DSU - Key UW Considerations & Strategies to …628a80f1-b040-4874-a42a...DSU - Key UW Considerations & | Strategies to Claims Management | Kuala Lumpur, 22 & 23 Aug 2019 5 DSU - Introduction

DSU - Key UW Considerations & Strategies to Claims MgmtAndianto P Phan & Clarence Ting, 22 August 2019

DSU - Key UW Considerations & | Strategies to Claims Management | Kuala Lumpur, 22 & 23 Aug 2019

• DSU - Introduction

• Why do we concern with DSU?

• Key assessment and Underwriting Issues

• Project Monitoring

• Reinstatement Project Management

• Increased Costs of Working

Agenda

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DSU - Introduction

3

DSU - Key UW Considerations & | Strategies to Claims Management | Kuala Lumpur, 22 & 23 Aug 2019 4

DSU - Introduction

DSU (Delayed in Start Up)

• Also called as ALOP (Advanced Loss of Profit)

• Provide cover to project owner(s) for the actual loss sustained of opportunity loss to earn revenue due to a Delay in completion of the insured project works.

• This delay must be caused by accidental physical damage covered under MD policy.

➔More than 1 loss event may contribute to one delay

Insured Parties

• Principal/Owner who suffers financial lossqualifies as Named Insured

• Bankers / Lenders interest can be included

• Contractors, Engineers, Consultants haveno insurable interest under DSUThus, they can not be named as the Insureds


DSU - Introduction

Sum Insured

• The Sum Insured has to be fixed (estimated) for each project

• The amount is defined by the anticipated ‘Annual Gross Profit’

➔ Net Profit plus Standing Charges & Debt Service

➔ Annual Turnover less Variable Costs

Note• Variable Costs are not insurable

• Turnover forecast risk is not insurable

• Loss of Market is not insured

Alternative sum insured :

• Debt service

• Fixed costs

• Loss of rent

• Tailor-made amounts


DSU - Introduction

Basis of Indemnity

The amount payable is

X

Gross Profit (= Fixed Costs + Net Profit).

Less any sums saved during the delay

Actual turnover that falls short of what would have been achieved had the delay not occurred

A

Increased Cost of Working (ICOW) with prior consent (of Insurer) for the purpose of avoiding or diminishing the amount which insurers would have been liable to pay under A, but not exceeding the sum by which the amount otherwise payable is reduced.

B

Why do we concern with DSU?

7



Historical Large Claims Involving DSU/ALOPSource: IMIA – Engineering Insurance Premium and Loss Statistics

2015 2016 2017



Recent Large Claims (2018) involving DSU



The question is why does DSU cause such an alarming loss amount?It is not just a simple ALOP, but…

roblemsot f

10

ispute ettlement nderstanding

And, the claim handling is not as simple as…

DSU is indeed a complex product, and therefore requiring careful assessment and consideration.

Key Assessment and Underwriting Issues

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Key assessment and Underwriting Issues

Issue 1:

Contractual relationship between Principal and Contractor

• Are the Principal and Contractor belong to the same Owner?

• Are the Principal and Contractor bound in the same holding company?

• Is there any conflict of interest between Principal and Contractor?



Issue 2:

Project Feasibility

• Is the project economically sound?

• Are project technical challenges within reach?

• Are the main players (contractors, consultants and manufacturers) have good reputation, experiences and track records?

• Do the project management team have adequate on-site Risk Management?

• Do the project team have the required skilled work force?



Issue 3:

Work Schedule

• Is the work schedule reasonable and within reach?

• Is the work schedule tight (almost no float time) or loose (lots of float times)?

• Are critical / key items on critical path?

• Are critical / key items exposed to flood / TC?

• Do we know replacement time for critical / key equipment?

• Any items with expected long repair/ reinstatement period?



Issue 4:

Operation/production characteristics

• Seasonal?

• Start-up period?

• Redundancies?

• Partial operation / Partial Handover?

• Parallel or serial production line?



