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Jos Luis Montull

Risk and Insurance. Risk: it is not only the contingency or proximity of a damage (hazard), but also each and every contingency that can be subject of an insurance contract (Risk ). the mathematical product of the probability of a damage taking place, multiplied by the consequences of such da

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Jos Luis Montull

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    1. José Luis Montull

    2. Risk and Insurance the mathematical product of the probability of a damage taking place, multiplied by the consequences of such damage: R = P x C where: P = Probability of an event C = Consequences of that event

    3. The Insurance is nothing else than a financial transaction by which a party, the policyholder (Insured), through a remuneration (the premium), promises to himself or to a third party a payment or a reparation in case of risk producing damages. The other party (the Insurer) who makes this payment, takes a set of risks, and is able to compensate them according to the statistical laws. Risk and Insurance

    4. Risks-Matrix

    5. Risks-Matrix

    6. Risks hierarchy

    7. Retention: establishing enough reserves to overcome the possible losses ¿how do we face the Risk?

    8. Retention or Risk Transfer Risks with high probability and low consequences. (Risks have to be taken or "self-insured" if they don't affect the financial stability of the company).

    9. The Cost of the Risk

    11. Risks clasification Identified and Known ? assessable. Identified and Unknown ? because it's difficult to evaluate its consequences. Unidentified and Unknown ? surely we will be surprised (development risks).

    12. Particularities of Civil Engineering Each project is different from the previous, always showing different elements (ground conditions, climate, workmanship…) Technological development and innovation are steady, both in machinery and in materials Frequently there is non-skilled labour in the lowest levels of the chain Use and maintenance are sometimes not as careful as they should.

    13. The Risk in Civil Engineering a) of Internal origin:

    14. a) of Internal origin: The Risk in Civil Engineering

    15. b) of External origin: The Risk in Civil Engineering

    16. Example: Risks distribution

    17. 'insurable' Risks 'not insurable' Risks

    18. Deterministic analysis Based on scientific theories or empiric formulations: identical result if you take the same assumptions for the process (ex.: rust) Probabilistic analysis Based on occurrence probability of different risk's scenarios, estimating their consequences (ex.: flood) Statistical analysis Based on previous experience on existing statistics of losses (ex.: personal accidents at work) Risk's analysis

    19. Sufficient statistical base Financial stability Risks heterogeneity Geographical compensation Pilars of insurance activity

    20. Statistical base for the analisys

    21. Risks distribution

    22. Engineering Insurance Policies Annual policies

    23. Engineering Insurance Policies Temporary policies

    24. Engineering Insurance Policies Multi-annual policies

    25. Engineering Insurance Policies Special policies

    26. Construction All Risk (CAR)

    27. Construction All Risk (CAR)

    28. Construction All Risk (CAR)

    35. Civil Engineering Insurance Policies

    47. Privately Financed Infrastructure Projects and Their Insurance PFI Privately financed investments Most important models: BOT Build - operate - transfer BOO Build - own – operate Examples of other models: BLT Build - lease - transfer ROT Rehabilitate - operate - transfer ROO Rehabilitate- own - operate DBFO Design - build - finance - operate

    48. BOT and BOO In both models, a project company builds, owns and operates a plant. BOT: the plant is transferred to a public operator after a period of e.g. 15 years at a low price. BOO: a transfer is not intended. Privately Financed Infrastructure Projects and Their Insurance

    49. Typical for private financing of infrastructure projects: Sponsors invest only small fraction of the required capital Major funds borrowed from banks Liability of the sponsors in case of increased cost or delay in completion is limited Construction phase particularly critical: Major funds are spent without the project generating cash. Privately Financed Infrastructure Projects and Their Insurance

    50. PFI: Finance and Contract Structure

    51. A Project Company is formed to erect and operate the plant or the infrastruture by means of a network of contract agreements. It often is a stock company. Banks will provide the funds necessary beyond the Sponsors' investments. The Principal, i.e. the initiator of the project, may be the host government, a licencing governmental agency or a public utility. The Principal agrees the project terms with the Project Company. The Contractor and Operator are normally shareholders in the Project Company. The Insurers are vital in view of the limited-recourse financing scheme. PFI: Finance and Contract Structure

    52. PFI: Flow of Payments (Operating Phase):

    53. Typical examples of PFI Projects ? large and communal:

    54. PFI Insurance Requirements:

    55. Insurance covers of industrial projects

    56. Staged Erection and Insurance Conventional Approach:

    57. Staged Erection and Insurance Typical PFI Approach:

    58. LoP insurance for a PFI LoP is an essential cover due to the scarce financial resources of the Project Company ALoP difficult to monitor: Delays in early project stages may have - full impact - partial impact - no impact on the commencement of operation Requires detailed and updated project schedules Constant follow-up with insured and non-insured delays Suppliers Extension intensifies the problem: The EAR/CAR insurer is normally not the manufacturer's local property insurer

    59. Time excess: ALoP: 60 days not uncommon, related to the total erection phase Operational LoP cover: 7 - 30 days, related to each loss event individually. LoP insurance for a PFI

    60. What do the Banks ask for in a PFI ?

    61. In PFI, beware of terms which aim at:

    62. PFI: Breach of Contract / Vitating Act in case of a Multiple Insureds Policy No indemnification of the violating party Other insureds to be indemnified for their direct loss Recourse against violating party not to be waived However, ? No indemnification of the banks

    63. PFI: Multiple Insureds Clause (London Engineering Group) "In the event of any vitiating act committed by any one or more insured parties, the lenders shall not be entitled to any indemnity under this policy for or arising from loss or damage in respect of which insurers are otherwise no longer liable to indemnify..."

    64. PFI: Who has an Interest in Insurance?

    65. Insurance from a single source Desirable for the Project Company No interfacing problems from one risk phase to the next Comprehensive insurance scheme requested by the banks from the beginning However, Covers traditionally underwritten by different markets and branches Manufacturers, suppliers, hauliers, operators may engage their own insurers or brokers Local insurers normally more engaged in operational than erection covers

    66. Insurance / Reinsurance Arrangement:

    68. Different treatement of damages by inherent defects in buildings in european area

    70. Civil Engineering Insurance Policies

    71. Many thanks for your attention! José Luis Montull Münchener Rück

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