Risk. Reinsurance. Human Resources. Empower Results® | 1

Q4 2013

Power Newsletter

Message from the CEO Global PowerContents

Push for Cyber Exclusion to be Removed from Policies

60 Seconds with Andrew Baillie, The AES Corporation Basis of Indemnity for Mothballed Plants Claims - Why we are all here!

News from Aon’s Global Power Network

Dear Reader,

The globe is emerging from the recession and we are seeing lenders beginning to provide funds for

projects with more confidence again. Moreover, some lenders have an unprecedented amount of

funds to lend to power projects. I believe that lenders will be quite aggressive in their investments in

this sector, so this is a great time for companies to expand.

What might dampen the rate of investment is the changes in regulation seen in many countries

concerning power generation, for example the subsidy rates for renewable energy projects. But in the

developed world we have seen many power projects coming off the drawing board, especially nuclear

projects. These often take 5 times longer than traditionally fuelled power projects with the equivalent

amount of MWs to be built.

It remains that investment in the power sector falls into 3 categories:

� Upgrade and repowering of existing plants and extending lifecycle projects

� Renewable energy, where the attraction is favourable tax and carbon credits

� Traditional power generation projects such as coal and CCGT, where a stable rate of return attracts investors

So as we go into 2014 it is fair to say that globally we are likely to witness many projects begin or

come to fruition. From an insurers perspective the market is geared up to offer competitive capacity

on almost all types of technology. It is a good time to be a client.

In our Q4 Newsletter Gemma Avey, our Global COO, managed to grab 60 seconds to interview

Andrew Baillie, from AES. Rosa Wildy, part of our broking team, updates us on the push for the

cyber exclusion to be removed from policies whilst attacks on power generation systems rise. She

also investigates how mothballed plants need to be indemnified, as a changing economic and

political environment has resulted in the temporary and permanent mothballing of traditional power

generation units globally.

I would also like to introduce Kirk Williams, General Manager for Power and Energy in New

Zealand and Brad Diebert, part of our Broking team in Canada, to the global team.

The team and I are looking forward to the opportunities and challenges for 2014.

Hamish Roberts

2 | Aon Risk Solutions | Power

The increased sophistication and volume of hacker attacks means that cyber coverage is becoming a rising concern for power companies. Due to the evolving nature of cyber crime, insurers are reluctant to include this coverage in a Property Damage policy. This results in the cover being placed as stand-alone or not covered at all.

Insurers in the London Market have reported an increase in brokers requesting the removal of the usually standard LMA2914/5 Electronic Data Endorsement. The clause excludes loss or damage to data including loss or damage caused by a computer virus. This includes such things as ‘Trojan Horses’, ‘worms’ and ‘time or logic bombs’.

The US Department of Homeland Security cyber security response team claims that attacks on America’s power, water and nuclear systems increased 52% in 2013. The power sector was the most targeted and it is estimated that the majority of attacks go undiscovered. The negatives of such an attack could result in any of the following:

� Operations disrupted - outage of power � Property damaged � Sensitive customer information stolen � Experience substantial loss of revenues � Response costs and other financial loss � Subject to increased regulation � Litigation and damage to reputation

Alistair Clarke from the Aon Cyber & Commercial E&O Team warns that if you are a power company and you are hacked, the computer network can be taken down causing financial business interruption losses as well as property damage.

Despite these disturbing trends, experts believe that the insurance industry can effectively manage the risk and offer appropriate solutions. Scott Kannry of the Aon Cyber and Commercial E&O Team says, “these are large risks, but take out the ‘cyber’ trigger from the aforementioned scenarios and you’ll find that the insurance industry is already comfortable with those ultimate outcomes in many catastrophic property and casualty programs. It’s largely a matter of appropriate insight and underwriting diligence - the industry needs to broaden its cyber underwriting capability beyond the ‘privacy’ focus that has predominated over the last decade.”

...to be removed from policies whilst attacks on power generation systems rise

Push for cyber exclusion...

