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Lexpert. Introduction to PPP Construction Insurance and Performance Security Requirements 06 December 2012. Presented by David Bowcott Senior Vice President and National Director Maurice Audet Senior Vice President Aon Risk Solutions™ Construction Services Group Infrastructure Services.

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lexpert

Lexpert

Introduction to PPP Construction Insurance and Performance Security Requirements

06 December 2012

Presented by

David Bowcott

Senior Vice President and National Director

Maurice Audet

Senior Vice President

Aon Risk Solutions™

Construction Services GroupInfrastructure Services

agenda
Agenda
  • A Bit About Aon
  • Basics of P3 Insurance and Performance Security
  • Uninsurable Risks in Insurance and Performance Security
  • When Disaster Strikes – how insurance and performance security requirements respond to various participants’ needs
  • IOCIP – impact on IO AFP market and the insurance market
aon s credentials
Aon’s Credentials
  • Our market share in Canada
    • Broker and advisor to 12 of the top 15 contractors in Canada
    • Broker and advisor to over 50% of the Top 100 Projects
    • Broker and advisor to over 80% of all Canadian Public Private Partnerships
    • Over 2,500 construction clients
  • Aon swims in the largest pool of construction risk management transactions in Canada

The following presentation reflects our perspective given our pool

the goal
The Goal

Effective Risk Communication

Cost

Insurance Brokerage and Advisory Costs

Cost of Construction

Cost of Operations

Insurance and Performance Security

Cost of Capital

(100’s of Thousands)

(Millions)

(10’s of Millions)

(10’s of Millions)

(100’s of Millions)

Unnecessary Risk Contingency

basics of ppp insurance and performance security key features
Basics of PPP Insurance and Performance Security -Key Features
  • Keys are alignment with on time, on budget, and as per specification objectives

Changes as a result of this alignment:

  • Scope of coverage
    • The broader the better
    • The lower the deductibles the better
  • Liquidity/Responsiveness
    • The faster the better
  • Better integration of covers
    • Eliminate the finger pointing between policies
the goal no gaps between buckets
The Goal - No Gaps Between Buckets

All Risks

Risk

Controls

Risk

Controls

Risk

Controls

Contractor

Policies

Builders

Risk

Wrap-

Up

Professional

Pollution

Liquidated

Damages

Insurance

Force

Majeure

Insurance

Sub Default

Insurance

Letter of

Credit

Surety

Uninsured Risks

Expanded Solutions (PPP/Quality Driven)

basics of ppp insurance and performance security products
Basics of PPP Insurance and Performance Security – Products

Common Insurance Covers – A “suite” of core coverages:

  • COC
  • Wrap-Up
  • Professional
  • PI
basics of ppp insurance alignment with project risks
Basics of PPP Insurance – Alignment with Project Risks
  • Beyond the limits and deductibles (though they are important too)
  • Identify specific risks and their impact on project delivery objectives
  • Determine insurability based on insurance market appetite for risks and cost for risk transfer
  • Then design solutions that strike the acceptable balance within the stakeholder group
  • This process potentially varies within the main “camps” of a project and within the stakeholders within these camps:
    • Sponsor
    • Project Co
      • Lenders
      • DB Contractors and Designers
      • Project Co / Equity
basics of ppp insurance key features
Basics of PPP Insurance – Key Features
  • Lenders:
    • Financial security ratings of insurers
    • Control over insurance mechanics
      • Control must remain with the party to whom they are lending
    • Control of claims proceeds
      • Loss payable
      • Insurance Trust Agreements
    • Non-cancellation
      • Except for non-payment of premium, suspension of project or termination of the Project Agreement
    • Non-vitiation
    • Exclusivity of insurance
      • Not shared with risks in which they hold no financial interest
basics of ppp insurance key features1
Basics of PPP Insurance – Key Features
  • Sponsors
    • Balance between price and coverage, though more is often better so they can transfer more risk
    • Alignment with supervening events as it reduces compensation
basics of ppp insurance key features2
Basics of PPP Insurance – Key Features
  • Project Co/Equity
    • Compliance with specifications – tick the box
    • Price – low bid still wins in the PPP world
performance security defined
Performance Security Defined

Any security used to guarantee the performance of entities contracted to complete project work

Broader definitions see all security (including insurance) as performance security

key to contractor performance security striking the balance
Key to Contractor Performance Security – Striking the Balance

Acceptance of

Security by

Debt (and Equity)

