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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 Group Infrastructure Services.

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Lexpert

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  1. 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

  2. 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

  3. A Bit About Aon 3

  4. 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

  5. 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

  6. Insurance and Performance Security in the World of P3s 6

  7. 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

  8. Basics of PPP Insurance and Performance Security – A Project Centric Approach

  9. 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)

  10. The Basics of P3 Insurance 10

  11. Basics of PPP Insurance and Performance Security – Products Common Insurance Covers – A “suite” of core coverages: • COC • Wrap-Up • Professional • PI

  12. 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

  13. 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

  14. 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

  15. Basics of PPP Insurance – Key Features • Project Co/Equity • Compliance with specifications – tick the box • Price – low bid still wins in the PPP world

  16. The Basics of P3 Performance Security 16

  17. 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

  18. Key to Contractor Performance Security – Striking the Balance Acceptance of Security by Debt (and Equity) Contractor Balance Sheet Constraints

  19. 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)

  20. 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

  21. The Uninsurable 21

  22. 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

  23. …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

  24. When Disaster Strikes – Selected Examples 24

  25. 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

  26. 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)

  27. IOCIP Explained 27

  28. 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

  29. 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

  30. Thank you Aon Risk Solutions™ Construction Services GroupInfrastructure Services 20 Bay Street, Toronto, OntarioTel:

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