Issue 4:

Operation/production characteristics

Example for Revenue Volatility / Seasonality

VIC RRP 2006

0

100

200

300

400

500

600

700

800

900

1000

1/01/06 1/04/06 30/06/06 28/09/06 27/12/06

Date

A$

/ M

Wh

SA pool price:

• 600 MW block would have lost up to A$6.0mio per hour

• Total of A$ 42m in just 5 days

• Annual Sum Insured A$ 185m based on avg. 50 $/MWh

South Australia NEM Data 2008

0

2,000

4,000

6,000

8,000

10,000

12,000

01-Jan-08 11-Jan-08 21-Jan-08 31-Jan-08 10-Feb-08 20-Feb-08

RR

P A

$/M

Wh

0

500

1,000

1,500

2,000

2,500

3,000

3,500

MW

RRP TOTALDEMAND

Actual Loss Sustained:

• limited to an average price / MWh during Indemnity Period

• Or Cap Spot price / MWh



Issue 5:

Time Excess

• The monetary amount corresponding to the Time Deductible shall be calculated by multiplying the average daily value of loss sustained during the Period of Indemnity by the number of days agreed upon as the Time Excess and shall be deducted from the amount payable.

• “First 60 Days”: open to interpretation, in particular for partial loss / intermittent loss?

• Definition of Time Excess as

• (i) time period or

• (ii) corresponding amount?

• Time Excess applicable “e.e.loss” or “in the aggr”?



Issue 6:

“Extended Definition of Delay”

• Suppliers/ Customers Extension:“Damage to any of the Insured suppliers’ or customers’ premises anywhere in the world”

• Specified Locations, FLEXA Perils only

• Sublimit

• Other Property:“Damage to property used by or on behalf of the insured whilst anywhere in the world”

• extremely wide cover for “entrepreneurial” risk of the contractor

• factual cover for late delivery of equipment

• Infectious Disease, Murder and Closure

• Delay not caused by material Damage

• Indirectly granting consequential loss cover for pandemics and quarantinable disease

• Port Blockage / Prevention of Access / Public Authorities

• impose reasonable sub-limits

➔ Definition of “Damage” is crucial – has to be limited to accidental physical damage



Issue 7:

Important Clauses

ICOW vs. AICOW

• ICOW required “efficiency test” for the insurer (called as “economic limit test”). It should not exceed the sum by which the amount otherwise payable is reduced.

• AICOW is not subject to “efficiency test” for the insurer. Consequently, the insured can make his business decisions without having to justify expenditure.

Automatic Progress Reports

• Post-incident information gathering is extremely difficult and laborious

• continuous monitoring of project progress is essential for:

• loss prevention

• loss assessment

Insuring Clause

• “sole” reason for delay is an indemnifiable loss under MD section

• often a number of causes contributing to a delay (covered and excluded)


Key Assessment and Underwriting Issues

Issue 8:

Handling Period Extension

• Any extension of the period of insurance under MD Section shall not automatically lead to a DSU period extension.

• Any extension of DSU insurance period shall be requested in writing as early as possible by the Insured, stating the circumstances leading to the need for such extension.

• Any alteration of the scheduled date of commencement of the insured business shall be reported and shall have effect for the DSU insurance period.

Delay caused by Insured Events

Delay caused by accident(s) which occurred withinthe initial insurance period covered

Additional delays caused by accident(s) occurringafter triggering of DSU liability

Insurance Period not Extended

Insurance Period Extended

Proximatecause

Covered

Newcause

Not Covered

Proximatecause

Covered

Newcause

Covered

Delay caused by Non Insured Events

Insurance Period not Extended

Insurance Period Extended

Cover expiresat the initial

commencementof business operation

specified in theSchedule

No Indemnity

Cover continuesup to

the revised anticipated

commencement of business

Insurers entitled tore-adjust Premiumand Time Excess

NB: Proximate cause=direct connection

with repair oraccident(s) occurring

within initial ins. period

Insurers entitled tore-adjust Premiumand Time Excess

Key Takeaways

• Understand extent cover of DSU policy

• Check who are the main players under the DSU policy

• Project feasibility and work schedule must be sound

• Beware with any impact from Production characteristic

• Beware with extension clauses

• DSU period extension shall not be automatic

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Delay Start-Up Strategies to Claims Management

Project Monitoring

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Project Monitoring avoids Costly Disputes

• Monthly Progress Reports

• Regular updating of Gantt Chart

• Site visits at key Milestones

• Understanding the Critical Path

• Clerk of Works


Progress Report – What to look out for?

• Key dates, milestones

• Record of delays, and their impact

• Changes to scheduled completion date

• Analysis of ongoing risks and mitigation plans


Gantt ChartsWhich version do we want?

• Schedule reports are typically level 1 to 5

• The Execution Schedule provides relevant working level details, for example the dates for start and completion of works

• Contains activities for specific sections, for example:

• Design

• Procurement

• Commissioning

• Provides details to critical path and near-critical elements






• Design

• Procurement

• Commissioning







• Design

• Procurement

• Commissioning







• Design

• Procurement

• Commissioning



What is Float?