Contractor

Balance Sheet

Constraints

basics of ppp construction performance security the options
Basics of PPP Construction Performance Security – The Options

Common P3 Performance Security

  • Parental company guarantees (PCGs)
  • Letters of credit
    • Traditional and EDC Performance Security Guarantees
  • Cash reserves
  • Surety bonds - Traditional performance bond and payment bond
  • Subcontractor default insurance (Subguard®)

Future Potential Solutions

  • Liquid surety – Performance bond with loss advance
  • Cap Assure – DB contractor cover with sub default insurance

NOTE: There are several others (be aware)

basics of ppp performance security
Basics of PPP Performance Security

Some Helpful Hints

  • Know all the performance security options
  • Read all agreements to ensure alignment of performance security requirements
  • Read the actual performance security documents
    • Watch for conditionality that doesn’t conform with agreements
  • Watch carrier ratings
  • Use performance security consultants/brokers
traditionally perceived uninsurable risks
Traditionally Perceived Uninsurable Risks…
  • Defect
    • Design, labour and materials
  • Force majeure
    • Strikes, lockout, embargo
  • Weather events
    • Weather events causing pure delay without causing property damage
  • Economic
    • Commodity price, currency and labour cost fluctuation
  • Delay or cost overrun
    • Schedule slippage
but the lines are getting blurry
…but the lines are getting blurry
  • Fifty Shades of Grey…
  • Lines between uninsurable and insurable are less clear because of coverage innovation

Case Study No. 1: Construction Defect (Faulty workmanship)

  • Scenario 1 - During construction defect discovered
  • Scenario 2 - Defect causes damage to project
  • Scenario 3 - Defect during completed operations

Case Study No. 2: Project Delay

  • Scenario 1 – Damage to project during construction
  • Scenario 2 – Supply chain disruption
  • Scenario 3 – Contractor or subcontractor failure
when disaster strikes how insurance and performance security responds
When Disaster Strikes – How Insurance and Performance Security Responds

Case Study No. 1: Hurricane Hazel Redux

Background:

  • 1954: Hurricane Hazel spills over to GTA, Don River floods
  • 2007: ORC begins construction of Flood Plain Landform (FPL), taking area from West Don Lands to Bay Street from the 300 yr. floodplain
  • 2011: Construction begins of Pan Am Athletes’ Village – an AFP project and part of major overall waterfront redevelopment in the area
  • 2011 and 2012: New York City sustains direct hits from 2 hurricanes
  • What if Toronto is next?

Discussion and Analysis:

  • If coverage properly crafted:
    • Flood coverage
    • Windstorm coverage
    • Pollution liability coverage
when disaster strikes how insurance and performance security responds1
When Disaster Strikes – How Insurance and Performance Security Responds

Case Study No. 2: Insolvency of Major Subcontractor

Background:

  • Currently over 20 Social Infrastructure APFs under construction
  • Valuations into the billions of dollars
  • On social infrastructure M&E could represent 30% to 40% of contract
  • In the large space there are limited options for M&E
  • What if one of them becomes insolvent?

Discussion and Analysis:

  • Focus on performance security
    • surety, sub default insurance, LCs, PCGs, etc:
  • Things to look for:
    • Look closely at the wording of the instruments (conditionality is an issue)
    • Liquidity and responsiveness is vital (secure the people, status of payments)
what is iocip
What is IOCIP?
  • Infrastructure Ontario Construction Insurance Program (IOCIP)
  • “Suite” of project-specific construction insurances:
    • Builders’ Risk
    • “Wrap-Up” CGL
    • Pollution
    • Professional
  • Concept developed and in place since 2008
  • Transactional construction insurance services on IO AFP infrastructure projects through a “sponsored program” concept
  • IO mandates Project Co purchase their main construction insurances through IOCIP but retains control of administration and claims management
  • Over 27 projects and $10.5 billion in construction values have passed through
iocip benefits
IOCIP Benefits
  • Lower insurance costs – benchmarked at delivering rates better than 30% lower than best-in-market transactions – generating over $35 million in savings since 2008
  • More comprehensive coverage – over 90 coverage innovations automatically included – many have rewritten the book on construction insurance in Canada
  • Flexibility – all asset classes, all proponents are eligible
  • Consistency – since inception, no premium increases or reductions in coverage; program is locked in by contract with insurers
slide30

Thank you

Aon Risk Solutions™

Construction Services GroupInfrastructure Services

20 Bay Street, Toronto, OntarioTel: