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20 th Willis Construction Risk Conference

20 th Willis Construction Risk Conference. Risky business: Construction risks in an era of evolving delivery methods, tight margins and alternative Risk capital. Paul Becker, CPCU, ARM Willis North America September 16, 2014. Today’s Thoughts.

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20 th Willis Construction Risk Conference

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  1. 20th Willis Construction Risk Conference Risky business: Construction risks in an era of evolving delivery methods, tight margins and alternative Risk capital Paul Becker, CPCU, ARM Willis North America September 16, 2014

  2. Today’s Thoughts Projects continue to move to more complexity not less Different stakeholders are involved and driving discussions around risk Risks are being highlighted and contractors will either need to proactively embrace them or be faced with reactively trying to manage them With the current margin environment construction firms will need to be totally focused on risk and look for ways to deliver more value to its customers New risks are emerging with technology The insurance industry is also changing with new players and new types of financing evolving

  3. What is Risk? RISK: INSURANCE: Possibility of loss or injury BROADER DEFINITION: Risk is the potential of losing something of value. Value (such as physical health, social status, emotional well being or financial wealth) can be gained or lost when taking risk.

  4. OF COURSE THERE IS A POPULAR VIEW……

  5. OF COURSE THERE IS A POPULAR VIEW……

  6. Section one Are projects getting more complex and what new stakeholders are involved in risk?

  7. WHAT ARE WE SEEING ON PROJECTS? • Design Build: Now about 40% of the non residential commercial marketplace • With new emphasis on Integrated Project Delivery esp. Health Care • Construction firms taking investment/equity positions in projects (including P3) • Broader Performance and warranty risks in contracts • Contracts starting to call for different performance security including demand instruments • Generally bigger jobs with significant increases in size of sub packages

  8. OTHER STAKEHOLDERS ARE GETTING INVOLVED • Owners more prescriptive on risk and insurance • Not just requiring insurance but verifying and challenging contractors to “prove it” • Lenders taking an active role, and not “reasonable” in insurance and contract requirements

  9. P3 PROJECTS ARE THE EMBODIMENT OF COUNTERPARTY COMPLEXITY • P3 creates four or more contract players (governmental body, concessionaire, financing, CJV, design and O&M)

  10. IMPACTS ON RISK • Are risks increasing? Maybe……. • We are spending a lot more time on the “front” end of jobs with you • Risk analysis both insurance related or not a huge focus • We are seeing “you” look at new types of work and in some cases in new territories- in the past “red flags” for risk • You are asking us to deliver broader risk discussions and more tailored solutions-this is testing us and the insurance industry

  11. IMPACTS ON RISK • Are risks increasing? • Are risks increasing or are they just being pushed around inside the contract to the contractor? • In many cases risks are being shifted as the upstream parties try to attain as much certainty as possible • We generally feel that risks are actually increasing based on several factors • Types of financing • Margin pressure • Schedules • Most of these have only partial risk financing solutions • Sub contractor health • Supply chain challenges • Technology

  12. ONE EXAMPLE, SUPPLY CHAIN-LARGEST STEEL COMPANIES GLOBALLY

  13. EXAMPLE 2: TECHNOLOGY RISK • Both a direct and indirect risk • Direct: • Housing data for all parties (BIM, IPD, Leed) • Loss of data due to construction activities • Drones-significant increase in use of drones with lack of standards for privacy, air traffic, insurance coverage • Indirect: • Counterparty risk-doing business via owner platforms or via third party interfaces • Target! • Insurance is and must continue to evolve to provide complete financing solutions to e-commerce and cyber risk

  14. Section two Building a strategic risk focus

  15. VALUE IN RISK MANAGEMENT IS ACHIEVED AS IT ENABLES THE COMPANY TO SUCCEED IN ALL AREAS OF RISK Courtesy of Business Finance

