8/18/2010 1

The Navigators Group, Inc.The Opportunity and Challenges of Underwriting Construction Risks

in the Energy and Infrastructure Sectors

2nd Seminar of Lloyd’s in Brazil

Stephen CowardPresidentNavigators Technical Risk

20th July 2010

Agenda

Introduction

What is the subject matter? A quick guide to construction project insurance

Construction loss illustrations to give context

What are the challenges?

Key project information and its worth

Essential attributes of a construction (re) insurer

The opportunity: What does Lloyd’s offer on Brazilian construction projects?

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Planned spending under PAC2 2011-14

Clockwise:

What is the subject matter? An introductory look at construction project insurance

Erection all risks (EAR) = Electrical/mechanical projects (nuts & bolts) e.g. power stations, oil refineries, gas processing, industrial plants, pipelines, water /waste treatment and offshore exploration and production installations

“All risks” of physical loss/damage to the contract works

Covering all parties associated with project site (Employer, Financiers, Contractors, sub contractors, etc.)

Main exposures = fire, explosion, collapse, mechanical breakdown, human error

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What is the subject matter? An introductory look at construction project insurance (2)

Contractors all risks (CAR) = dwellings, commercial buildings, roads, bridges, tunnels, dams, sea defences

“All risks” of physical loss/damage to the contract works

Covering all parties associated with project site (Employer, Financiers, Contractors, sub contractors, etc.)

Main exposures= fire, collapse, landslide, faulty design or materials, storm, flood, human error

What is the subject matter? An introductory look at construction project insurance (3)

Delay start up insurance (DSU) also known as ALoPLoss of anticipated profit/loan interest repayment (and/or ICOW)arising from an insured delay to the commencement of the businessEmployer (and financiers) insured, but not contractorsThird party liabilityAll insured parties protected against liabilities to others for bodily injury or damage arising out of the execution of project works

Let’s see what can go wrong – some claims examples

Run of river hydroelectric scheme – inundation of workings Central America

Blow down tank for steam turbine under construction –vacuum induced collapse

Crane collapse at construction site in USA –jib falling on site camp caused fatalities

Generator Step-Up transformer explosion and fire

Deep excavation in Dubai

Retaining wall showing signs failure

Major failure of retaining wall

We wanted a basement car park not a swimming pool!!!!

Gas fired power plant nearing completion in USA

Gas explosion during pipeline purging –widespread damage and loss of life

Extensive damage and project delayed several months

What are the challenges?

Many projects in the infrastructure and energy sectors are highly complex risks, with distinctly individual characteristics Insurance is required for the whole of the project periodComplex contractual arrangements

Various separate entities working together; sometimes conflicts arise during the life of the project Building sites are inherently dangerous places

Profit margins are slim in the construction industry; aggressive tendering process in public and private sectors; cash flow is an important consideration for contractors

Insurance risk assessment is often required at tender/pre-bid stage before full plans and specifications have been developed or suppliers identified. Getting relevant information can prove difficult.

Cont/..

What are the challenges?

At the commencement of the insurance many projects elements are yet to be determined – even the basics are only estimates e.g. estimatedContract Value, estimated period of construction

Risk monitoring and loss prevention is a key part of a successful project. Loss mitigation is also an important element. What went wrong and how to fix it? How to prevent a recurrence on this and other similar projects around the world?Non-renewable business directly impacted by economic cycles. Environmental and political influences are becoming key drivers too.

Increasingly ambitious projects lead to greater exposure. Technological and environmental boundaries are being taken to new limits

Substantial (re) insurance capacity is required; this capacity has to be sustainable in the long termUnderwriting results take several years to develop

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Cont/…

Development of results- an illustration of EAR exposure over time

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Key project information and its worth

Underwriting information required

What is it? - project features, technical characteristics

Who is involved? – the parties to the project and their past experience

Where is it? – location of site, ground conditions , proximity to water

How much is it going to cost? – the make up of the contract value between its key constituent parts

How long will it take to complete? – seasonal exposures, length of testing/commissioning phase, lead time for items on the “critical path” (DSU)

And more . . . . . . . .?

Why it makes a difference?

No two projects are the same

Premium and deductibles need to be commensurate with expected risk

Tailoring coverage to match the exposure

Better utilization of capacity. Realistic PML needs to be assessed

Loss prevention strategies can be developed with clients

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Essential attributes of a construction (re) insurer

Since these are long term policies, the market needs underwriters who provide:

A continuing appetite for the risk throughout the project period

Adequate engineering resources to provide “after sales” services; progress monitoring

A positive attitude to change after policy inception; project alterations are likely (project plan vs actual activity)

A willingness to extend the period of insurance, perhaps long into the future

An ability to accept future increases in insured values and the additional exposure

~ Variation orders

~ Unforeseen rise in construction costs, which can be significant

~ Long-term inflation

Claims handling capability ~ Technical understanding what went wrong and how to fix it

Claims paying ability ~ staged payments, recognising the liquidity of insured parties, long term financial security

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The opportunity: What does Lloyd’s offer on Brazilian construction projects?

Technical expertise across a range of project types

Wide experience drawn from all parts of the world (direct insurance and reinsurance)

Reinsurance leadership, including risk management/loss prevention and claim handling capabilities

Meaningful facultative capacity from several individual syndicates

Competitive pricing

Policy/Product innovation: coverage developed from internationalexperience (an alternative to standard Munich Re forms)

When the works are completed, the possibility of a smooth transition into operational (re)insurances – i.e. property, business interruption

Lloyd’s unique financial security

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