Distinctive. Choice.

Construction

IMUA 2011

Builders Risks Below Ground - “A Brokers View”

Jeremy Osborne

Partner, JLT Construction

Agenda

• Understanding the Background

– Insurers Challenge

– Historical Losses

– Insurers Reaction

• Role of the Broker

– The Challenge

– More than just Construction Insurance

• A Brokers View

Historical Losses / Challenges

• Frequency and size of claims

– Globally

– Unprofitable Sector

– Engineering / Construction > 110% Loss Ratio

– Tunnelling > 500% Loss Ratio

• Size of Losses against Premium Volumes

• Size of Losses against Contract Value

• Reinstatement Cost against Original Construction Costs of Damaged Areas

Background - Loss Example

Example: Hull Sewer Tunnel, UK

• Original Cost of Tunnelling = USD 11,000 per metre

• Immediate Damaged Area = 150m

• Construction Cost of the immediate Damaged Area =

USD1,650,000

• Actual Adjusted Loss = USD 75,000,000

• 4545% of the Original Cost of Construction !

Examples of Major Tunnel losses

• 1994 Great Belt Link, Denmark Fire and Flood USD 33m

• 1994 Heathrow Express Link, GB Collapse USD 141m

• 1999 Hull Yorkshire Tunnel, UK Collapse USD 55m

• 1999 Anatolia Motorway, Turkey Earthquake USD 115m

• 2000 TAV Bologna -Florence, Italy Collapse USD 12m

• 2002 Taiwan High Speed Railway Collapse USD 30m

• 2003 Shanghai Metro, PRC Collapse USD150m

• 2004 Singapore Metro, Singapore Collapse USD100m

• 2005 Lane Cove, Australia Collapse AUD20m

• 2007 Sao Paolo, Brazil Collapse

• 2008 Cologne, Germany Collapse

• 2008 Huizhou, China Collapse

• 2009 Cairo, Egypt Collapse

Singapore 2004

Pinheiros, Sao Paolo

Great Belt Link

Hull

Insurers Reaction

• Insurance

– Stop offering insurance in Specialist Tunnelling sector altogether or ..

– Higher Deductibles

– Higher Rates

– Restrictions in Cover

– Limits of Indemnity for Underground Works – limited to a percentage

of original construction costs

• Risk Management– Development of Joint Code of Practice and Evolution towards Risk

Management

– Clearer Picture of the Risks during the Underwriting Process

Evolution towards Risk Management

• Perception that the tunnelling industry had an inconsistent approach to Risk Management

• Now the key focus of Insurers - how the Project Team manage risks

• How the contractors are managed

• Risk Registers – Active live documents

• Underwriters Looking to have Confidence that Risks known and managed

• Joint Codes of Practice

• Acknowledgement that it would not prevent claims happening

Deliverables

Underground Works % Approach

Underground Works Clausethe costs incurred in respect of Tunnelling Work relating to:

a) alterations in the construction method due to unforeseen ground conditions or obstructions where no Damage has arisen,

b) measures which become necessary to improve or stabilize ground conditions or to seal against water ingress unless necessary to reinstate indemnifiable Damage,

c) removing material which has been excavated or due to over-break in excess of the design profile and/or refilling cavities resulting therefrom

d) de-watering unless necessary to reinstate indemnifiable Damage

e) Damage due to breakdown of the de-watering system if such Damage could have been avoided by use of standby facilities

f) the abandonment or recovery of Tunnel Boring Machines

g) loss of bentonite suspensions or any media or substance used for excavation support or as ground-conditioning agent

In the event of indemnifiable Damage to Tunnelling Work due to subsidence and/or collapse, theamount payable under this Policy shall be limited to the costs incurred to reinstate the permanentworks to a standard or condition technically equivalent to that which existed immediately before theoccurrence of Damage but not exceeding [150%] of the original average per-foot constructioncost of the immediate Damaged area

Example

Example: Hull Sewer Tunnel, UK

• Original cost of tunnelling = USD 11,000 per metre

• Immediate damaged area = 150m

• Construction cost of the immediate damaged area =

USD1,650,000

• actual adjusted Loss = USD 75,000,000

• If the 150% limit applied then Policy provides

USD1,650,000 X 150% = USD2,475,000

• Client shortfall = USD72,525,000 !

Brokers Role

Technical

Appreciation

Risk

Management

Construction

Insurance

A Balanced, Specialist Role not Generalist …

Technical ..

Advances in technology

Technical ..

• Understanding of:

– Proposed Construction Methods

– Design – check and review, temporary works

– Type of Contracts and Procurement

– Geotechnical Investigation / Baseline Reports

– Monitoring

• Quality Underwriting Presentation of Clients

Project

Risk Management ..

• Recognition that it needs to be addressed – best

practice and encourage client to demonstrate

• Approach - rather than allow Codes of Practice to be

applied as an Insurance condition:

– Independent Engineer ‘pre’ construction

– Initiate a dialogue with Project Team and Insurers

• Reports

– Level of comfort for Insurers – Risk Management Framework

– To be included in the Underwriting Information

– Ongoing Progress and Risk reviews During Construction

• Extent of Self Insured Retention

Construction Insurance ..

Underground Works – Monetary Limit

• Worst Case Works Damage Scenario

• Underground Works – Monetary LimitUnderground Works Limit (Monetary value)

In the event of indemnifiable physical loss of or damage to Underground Works due to ground movement the maximum amount payable under this Policy shall be limited to the expenses incurred to reinstate that part of the Insured Property to a standard or condition technically equivalent to that which existed immediately before the occurrence of loss or damage but not in excess of [USD VALUE] each and every occurrence inclusive of all provisions under the Builders Risk Section…

A Brokers View ..

• Conditions in Construction Insurance Market

have Improved Recently

• Lower Frequency of Losses

• Importance of Quality Underwriting Information

allied to Risk Management Approach

• Should Clients now Expect Better Terms ?

A Brokers View ..

• Coverage and Indemnity for our Clients !

• Promote Improvements in Industry Practice

• Long Term Commitment from Insurers – still a

Highly Specialized Sector

• Commitment to Engagement in Risk

Management process in conjunction with the

broker

• Insurance Partnership – a Successful Project

for all Parties !