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Risk. Reinsurance. Human Resources.
Aon Risk SolutionsGlobal Broking Centre | Construction
Construction NewsletterA Message from the Managing Director
In spite of the demise of Infrassure, an infrastructure specialist, and that of Sciemus, a specialist carrier in power, the Construction market continues to be characterised by marked softening, with abundant capacity available for all but the most esoteric and catastrophe-exposed risks. This is great news for our clients, who are able to place risks in a competitive market, enabling them to concentrate on the development of infrastructure projects with an increasingly international pedigree.
Conditions may also have been behind a number of significant people moves within the London market, with four underwriters having left Torus for Tokio Marine and most of the construction team leaving Zurich for Torus in recent months. Such moves are creating uncertainty, even if capacity and rates have been unaffected.
The growth of regional hubs for construction and power meanwhile continues apace, with Dubai, Miami and Singapore all developing strong local capacity spurred on by regional development. London remains the centre for specialist capabilities, large-scale capacity and innovation, but the GBC is working increasingly closely with our network colleagues to bring regional and global expertise to our clients.
The GBC continues to develop innovative market solutions such as the use of surety bonds to fund pension deficits, with further details outlined in this newsletter. Our team is also showing its pedigree in public private partnership projects and renewable power. In offshore wind we continue to dominate the market, representing the insurance needs of over 70% of global offshore wind generation capacity. London continues to offer strong capacity for major Energy and heavy civils projects where lead markets continue to be recognised as market leaders for these classes.
With access to more than USD 3 billion of estimated maximum loss capacity for construction projects and a team that brokered 1,800 policies in 2013, London continues to extend invaluable expertise and capacity to clients and the wider Aon network worldwide. And in a sector increasingly dominated my multinational projects, we continue to deliver efficiencies and capabilities for Aon’s global client base.
We hope that the insights in this newsletter will provide further food for thought for our clients and the network in Construction and Power.
James MacNeal Managing Director of Construction and Power, GBC London
In this Issue
1 Message from James MacNeal
2 Tunnelling: getting the expertise right
2 Construction in EMEA - a joined up approach
2 US Casualty: the benefits of collaboration
3 Multi-party projects: getting the coverage right
3 PPP projects: London appetite
3 China and EMEA - bridging the divide
4 Surety bonds: delivering financing alternatives
4 Key Contacts
“With access to more than USD 3 billion of estimated maximum loss capacity for construction projects and a team that brokered 1,800 policies in 2013, London continues to extend invaluable expertise and capacity to clients and the wider Aon network worldwide.”
2 Construction Newsletter
Tunnelling: getting the expertise right Construction in EMEA - a joined up approach
With an increasing number of Construction projects in the EMEA region being developed on a cross-border basis, the Aon EMEA leadership team is arranging a meeting of Construction practice leaders from across EMEA, Canada and the US.
Attendees will discuss how to deliver coordinated and consistent capabilities to Construction clients and stakeholders, drawing on the capabilities of the wider Aon network. We encourage those interested in learning more about our ongoing regional work to get in touch with Nic Carreno or Robert Humphreys.
Nic Carreno +44 (0)20 7086 2208 [email protected] Robert Humphreys +44 (0)20 7086 0653 [email protected]
It is now 20 years since the Heathrow Tunnel Collapse, an event that triggered dramatic changes in the relationship between the insurance market and the construction industry. The event was the largest single civil engineering loss to the insurance industry and highlighted the importance of robust risk management and specialist expertise.
Twenty years on, expertise is still very much at the forefront of global tunnelling projects, with international contracting firms now competing for project work on a global basis. Often they bring with them a consolidation of expertise gathered from wherever major civil engineering projects are in highest demand. This approach is also reflected in the insurance sector, with insurers placing increasing emphasis on the capabilities of tunnelling teams when it comes to assessing their interest and the pricing of coverage.