For more information please contact:

Rosa Wildy Client Service Advisor

& Broker Aon London

+44 (0)207 086 0655 rosa.wildy@aon.co.uk

The power sector was the most targeted

and it is estimated that the majority of attacks go undiscovered

Aon has published a varierty of white papers on Cyber Exposures, if you would like to receive a copy of any of these papers, please email: power@aon.com

Recent Aon Cyber Publications

3 | Aon Risk Solutions | Power

60 seconds with... Andrew Baillie, The AES Corporation

Andrew Baillie has been with The AES Corporation since 2006, giving up life on Bermuda to join their Risk Management Group in the Arlington, VA Head Office. He now manages the global property insurance arrangements for AES including the AES Captive which is domiciled in Vermont. AES operates a large portfolio of power generation and distribution facilities in more than 20 countries and as a central risk management function including 3 risk engineers and is also deploying regional risk managers around the world. Prior to joining AES, Andrew worked for the packaging company Tetra Pak in Switzerland in a similar role and also had a number of years servicing large global programs with AIG in Bermuda. Although his background is in traditional insurance and risk management, he has spent time in the financial area and is also qualified as a Corporate Treasury professional which is very useful for the diversity of challenges that come from being part of such an international company with operations in many challenging locations with various regulatory and currency exposures to manage.

What do you most enjoy about your role?The multiple challenges that we have every day, which range from risk engineering to underwriting. It is very rewarding to hold profit and loss responsibility for a large business such as our own Captive.

What do you most enjoy about working for your company?AES is a very dynamic organisation and there is always something happening such as a new acquisition, a project under development or the use of new technology. So there are many diverse and interesting challenges to face when you work for the company.

What do you think will be the biggest change in your industry over the next 2 years?I think about Europe and the United States and the amount of retiring assets due to environmental restrictions. The retiring assets put strain on the other assets companies have which are then no longer operating the way they were designed to such as short term running cycles. I foresee this to be a challenge over the next years.

What has surprised you the most this year about the power industry?The scale of problem within the solar industry, especially in terms of the supply chain. Everybody rushed into this sector believing the demand would continue unabated, but the required regulatory environment did not prevail and so the demand and market imploded. These were the same issues with expected demand for gas turbines and wind turbines but lessons were not learnt.

What do you find most challenging about the insurance industry?At the moment there seems to be a lack of transparency in the insurers’ pricing methodology, for example in the cat modelling.

This is a key driver in the pricing process with capacity becoming more scarce in this area but often it is very hard to get clear information about how this is really impacting final price based on the modelled exposure.

What do you remember about your first claim in insurance?It was an employment liability claim in a factory where the person was meant to be permanently incapacitated. We found out that this same person was, however, well enough to compete in martial arts competitions on the weekend. So we took a video of him competing. When confronted this employee withdrew his claim.

If you were not doing your current role what would you be doing?I have worked both in finance and in the insurance industry. I am good with numbers and logic and I can detect the weak spot in a spread-sheet very quickly, so I would most likely be a forensic accountant or an actuary. What do you wish other people knew about your job?In the company some think I just buy insurance, but what we are dealing with is so much more than that. Insurance is actually the last option we use once we have also addressed contract risk and proactive risk engineering. What we do directly affects the bottom line results of the parent company and we often do not get credit for this.

What might readers be surprised to know about you?Everything I do I give it 100%. Until a few years ago I could not swim, but after I had learnt to swim I have now competed in more than 30 sprint triathlons and duathlons.

4 | Aon Risk Solutions | Power

Basis of indemnity for mothballed power plants

A changing economic and political environment has resulted in the temporary and permanent mothballing of traditional power generation units globally.

The insured values of base-load or peaking operational plants are declared based on their expected revenues and the new replacement value of the property, machinery and equipment. The position is less clear for mothballed plants, in particular the Business Interruption values associated with the plant.

Rosa Wildy, an Aon Power expert, says: “The key to insuring mothballed plants, as with all insurances, is to base the insured value of the asset on what you require from the insurance, as agreed with your insurer. This becomes clear when the uses of the unit are examined. It is important to discuss before the policy incepts how the insured expects to be indemnified and why.” She adds: “Having determined the value of the asset in this way, an underwriter can apply a rate that takes into consideration the expected use of the plant to the actual value at risk and arrive at the correct premium.”

Many mothballed plants are relatively new and will have swallowed up precious capital. Older plants may be inefficient and in turn redundant.

“In exceptional cases the owners may consider such plants more valuable dead than alive, raising the issue of moral hazards in mothballed plants”, Wildy adds.

