Infrastructure Export Project and Insurance Program

October 23, 2013

Masakazu Koshimoto

Tokio Marine and Nichido Fire Insurance Co.,Ltd.

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2Contents

1. Process of Project Finance

2. Insurance for Construction Worksand Delay in Start up

3. Advance Loss of Profit

4. Important Points of Insurance Arrangement for Project Finance

5. Risk of Tunneling Works

6. Conclusions

1. Process of Project Finance

In Project Finance, there is variety of parties that work closely to make the project successful.

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Type of Finance

Sovereign FinanceThe central government's credit capability

Sub-Sovereign FinanceCredit capability of a local self-governing body or a government organization

Corporate FinanceCredit capability of a company

Project Finance

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Dividend of Profit

necessary fund payment

payment

construction

investment

payment

operation & maintenance

⑦Government

⑧Off taker

⑨Escrow Account Agent

⑩ Insurance Advisor

④Render

⑥Feedstock Supplier

① ＳＰＣ

⑤Operator

③EPC Contractor

②Sponsor

products

payment fuel

loan

security

Project Finance

The Parties Concerned (1)

assessment/permission

payment of debts

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i.e. ： Taiwan HSR Project

1) SPC ： Taiwan High Speed Rail Corporation

2) Sponsor ： Continental Engineering Corporation, Fubon Group, TECO and Evergreen Group,etc.

3) EPC contractor ： Europe Alliance （ power supply/control), Japan Alliance （ rail/vehicle), International bidding （ civil & building ）

4) Render ： Taiwan Government, Bank Loan （ US$10 billion/total project cost US$18billion)

5) Operator ： Taiwan High Speed Rail Corporation

6) Fuel Supplier : Taipower

7) Government ： Taiwan Government

8) Off Taker ： Passengers

9) Escrow Account Agent: Nil

10) Insurance Advisor ： Marsh, JLT Consortium

6The Parties Concerned (2)

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Process of Negotiation for Project Finance

C1

C2

C3

C6

C7

Consulting

End of F/S

Firm Order

Commencement of Construction works

I1

I2

I5

Preparation of basic scheme

Marketing

Discussion for Insurance

Agreement for Insurance

Purchase

F1

F2

F3

F5 I4 C5

C4

F6

F7 　　　 I6Submission of Policy

F8 　　　 I7Establishment of the right of pledge / Loan extension

Commencement

Forming Syndicate

Preparation of basic loan condition

Settle of loan condition

P1

Approval of license

Application for license

P3

Permission(P)

Construction(C)

Insurance(I)

Finance(F)

F4 I3

© 2008-2012 東京海上日動火災保険株式会社　不許複製© 2008-2012 東京海上日動火災保険株式会社　不許複製

P2

Letter of Intent

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Loan Negotiation Insurance Construction Permission

2. Insurance for Construction Worksand Delay in Start up

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9Insurance for Construction and Operation(1)

Design/Procurement/Fabricationorder

Construction Work

TransportationTesting Maintenance

OperationCompletion

Physical Damage

Loss of Profit

Delay in Start-up Insurance

Advance Loss of Profit InsuranceLiability

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Marine Cargo Insurance

Maintenance Cl.Construction All Risks Insurance

Worker's Compensation Insurance/ Employers Liability Insurance

Third Party Liability Insurance)

Automobile Third Party Liability Insurance

Fire,Machinery Breakdown Insurance

Business Interruption Insurance

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10Insurance for Construction and Operation(2)

• Construction All Risks : • Section I : Material damage

• Section II : Third Party Liability (optional)

• Section III : Advance Loss of Profit (ALOP)

Marine Cargo

Marine Delay in Start-up (DSU)

Workmen's Compensation / / Employer's Liability

Automobile Third Party Liability

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Important Points for Privately Financed Project

Trend of General Scheme

• Nowadays OCIP is more popular for large Infrastructure Projects

• "OCIP"= Owner Controlled Insurance Program Render requests OCIP with a pledge enforced Generally deductible higher than US$1million should be adopted Excess Liability with US$10 million deductible should be adopted

• EPC contractors purchase the under-mentioned Insurances. Primary Layer of Third Party Liability Insurance example, up to US$10 million Workmen's Compensation/Employer's Liability Temporary Camps and equipment Deference in Condition Policy / CAR DIE/DIC Property Insurance for Module or Construction Machineries Marine Cargo

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Construction All Risks Insurance (CAR)(1)

Outline

The Insurers indemnify the insured in respect of damage to the Insured properties of which the amount should be included to the insured amount. The Insurers pay the cost of repairs necessary to restore the items to their condition immediately before the occurrence of the damage.

