“Silent Risks”

Bassem Mesallam

Vice President – Engineering Underwriting

Oman Insurance Company

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CONTENT

Implications of financial crisis on Construction Insurance

Typical triggers for interruption of works

Work Interruption – Three Scenarios

Risk assessment

Basic requirements for site protection

Salient features of standstill cover

Summary

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IMPLICATION OF FINACIAL CRISIS ON CONSTRUCTION INSURANCE

Cancellation and postponement of orders

Suspension of ongoing projects

Negative growth of premium

Increase of loss ratio due to moral hazards

Difficulty in premium collection

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IMPLICATION OF THE FINACIAL CRISIS ON CONSTRUCTION INSURANCE – Cont.

Shrinkage of reinsurance capacity

Reallocation of resources and expenses

Increased pressure on project costs (Contractors compromise on safety measures to save on cost)

Late payment by clients

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TYPICAL TRIGGERS FOR INTERRPUTION OF WORKS

Failure of investors to fulfill their obligations

Cash flow and liquidity problems

Viability of the project as a result of changes in the economic environment

Work progress affected by disputes between the principal and a contractor

Project time schedule delayed by shortage of, or late delivery of material and equipment

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WORK INTERRUPTION LEADS TO THREE POSSIBLE SCENARIOS

Scenario 1 - Abandonment of the project

Scenario 2 - Abandonment of the site

Scenario 3 - Temporary interruption of the project

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INSURANCE PERSPECTIVE

“Material Change in Risk”.

Cessation of insurance cover (General Exclusion “d”)

Immediate notice to Insurers (General condition no. 4)

Modification of terms (standstill cover)

Re-confirming continuity of cover

Informing reinsurers

It is important to remember that ...........

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SCENARIO I - ABANDONMENT OF THE PROJECT

EFFECT: Cancellation of the policy with final premium adjustment

CHECK LIST: 6 W’s Principle

Written confirmation from the principal Whether premium has been paid (in full or in part) Whether any work has been carried out on the site Whether any claim has been lodged under the policy Whether any bank financiers/assignments are involved Worth of the client

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SCENARIO I - ABANDONMENT OF THE PROJECT – Cont.

PREMIUM ADJUSTMENT:

i) Partial work undertaken: Time on risk Value at risk Loss experience

ii) No work undertaken Admin fees and expenses

III) Reinsures’ agreement is must in case of fac placement

IV) Each case shall be evaluated on its own merits

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SCENARIO I - ABANDONMENT OF THE PROJECT – Cont.

PROSPECT:

The project may still present an insurable value depending on the stage of completion

Suitable insurance options to be examined

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SCENARIO II - ABANDONMENT OF THE SITE

EFFECT:

Policy cover ceases in line with General Exclusion No. d

ACTION:

The project may still present an insurable value Identify party with an ongoing insurance interest Standstill cover to be provided

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SCENARIO III - TEMPORARY SUSPENSION BY MUTUAL AGREEMENT

EFFECT:

Policy cover ceases in line with General Exclusion No. d

ACTION:

The project may still present an insurable value Standstill cover to be provided

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PROJECTS FREQUENTLY AFFECTED BY SUSPENSION

Residential and commercial buildings

Civil engineering projects

Industrial buildings

Complex projects

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CONSTRUCTION PHASES & RISK PROGRESSION

(30 days) (12 - 24 months)

Demobilisation

Maintenance

Period

Construction Period

Value

(3-6 months) (18-24 months)

Mobilisation

Rain

y Pe

riod

Rain

y Pe

riod

Substructure Superstructure

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MAIN HAZARDS DURING STANDSTILL PERIOD

Example: Commercial Building

Water

Fire

Theft, Burglary and malicious damage

TPL

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SITE SURVEY

Stage of completion and estimated value of completed portions

Comparison of planned to actual progress Water exposure Drainage facilities Windstorm exposure Fire exposure Fire-fighting facility Exposure to theft or burglary Third party exposure Storage of material or equipment

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BASIC REQUIREMENTS TO SITE PROTECTION

24 hours security Fencing of site Clearance of combustible waste material Removal of highly inflammable and combustible material Adequate fire fighting equipment Installing safety nets around superstructures

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SALIENT FEATURES OF STANDSTILL COVER

Cover is reduced from “all risks” to “named perils” Standstill cover can be endorsed and extended at certain

time intervals Deductibles of the original policy are either maintained or

adjusted The SI must be monitored and adjusted in response to

inflation and currency fluctuation Any resumption of all risks cover is subject to a survey

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SUMMARY

1. Material change in risk

2. Re underwriting

3. Terms and conditions for the silent risks are based on site survey

SILENT RISKS ARE ALWAYS TAILOR-MADE SOLUTIONS

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THANK YOU

For more information please contact:

Bassem MesallamTe: 04 2337803Email: bassem@tameen.ae