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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!