Key Words

• Within the Period of Insurance• Property Insured• Unforeseen and Sudden Accident• Physical Damage• Not apply to Exclusions (all risks basis)

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Construction All Risks Insurance (CAR)(2)

Period of Cover

• Start: Directly upon commencement of work or after the unloading of the items insured at the site

• Expiration: As soon as construction works are taken over or put into service

• Extension: Can be covered during the maintenance period with special conditions

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Construction All Risks Insurance (CAR)(3)

• Properties insured

• Construction Plant, Construction Materials, Equipment

• Note Inflation Divided Purchasing Orders Change Order Materials supplied by the Owner

• Coverage could be extended to Design Risk Debris of Removals Extra Charges Extra Air Freight Temporary Facilities Existing Properties

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Design Cover (Design Exclusion)

• Manufacturers' Risks(M/R) = Faulty Design, Defective Materials, Bad Workmanship

LEG1/96 No actual coverage for M/R Applied to Proto-Type machinery, technology, process Deal Breaker for Financed Project

LEG2/96Supposed cost of removal of defects due to M/R should be deductedVery general in today's Insurance Market In many cases inevitable condition for loan agreement in respect of technology risk

LEG3/96 (LEG3/06)Cost of repairs or replacement for loss or damage due to M/R Best and broadest coverage for contractor or supplierNot apply to the project consisting mainly of Civil and/or Building works

LEG=London Engineering Group

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CAR would be Almighty ?

Catastrophe• General Exclusions (war, revolution, nuclear radiation, wilful act, etc.)• Terrorism• Earthquake (Japan, Indonesia, California, etc.), Flood (Thailand, Australia)

Technology Risk• Manufacturers' Risks Coverage for Proto-type process, technology should be

limited to LEG1/96 condition

Huge Risk• Difficulty to arrange enough capacity for huge project

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Third Party Liability(1)

OutlineLegal Liability to pay as damages consequent upon

• Accidental bodily injury of third parties• Accidental loss of or damage to property belonging to third parties

Period of CoverGenerally same as CAR

Who should be insured?Owner, Contractors, Sub-contractors and Suppliers, etc

Cross LiabilityCoverage extended to legal liability against the other Insured

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Third Party Liability(2)

Insured Parties

Insurer

Third Party

Owner

Contractor①

Contractor②

Contractor③

Sub-contractors Suppliers

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TPL would be almighty ?

• Diversification of Liability Risks• Environmental Pollution, Intellectual property right and Cyber risks• Insurance Market is not always positive to expand to New risk categories other

than bodily injury and property damage

• US Standard• Requirements of TPL condition are mostly based on legal system and insurance

market practice in the United States.• Limit of indemnity US$ 100 Million• Exclusive jurisdiction

3. Advance Loss of Profit

The loss of revenue in respect of delay in serviceavailability following an event indemnifiable by the CAR

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Why is ALOP necessary to Project Finance ?

Loss or damage during transportation and construction works could cause SPC to go into default.

Cash flow is the most important factor for SPC management and for Lenders.