  16. CONSTRUCTION FIRMS AND THEIR PARTNERS HAVE TO DEVELOP MORE STRATEGIC VIEWS OF RISK THERE ARE VARIOUS WAYS TO LOOK AT RISK WITH THE TWO EXTREMES BEING A SUPPORT FUNCTION AND THE OTHERE BEING A PROACTIVE, INTEGREATED FOCUS WHICH STRIVES TO BRING MORE VALUE TO THE PROJECT • “SUPPORT FUNCTION” • Protect the balance sheet • Contract compliance • Minimum insurance to meet specs • “All your competitors will sign this” • PROACTIVE, DIFFERENTIATION • Engineer risk. Use insurance as a differentiator by deconstructing risk costs on the job. • Build data models to measure risk costs over time • Sub contractors-SDI • Long tail exposures and defects: CIP’s • Blanket builder’s risk programs which mold around the risks particularly delays, Advanced Loss of Profits and other soft costs • A close examination of other “non insurable risks” and alternative methods to fund these (incl. Captives) • The overarching goal is to bring the project better risk solutions and reduce long term project costs

  17. Section three Alternative risk capital: what is this and will it impact risk financing choices for contractors?

  18. ALTERNATIVE RISK CAPITAL • What is this? • There is not a universal definition but think of it as investors using financial transactions to take risk positions outside of traditional insurance companies and reinsurers • The biggest example to date is Cat Bonds which act as reinsurance for catastrophic events for insurance companies • These have eaten into traditional reinsurers’ businesses and the result has helped to drive lower reinsurance costs. • In reaction Reinsurer’s are now building their own investment facilities to manage these types of risk

  19. ALTERNATIVE RISK CAPITAL • What impact will this have on the ultimate insurance buyer? • We think it will have impacts in several areas • It will moderate premiums particularly in property lines as insurance companies can access more creative reinsurance transactions • It should increase capital in the insurance business • Ultimately it will allow financial innovation which should increase appetites for new products

  20. INSURANCE CAPACITY AND SURPLUS ARE ALREADY AT ALL TIME HIGHS Investors really, really like the P&C business Insurance Information Institute Data

  21. AS A RESULT RATES ARE STEADY WITH SOME IMPROVMENTS DEPENDING ON LOSS OUTCOMES Market Scout and Willis Benchmark data

  22. Section four Innovation in the insurance industry for construction. You’rE kidding right?

  23. INNOVATION FOR CONSTRUCTION RISKS OVER THE LAST 20 YEARS THERE HAS BEEN SIGNIFICANT INNOVATION IN THE INSURANCE INDUSTRY FOR CONSTRUCTION ACCOUNTS

  24. INNOVATION FOR CONSTRUCTION RISKS

  25. INNOVATION FOR CONSTRUCTION RISKS

  26. THAT’S ALL FINE AND GOOD BUT WHAT NEEDS DOES THE CONSTRUCTION INDUSTRY HAVE NOW AND WHAT SHOULD WE EXPECT IN THE FUTURE? • REEVALUATING EMERGING RISK NEEDS • Performance Risks • Technology Risks • Equity/operational Risks • Project maintenance guarantees and broader warrantees • Cost overruns • Insurance which responds across multiple risks and lines of coverage while reducing frictional costs and litigation expenses • With the growth of P3, products which addressing all phases of project risk from finance, engineering, construction and operations seamlessly.

  27. I AM ACTUALLY QUITE HOPEFUL ABOUT PRODUCT INNOVATION • As all our contractor friends in the audience knows there are several ways to compete in any industry • Price • Best Value • Innovative approaches • Financial strength • Long term relationships • The insurance industry is no different, it has a capacity and margin challenge just as the construction industry does.

  28. AS A RESULT THE INSURANCE INDUSTRY HAS TO DECIDE WHERE IT WANTS TO PLAY • There will always be a substantial portion of the market that will stick with core product portfolios • We believe however that carriers will need to create innovative approaches to bring more VALUE to construction projects with more flexible solutions

  29. INNOVATION NEEDS TO CONTINUE AND ACCELERATE……. • I believe we are in the beginning of a period of more innovation as insurance carriers continue to put their surplus to work and bring higher value solutions to construction projects

  30. I AM HOPEFUL ABOUT PRODUCT INNOVATION Looking at the last two decades a lot has changed Over the last three years we have seen new carriers enter the market in all lines creating intense competition This includes the surety industry where major financial bets are being made by new carriers-this will impact the product offerings in surety significantly as they look to differentiate themselves

  31. THE NEXT FEW YEARS WILL CREATE A NEW SET OF IDEAS • We look forward to working with you on new solutions in the next few years • We know these will be different than today but we believe that there has never been a better time to bring you the value you need to be successful

  32. Thank You Paul R. Becker CPCU, ARM Chairman Construction Practice Willis North America (615)872-3464 Paul.becker@willis.com

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