‘s All Risk Insurer One Insurer Two

Sum insured 20.000.000 RON 20.000.000 RON

Maintenance 003 Maintenance Visits 004 Extended Maintenance

112 Fire Fighting Included Excluded

114 Serial loss Included Excluded

Designer‘s Risk Clause 115 MunichRe DE 5

107 Camps and Stores Included Excluded

108 Plant and Equipment Included Excluded

109 Construction Material Included Excluded

Deductible 10% of claim min 1.000 RON 10.000 RON

Premium 20.000 RON (0,0010 on TCV) RON 24.000 (0,0012 on TCV)

57

Builder‘s Associations International5

58

Exemplary Overview

Country Chamber Take on insurance

HU National Federation of Hungarian Building Contractors Recommendation of broker

TR The Turkish Contractors Association, The Turkish employer’s association of construction industries

Workshops on risk and insurance

FR Federation Française de la construction, SYNTEC ingénierie for the architect et engineering companies FPI

Excess Liability fo architects and engineers

CZ Association of Building Entrepreneurs of the Czech Republic, Association forInfrastructure DevelopmentCzech Chamber of Certified Engineers and Technicians Active in Construction

Framework contract for PI

AU Master Builders Association Captive Broker

RU SRO Self regulating organisation

ES AGERSIGREA

Workshops and seminars

IT Cmb, Cooperativa Muratori e Braccianti di Carpi, Consorzio Nazionale Cooperative Produzione E Lavoro Ciro Menotti, C.M.S.A., Cooperativa Muratori Sterratori ed Affini, Cme, Consorzio Imprenditori Edili

Risk placing and Claims handling over preferred broker

JP Japan Road Contractors Association, Japan Construction Machinery and ConstrucitonAssociation, The Japan Institute of Architects, Association of Structural Engineers

PI Coverage

59

Spotlight: Australia

• MBA Insurance Services is owned by seven of the Master Builder Associations around Australia. Results / profits are injected back into the Building & Construction Industry.

60

Spotlight: Russia and SRO

• From State Licensing to Self Regulation: Under the Russian laws, self regulating is a type of activity that is performed by entrepreneurs. It is aimed to develop and install the rules of their activity and control compliance of the installed rules. One of the types of self regulating organization is a construction SRO, members of which are the parties that operate in the construction business.

• Construction SRO must have compensation fund which is formed in the amount of not less than one million Rubles (about 32 000 USD ). In case the construction SRO requires its members to insure their general liability, the amount of compensation fee decreases to not less than 300 000 Rubles (about 9 500 USD) per single member.

• Not complying with the requirements of the SRO means loosing the permit to conduct construction works.

61

6

62

Current structure

Company A

Liab

ility

CA

RCompany B

Liab

ility

CA

R

Company C

Liab

ility

CA

R

Company D

Liab

ility

63

TPL Excess Layer

TPL: Excess Coverage

Liab

ility

CA

R Liab

ility

CA

R

Liab

ility

CA

R

Liab

ility

• Excess TPL contract with a fixed attachment point (amount from which there is coverage)

• Example: Sum insured RON 100 Mio in excess of RON 2 Mio

• Premium based on turnover

• Structure: obligatory or facultatively

Company A

Company B Company C

Company D

64

TPL: The multiplier

Liab

ility

CA

R Liab

ility

CA

R

Liab

ility

CA

R

Liab

ility

• Excess TPL contract which multiplies the sum insured based on the existing sum insured.

• Example: Sum insured multiplied by 3, min RON 2 Mio max RON 15 Mio

• Premium based on turnover

Company A

Company B Company C

Company D

65

CA

R

CA

R

CA

R

CAR Framework: The bundling

Liab

ility

CA

R Liab

ility

CA

R

Liab

ility

CA

R

Liab

ility

• Framework contract CAR only accessible to members of the association

• By bundling purchasing power economies of scale and diversification realize, driving down premium

• Also large losses will not immediately have impact

• Premium based on project volumes, initial setup depends on claims history and scope of cover

• Cover can also adress things which are not available on local market by using specialized markets, such assubcontractor default and consequential expenses for the contractor

Company A

Company B Company C

Company D

66

CAR Subsidiary cover

CAR Framework: The subsidiary cover

Liab

ility

CA

R Liab

ility

CA

R

Liab

ility

CA

R

Liab

ility

• Framework contract CAR which exists in the back for all projects which have been insured separately, even if elsewhere

• By setting up this solution a harmonized, extended coverage is obtained.

• Focused on large losses it offers broad coverage.

• Premium based on project volumes or fixed premium on total structure

Company A

Company B Company C

Company D

67

Weather and parametric covers

• Adverse weather conditions can severely impact the construction industry‘s performance

• Conventional covers require a damageto get reimbursement from insurance

• Parametric covers pay if a certaincondition is met. Similar to option / future on financial markets.

• Examples: average temperature overan extended period of time, precipitation, heat.

68

Multumim pentru atentie!

Toate drepturile pentru aceasta prezentare sunt rezervate. Toate sectiunile prezentarii (in intregime sau fiecare in parte) sunt protejate de legea copyright-ului. Informatiile continute in aceasta prezentare sunt

confidentiale. Aceasta prezentare si continutul sau nu pot fi folosite, traduse, distribuite, copiate sau modificate electronic fara acordul expres al grupului GrECo. Distribuirea catre o terta parte nu este

permisa.

Discussion

What is my position on rating of insurer,

deductibleand insurance coverage