Huge risk

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Accident Delay in Completion Delay in Start Operation

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Advance Loss of Profit

Applicant• SPC (Owner)

Insured• SPC （ Contractors excluded ）• lender/Escrow account agent

Formation• ALOP must be Section of CAR(EAR) policy.Ⅲ

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Advance Loss of Profit

Indemnification• Loss of gross profit

• Actual turnover × Rate of gross profit

• Increase of working cost• The additional expenditure incurred to avoid or diminish the turnover reduction

Main exclusions / caused by or resulting from• Same as CAR Section I• Earthquake, volcanic eruption, tsunami• Loss of or damage to surrounding property, construction machinery, plant and

equipment

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100

80

60

40

20

0

0

Testing

3 7 9 12 months

Operation

projected date

Construction

actual date

Fire

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Delay

Construction

Commencementof Repair work

Additional cost/ overtime, nightwork, work on public holidays

Increased Cost of Working

Increased Cost of Working

Indemnity Period

Indemnity Period

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Progress

Concept of ALOP

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Claim History of ALOP

"RISK CONTROL ANS CLAIMS HANDLING IN ADVANCE LOSS OF PROFITS INSURANCE(ALOP)", IMIA WGP 63 (09)"RISK CONTROL ANS CLAIMS HANDLING IN ADVANCE LOSS OF PROFITS INSURANCE(ALOP)", IMIA WGP 63 (09)

Period : January 1980 – December 2008Period : January 1980 – December 2008

Industry Group Number of Risks Number of Claims Loss Amount (Euro)

Building Construction 317 5 46,999,124

Industrial Process Plants 150 19 151,857,674

Civil Engineering 119 14 53,799,694

Food Industry 30 2 5,228,179

Wood Industry 21 5 22,376,681

Metal Industry 55 1 2,573,549

Mining 51 2 11,593,320

Other 48 2 6,010,540

Paper Industry 62 2 10,250,734

Power Plants 323 25 156,289,837

TOTAL 1,176 77 466,979,330

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ALOP would be Almighty ?

Weak points• Only covers specific accidents

Delay in getting license or of permission Delay in shipment or customs Shortage of workmen Redesign, omission of design Readjust of parts fabricated in the factory Problem of quality control etc.

• Accidents occurred to any properties before brought into the site can not covered

Huge projects• Insurers of CAR and of ALOP are same• Difficult to find insurers who accept huge capacity for CAR and ALOP

4. Important Points of Insurance Arrangement

for Project Finance

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Requirements under the loan agreement

Careful Examination of Loan Agreement

• What kind of insurance SPC is requested to arrange? Insurances purchased by SPC Insurances purchased by the EPC contractor

• Requirement about rating of the Insurers

• "Lender's Clause“

• To whom the Rights for Insurance claims belong?

• Insurance condition of Loan Agreement and EPC contract should be same

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LEG Multiple Insured Clause

1. It is noted and agreed that if the Insured described in the schedule comprises more than one insured party each operating as a separate and distinct entity then (save as described in this Multiple Insureds Clause) cover hereunder shall apply in the same manner and to the same extent as if individual policies had been issued to each such insured party provided that the total liability of the Insurers to all of the insured parties collectively shall not exceed the sums insured and limits of indemnity including any inner limits set by memorandum or endorsement stated in the policy.

2. It is understood and agreed that any payment or payments by Insurers to any one or more such insured parties shall reduce to the extent of that payment Insurers' liability to all such parties arising from any one event giving rise to a claim under this policy and (if applicable) in the aggregate.

3. It is further understood that the Insured parties will at all times preserve the various contractual rights and agreements entered into by the insured parties and the contractual remedies of such parties in the event of loss or damage.

4. It is further understood and agreed that Insurers shall be entitled to avoid liability to or (as may be appropriate) claim damages from any of the Insured parties in circumstances of fraud, material misrepresentation, material non-disclosure or breach of any warranty or condition of this policy each referred to in this clause as a Vitiating Act.

5. It is however agreed that (save as described in this Multiple Insureds Clause) a Vitiating Act committed by one insured party shall not prejudice the right to indemnity of any other insured party who has an insurable interest and who has not committed a Vitiating Act.

6. Insurers hereby agree to waive all rights of subrogation which they may have or acquire against any insured party except where the rights of subrogation or recourse are required in consequence of or otherwise following a Vitiating Act in which circumstances Insurers may enforce such rights notwithstanding the continuing or former status of the vitiating party as an insured.

6. Insurers hereby agree to waive all rights of subrogation which they may have or acquire against any insured party except where the rights of subrogation or recourse are required in consequence of or otherwise following a Vitiating Act in which circumstances Insurers may enforce such rights notwithstanding the continuing or former status of the vitiating party as an insured.