Fortunately, insurers continue to be amenable to the broadest forms of insurance coverage available for those projects that are led by recognised teams. As a result, corporate and individual CVs are an important factor in insurers’ determination of the desirability of insuring any major tunnelling project.
The collective knowledge of these people and organisations is paramount to demonstrating an ability to manage the multiple complications and challenges these vast projects face.
Some employers are able to draw upon an impressive track record of successful projects that can lead to greater willingness to take on construction risk, and as a broker we help them to consider their options. Others will aim to leverage past successes to achieve the best possible outcomes in the market. What is evident is that expertise in an increasingly global construction sector is a now key insurance commodity.
“Munich Re estimates that 41% of all tunnelling losses by value are as a result of design error.”
US Casualty: the benefits of collaborationWith numerous projects seeking the expertise of the London and Bermuda markets via Aon’s global Construction Services Group in 2014, it is increasingly apparent that the Global Broking Centres (GBCs) continue to help clients access much needed capacity and Construction knowledge and expertise.
There has been a significant increase in West Coast risks looking to London and Bermuda for support, many with specific insurance requirements that draw upon the strengths of the London and Bermuda markets.
Recognising these trends, the already experienced West Coast team has been
bolstered by the transfer of Aon’s Senior Broker Tony Owen from London to Los Angeles. Tony has been instrumental in offering clients with large flagship projects the ability to access the GBCs.
Bespoke solutions for these often complex projects include large catastrophic limits, construction periods in excess of five years and coverage enhancements generally not available through domestic carriers.
Recent examples of clients accessing Aon’s global Construction capability include our work on the Los Angeles Metro Transport Authority’s (LAMTA) Super Layer. This difference in limits layer sits above five separate LA metro line extensions (totalling
$5.28 billion in construction values) and provides up to $500 million of limit.
The GBCs have been able to support many West Coast projects, demonstrating that teamwork and collaboration is at the heart of everything we do, bringing to bear the best capabilities Aon can offer from our extensive global network.
The success of these flagship projects has proved a catalyst for further project submissions, and helps to highlight where Aon can bring value to global clients considering the risks their organisations face and the way in which they manage them.
3 Construction Newsletter
China and EMEA - bridging the divide
The GBC now boasts a dedicated China desk within Construction, with a primary focus on Chinese overseas projects in the EMEA region. Aon is now able to draw on the capabilities of our colleague Fang Li, who has a profound knowledge of Chinese business culture, contractors’ insurance appetite and insurance markets’ involvement in EMEA projects. She works closely with the Aon China team and will be an invaluable addition for Aon network clients involved with Chinese overseas projects.
Fang recently attended the Aon China Global Services (ACGS) conference held in Beijing, during which colleagues re-emphasised the need for coordinated teamwork when working on complex Chinese overseas projects. Fang will undoubtedly play a key role in supporting clients in EMEA.
Multi-party projects: getting the coverage right
PPP projects: London appetiteThere has been a growing global trend in recent years towards the use of public-private partnership (PPP) initiatives to design, finance, construct and operate infrastructure projects such as roads, schools and hospitals. There are many risk issues to consider with such projects, but project teams would certainly benefit from close consideration of their operational insurance.
Typically, the insurable assets of such projects were not previously insured or, if they were, they would likely have had substantial self-insured retentions.
This means insurers typically lack the full claims experience needed to technically underwrite such assets, limiting the number of insurers prepared to offer terms and often resulting in hard market conditions.
The UK witnessed exactly this phenomenon around 15 years ago.
Fortunately, the UK market for operational PPP has since matured, with London displaying a strong appetite for writing such business and an abundance of capacity. Key to this change was greater understanding of the risk protection required and ensuring that this is built into the Authority Requirements at an early stage.
Aon has played an integral part in helping clients build appropriate risk management protection for their PPP projects here in the UK, with the London market presenting considerable opportunities for insurance buyers who are experiencing difficulties with their local market’s understanding of operational PPP project risk. We are working with our colleagues in developing market-leading PPP capabilities right across our international network.