• Slack, buffer; Non-critical

• Extent of time an activity can be delayed without impacting subsequent tasks, and/or the scheduled completion date

• Enables proper planning in reassigning resources and work schedules to mitigate delay


What is in the Critical Path?

• The sequence of project activities adding up to the total overall duration

• Any slippage of these activities directly impacts the duration of the project

• Task dependencies affect which activities can start only when certain activities are complete

• Un-insured delays can alter the critical path and/or reduce the float originally available

• Not all delays extend the critical path

Reinstatement Project Management

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Who are your Experts?

LossAdjuster

Clerkof Works

ForensicAccountant

LossMitigationSpecialist

ForensicTimelineAnalyst


LossAdjuster

Clerkof Works

ForensicAccountant


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Role of the Loss Mitigation Specialist


• Identifying & optimising loss mitigation strategies

• How is this distinct from the Loss Adjuster’s role?

• Examples include:

• negotiating directly with the OEM

• risk managing freight, land transport

• coordinating delivery timelines with key suppliers

• sourcing for temporary repair solutions

• Regular reporting to the loss adjuster & Lead


LossAdjuster

ForensicAccountant



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Who is the Clerk of Works?

• Physically on site liaising with contractors, engineers and surveyors

• Monitoring and reporting on progress

• Maintaining detailed records of incident related repairs

• Keeping records of un-insured events which may impact the critical path

• Comparing completed works with planned specifications

Clerkof Works


Clerkof Works

LossAdjuster

ForensicAccountant


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Role of the Forensic Timeline Analyst

• Reconstructing an accurate chronology of events

• Validating mitigation & accelerating strategies

• Evaluating scheduling data

• Determining critical paths

• Analysing incident related delayForensicTimelineAnalyst


Clerkof Works

LossAdjuster

ForensicAccountant


37




Clerkof Works

LossAdjuster

ForensicAccountant


38




Clerkof Works

LossAdjuster

ForensicAccountant


39




Clerkof Works

LossAdjuster

ForensicAccountant


40



Increased Costs of Working

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Spending money to mitigate delay

Increased Cost of Working

• Additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the amount for which the Insurer would been liable to pay (i.e. the delay)

• For example, chartering the Antonov 225 to carry a large generator transformer from factory to site, reducing transportation by 6-weeks compared to sea freight.


Spending money to mitigate delay

• Having a clear understanding of the pre-loss progress enables early decisions to accelerate repairs

• Conversely, this can be time consuming where project monitoring has not taken place

• Increased Cost of Working (ICOW) provides for extra expenses to pay for more resources

• Once the economic test has been established, incentive payments can be validated with reference to the time saved

• For example:• Overtime wages for multiple shifts• Air freight or private charter• Rental of temporary/lease equipment


Consider your Sub-Limit !

Consider your Sub-Limit !

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What about AICOW ?

Additional Increased Cost of Working

• Additional expenditure necessarily and reasonably incurred for the purpose of avoiding or diminishing the amount for which the Insurer would been liable to pay, or resuming and/or maintaining normal business operations.

• AICOW is not subject to the economic limit test, thereby allowing an Insured to make business decisions without having to justify expenditure.


There can only be one claim

• One Insured Party- the Principal/Owner

• One Scheduled Commencement Date – the date which the Project is expected to generate Revenue

• One Completion Date

• One Delay – irrespective of the numberof individual incidents, contributing to the overall Delay

• One Indemnity - the Actual Loss Sustained

• One Time Excess


• The original scheduled Completion Date can change during the construction phase, even where there are no insured events reported

• Project time schedule – There are a number of versions owned by the Contractor and the Principal, and they often tell a different story

• Availability of Liquidated Damages (LD) to the Principal – does the Policy say “Who pays first”?

• LDs can be Contentious – It is normal for Contractors to defend their entitlement to extensions

• DSU is not Business Interruption – Establish your panel of experts in the earlier phase of the project

P&C Business Management Asia | DSU – Strategies to Claims Management

Other Considerations

Key Takeaways

• Project Monitoring is essential in avoiding costly disputes

• Look out for uninsured delays

• Be prepared to spend money & accelerate

• There can only be one DSU claim

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Legal notice

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©2019 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.

Documents

DSU - Key UW Considerations & Strategies to …628a80f1-b040-4874-a42a...DSU - Key UW Considerations & | Strategies to Claims Management | Kuala Lumpur, 22 & 23 Aug 2019 5 DSU - Introduction