An underwriter will additionally require assurances that the plant is being maintained to the manufacturer’s standards.

Where the policy contains an Average Clause it is vital that the sum insured reflects the basis of settlement. Where it doesn’t and the sum insured is too low the insured will only make a partial recovery of losses.

Losses for mothballed plants are most likely to be partial. With this in mind replacement of the damaged part of the plant may not be the most effective method of indemnification. This becomes more important in the event of underinsurance.

Increased Cost of Debris Removal during the decommissioning stage , which is especially pertinent for nuclear facilities, is a consideration, if decommissioning is included under the insurance contract.

The owners of mothballed power plants need to clearly explain how assets have been valued

pre-inception. In the event of a loss, the appropriate indemnity can then be claimed. This also avoids the possibility of time and money spent during arbitration or litigation.

Mothballing is defined as when ‘a plant is no longer used but is left in a condition that allows you to use it again in the future’. In an insurance context, this can be expanded to include a wider range of scenarios as follows:

German Mothballed 80MW Gas fired power station – options available to the insured:

Example of options available to the insured:

The key to insuring

mothballed plants, as with all insurances, is to base the insured value

of the asset on what you

require from the insurance

Losses for mothballed

plants are most likely to be

partial. With this in mind

replacement of the damaged

part of the plant may not be the most effective

method of indemnificationUse of Plant Basis of Value Total Insured Value Indemnification

Used as spare generator if demand arises (not peaking plant)

Reinstatement to operational standard: EUR 100,000,000

EUR 100,000,000 Replacement as new

O&M regime with parts being used as spares

Repair of partial loss. Cash option for total/constructive total loss. Full reinstatement of re-useable equipment

EUR 60,000,000 Repair Reinstatement New for old Cash

Completely Mothballed - not to be used again possibly scheduled for demolition

Cost of removing the debris to clear the land in the event of a loss EUR 2,000,000. Scrap value of the property and equipment EUR 8,000,000

EUR 10,000,000 Cash

1

2

3

5 | Aon Risk Solutions | Power

Claims in the power sector have a notorious reputation for becoming long, drawn out and difficult to resolve due to their size and complexity. The actual cost of large claims in the sector is often underestimated due to the lack of understanding around the uninsured costs and wasted management time.

There have been a number of significant claims in the power generation sector in the past 5 years. The high value and complexity of these claims can lead to protracted and frustrating negotiations with insurers in the event of a major loss.

A study by Advisen* revealed that:

� Resolving large property claims has become more difficult over the last 20 years

� Large property claims involve many people and a lengthy process

� There are many reasons for claim disputes, even after all the facts are known

� Insureds often experience expenses and lost earnings that are not covered by property insurance

� Insureds often believe their insurance covers more than it does

� Property insurance usually pays 76% to 87% of the amount claimed

The study also concluded that most claims settle within a reasonable amount of time, but the claim experts surveyed indicated that it is not infrequent for property claims to take significantly longer. 29% of physical damage claims were not fully settled within six months of the property being repaired or replaced, and approximately one in ten physical damage claims took more than a year after the property was repaired or replaced to settle. David Llewellin, Head of Construction and Power Claims at Aon, says “on average a claim takes 18 months to settle depending on the complexity of the claim.”

In addition to the amounts retained by the insured in the form of deductibles, amounts in excess of sublimits and policy limits, and co-insurance penalties, there were many other damages that insureds document but do not ultimately claim.

Organizations also sustained economic damages that could not be documented but which show up over time in the form of lost revenues or higher expenses. The use of management time or outside experts to remediate damages and settle claims is an obvious example of this type of damage.

Due to the complexity of many businesses it is very difficult to accurately analyse the appropriate business interruption declared values. Companies should complete a comprehensive business interruption review with their insurance broker which addresses the following key elements of policy coverage:

� Calculation and substantiation of appropriate gross profit declared values

� Identification of appropriate uninsured working expenses

� Assistance with the determination of appropriate periods of indemnity for both gross profit and additional cost exposures

� Identification of key suppliers and customers and determination of financial exposure

� Review of the policy wording and the basis of settlement to ensure the intention of the insurance cover is reflected in the policy wording

� Ensuring that the insurance policy provides enough cover to fund all mitigation measures contained in the client’s business continuity plans

� Compilation of a comprehensive report in consolidation of all the aforementioned issues

“Following any major loss event the key to success is for the client to keep in control of the claims process,” says Andy King, Head of Risk Accounting and Claims at Aon. “ A broker advocate should help clients do this by discussing and agreeing the options available to the client following the incident as well as advising on immediate mitigation actions and compiling and agreeing a claims measurement and management plan amongst other measures.”