There has been a general reawakening in the building sector after the prolonged drought that followed the financial crisis. Firms are seeing appetite for new projects increase and despite the uptake in claims severity in recent years, professional indemnity (PI) coverage for design and consulting firms remains buoyant, with capacity particularly strong in the US, London and Middle East markets.
However, with many large infrastructure projects involving multiple parties, project owners taking on new proposals need to be aware of the potential pitfalls associated with insured versus insured exclusions present in most PI contracts.
Standard PI wording limits claims to those made against third parties and excludes members of an owners’ own insured team, limiting the potential for owners to claim should an internal claim arise. This situation leaves owners exposed to the potential failings of their project team.
Insurers are however wary about the implications of removing the exclusion, citing the potential for collusion and manufactured claims. Even if insurers do opt to delete the exclusion, Aon knows of instances where the owner’s liability limit was eroded because a contractual claim between a consultant and a contractor led to cost overruns.
Our suggestion for an enhanced solution for owners is to endorse the policy with an Indemnity to Principals extension, coupled with a waiver of the subrogation clause and a mitigation/rectification extension. This places the owners’ interests’ front and centre, while allowing them to continue to provide coverage right across the project team.
Surety bonds: delivering financing alternativesFor power companies weighing up their funding options, it may well be worth considering surety bonds as a means of delivering alternative, off-balance sheet credit. A number of players in the space are already doing so and as Mark Holt, Leader of Aon Risk Solutions Surety & Guarantee, London explains, they are rapidly replacing bank guarantees as the financing option of choice in the power sector.
“Our team has already worked with a number of companies in the power sector, who have used surety bonds to back North Sea oil decommissioning, waste to energy developments, PFI performance, and deferment of tax liabilities to allow for monthly excise payments,” said Holt.
Aon was also involved in the innovative application of a surety facility for a FTSE 100 client, said Holt, having recently closed a five year, GBP 400 million transaction to offer surety bonds to its pension
scheme as part of its funding strategy and recovery plan. This innovative use of surety bonds was a market first and is believed to be the largest surety syndication ever constructed in the UK.
Through the facility the sponsoring employer opened up a new pool of competitively priced capital, and the pension fund gained certainty of future payments from a highly-rated syndicate of insurers. With balance sheet management, working capital and cash being key business considerations in the current economic climate, we anticipate off-balance sheet surety bonds being widely used for pension deficit planning, explained Holt.
Surety bonds are designed to protect against issues such as company insolvency or contractual default, and are being used within the sector to finance deductibles on compulsory insurance policies, decommissioning liabilities, performance defaults, pension deficits and tax liabilities.
About Aon Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and
human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to
empower results for clients in over 120 countries via innovative and effective risk and people solutions and through
industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker,
best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits
consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited
to learn about Aon’s global partnership with Manchester United.
© Aon plc 2014. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular
individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.
Aon UK Limited is authorised and regulated by the Financial Conduct Authority.
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James MacNeal Managing Director +44 (0)20 7086 4353 [email protected]
Robert Humphreys Chief Commercial Officer +44 (0)79 6840 9686 [email protected]
Fang Li Head of China Desk +44 (0)207 086 0441 [email protected]
Simon Simpson Head of PFI & UK Construction +44 (0)20 7086 2003 [email protected]
Warren Beardall Client Director, PFI +44 (0)20 7086 4328 [email protected]
Mark Holt Head of Surety & Guarantee +44 (0)20 7086 0576 [email protected]
Peter Rudd Head of International Construction +44 (0)20 7086 4332 [email protected]
Galen Brislane U.S. Casualty +44 (0)207 086 3432 [email protected]
Michael Earp Professional Indemnity +44 (0)207 086 4414 [email protected]
Key Contacts
“With balance sheet management, working
capital and cash being key business
considerations in the current economic climate, we anticipate off-balance sheet surety bonds being
widely used for pension deficit planning.”