6. Insurers hereby agree to waive all rights of subrogation which they may have or acquire against any insured party except where the rights of subrogation or recourse are required in consequence of or otherwise following a Vitiating Act in which circumstances Insurers may enforce such rights notwithstanding the continuing or former status of the vitiating party as an insured.

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5. Risk of Tunneling Works

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Risk of Tunneling Works (1)

Loss Example : Heathrow Express Link (UK) - 1994

"The Code of Practice for Risk Management of Tunnel Works" Munich Re (ITA Conference Seou, April 25, 2006l)"The Code of Practice for Risk Management of Tunnel Works" Munich Re (ITA Conference Seou, April 25, 2006l)

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Loss Example : Singapore MRT – April 30, 2004, 3:15 pm

"The Code of Practice for Risk Management of Tunnel Works" Munich Re (ITA Conference Seou, April 25, 2006l)"The Code of Practice for Risk Management of Tunnel Works" Munich Re (ITA Conference Seou, April 25, 2006l)

Risk of Tunneling Works (2)

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O/C Y Project Type of Loss Cause of lossLoss Amounts of

Property Damage*

Delay in Months

1994 Great Belt Link, Denmark Ingress of water - 32 12

1994 Munich, Germany Collapse Faulty design (soil) 2 10

1994 Heathrow Express Link, UK Collapse Faulty workmanship 150 14

1995 Taipei Metro, Taiwan Ingress of water Faulty workmanship 12 12

1995 Los Angels Metro, USA Collapse Faulty workmanship 30 15

1995 Taipei Metro, Taiwan Ingress of water Faulty workmanship 30 18

1999 Hull Yorkshire Tunnel, UK Collapse Faulty design? 64 26

2000 Taegu Metro, Korea Collapse Faulty design/work 13 9

2002Taiwan High Speed Railway, Taiwan

Collapse - 11 0

2003 Shanghai Metro, China Collapse Faulty workmanship 69 47**

2004 Singapore Metro, Singapore Collapse Faulty design/work t.b.a. 18**

2005 Barcelona Metro, Spain Collapse - t.b.a. 24**

"ALOP/DSU coverage for tunneling risks", IMIA WGP 48 (06)"ALOP/DSU coverage for tunneling risks", IMIA WGP 48 (06)

** estimate** estimate*EURO Million*EURO Million

33Risk of Tunneling Works (3)

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Dubai Metro (1)

• "Tunneling Code of Practice Endorsement"

Purpose Effect

• The minimum standard of the risk management of tunneling work and construction progress

• The definition of each responsibility of all concerned in connection with tunneling work

• Reduction in frequency

• Mitigation of damage

• Continuation of insurance undertaking

• Spread of the best practice

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CONTENTS

• Section 1 - Objective of Code• Section 2 - Compliance with the Code• Section 3 - Introduction• Section 4 - Risk Assessment & Management• Section 5 - Client Role & Responsibilities• Section 6 - Project Development Stage• Section 7 - Construction Contract Procurement Stage• Section 8 - Design Stages• Section 9 – Construction Stage

http://www.imia.com/downloads/external_papers/EP24_2006.pdfhttp://www.imia.com/downloads/external_papers/EP24_2006.pdf

IMIA Tunneling Code of Practice

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• Based on TCOP, tunneling work monitoring investigation by a specialist is conducted.

• Monitoring about a design check, process control, the operation method of TBM (Tunnel Boring Machine), the risk reduction policy of tunneling work, and monitoring methodology

• A specialist pointed out necessity of

Review by the exterior Auditor about

a temporary installation design,

of foundation improvement of a

TBM start part, and of preliminary

survey for Creek underground

excavation, etc.

36Dubai Metro (2)

6. Conclusions

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Why is Insurance purchased for?• To meet loan requirement?• To whom is the Insurance necessary ?• For the Lenders?

Cost of Insurance• The cheaper, the better ?• Quality of Insurance program• Quality of Insurance Company

Conclusions

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Muito obrigado!