Putting this all into context it is imperative that individual insurers’ claims performance, or “willingness to pay” is factored into placement decisions at outset.

Claims - why we are all here!

Following any major loss

event the key to success is for the client

to keep in control of the claims process

On average a claim takes 18 months

to settle depending on the complexity

of the claim

$470,000,000

42%

58%

$240,000,000

7%

93%

$150,000,000

1%

99%

2011

2012

2013

*Source: Transurance Services, LLC 2010

Source: Aon’s Global Power Claims Database

For more information please contact:

David Llewellin Director of Claims

Aon London +44 (0)207 086 4447

david.llewellin@aon.co.uk

Settled

Outstanding

Settled

Outstanding

Settled

Outstanding

3 Year Incurred Claims Summary

Risk. Reinsurance. Human Resources. Empower Results®

News from the Global Power Network

Kirk has joined Aon as the General Manager within the Power and Energy team. Kirk has had over 35 years insurance experience as an underwriter and broker. His first 11 years were with AIG in NZ where he specialised in Property and Engineering before becoming the Underwriting manager. He left there to join Sedgwick which is now part of Marsh.

His broking experience has been across a broad range of industries including Power and Energy. His time at Marsh included 8 years as the CEO which he left to become a consultant to Marsh in 2010.

Kirk WilliamsNew Zealand

”“ We are delighted that Kirk has joined us. I am confident that he will add a lot of strength to our team in New Zealand as well as our global leadership team being such an experienced campaigner in the power and energy sector

Hamish Roberts - Global Power CEO

While we try to comment on issues we know to be fact, we are fully aware that in gathering the information contained from various sources there is always the possibility of inaccuracy.

We can therefore only claim that the information in this newsletter is correct to the best of our knowledge at the time of publication.

If you have any comments regarding this newsletter, contact: Gemma Avey: gemma.avey1@aon.co.uk, or Tayler Houlihan: tayler.houlihan@aon.co.uk Aon UK Limited is authorised and regulated by the Financial Conduct Authority

This information is for general purposes and guidance only and does not constitute professional advice.

Due to the nature of this type of bulletin, Aon UK Limited cannot be held responsible for any loss or damages caused through the use of any information contained herein.

Reproduction permitted with written authorisation.

Registered Office: 8 Devonshire Square, London, EC2M 4PL

Registered in London No.210725 VAT Registration No.480 48

© Copyright 2013 by Aon plc.

All rights reserved. FP: 8588

We are pleased to announce that Brad Deibert has joined the Canadian Power & Utilities Broking Centre of Excellence. Located in Calgary, Alberta, Brad’s twelve years of broad-based broking experience and commitment to collaboration and teamwork will enhance and strengthen Aon Global Power’s brand

and presence in western Canada. Prior to joining Aon Brad worked for a Calgary-based broker, and brings his strong local and national market relationships to the Centre of Excellence.

Brad DeibertCanada

”“ Brad has a strong brand in the insurance marketplace on a national basis. He is joining the Calgary office which is a key location of the Power & Utilities CoE where we are committed to grow and develop. HIs different perspective and background will be fully utilized to further build out our

Power & Utilities team to service our existing clients and help drive new business

Terry Dodsworth - National Centre of Excellence Manager - Power & Utilities

JAEIP has made Aon aware of a statement in the article ‘The Insurance reality behind the Tohoku Claim’ published in the Q1 2013 Newsletter which requires correction. The statement relates to JAEIP declining any claim based on an exclusion of “grave natural disaster of an exceptional character”. According to the Japanese Act of Compensation for Nuclear Damage and the coverage provided by the Nuclear Third Party Liability policy taken out by the operator of the plant, JAEIP did not make any judgments or take any position on coverage of the Fukushima nuclear claim; this was a matter for the Japanese government based on a decision that the incident was not caused by an extraordinary natural disaster. We apologize for any misunderstanding that this might have caused.