Maxmiizing Insurance-EPC-WEC.FINAL

MAXIMIZING USE OF INSURANCE:

CARLOS H. YTURZAETA Director , Environment & Risk Management Phils., Inc. MAXIMIZING USE OF INSURANCE EPC RISK MANAGEMENT Centara Grand at Central World & Bangkok Convention Center Bangkok, Thailand November 4-5, 2009 Chairman , Marine Underwriters Assoc of the Phils, Inc. WORLD ENGINEERING CONGRESS

PRESENTATION OVERVIEW:

PRESENTATION OVERVIEW PRESENTOR’S OBJECTIVES EPC Projects/Project Players EWRM: Foundation of INSURANCE INSURANCE AS AN EFFECTIVE RISK TRANSFER VEHICLE. POST LOSS OBJECTIVES NO SUBSTITUTE FOR EWRM. MAXIMUM USE OF RESOURCES WORLD ENGINEERING CONGRESS: EPC PROJECTS RISK MANAGEMENT

PRESENTOR’S PERSPECTIVE:

PRESENTOR’S PERSPECTIVE As an Insurance Officer – Project Owner As a Risk Manager – Project Owner As an Insurer/Reinsurer As a Insurance & Reinsurance Broker As a Claims Administration Manager

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Major infrastructure that costs over US$1 Billion. Projects attracting high level public attention.* Projects inviting high level political interest.* Substantial direct and indirect impacts on the community and environment.* Projects with large magnitude of tasks involved in planning, developing and management.* EPC PROJECTS:MEGA PROJECTS *Maybe below US$1 billion but the impact is great. WORLD ENGINEERING CONGRESS 2009

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EPC PROJECTS According to Ownership GOVERNMENT OWNED -- Wholly financed by government -- Partly government and partly private 2. PRIVATELY OWNED/PRIVATELY FINANCED 3. JOINT VENTURE – PRIVATE AND GOVERNMENT -- Wholly private but with government investment/financing -- Partly private and partly government but managed by private operator. EPC PROJECTS COULD BE: DESIGN & BUILD, TURNKEY, BUILD OPERATE & TRANSFER, REHABIITATE OPERATE & TRANSFER, ETC.

EPC PROJECTS According to Purpose:

EPC PROJECTS According to Purpose ENERGY POWER PLANTS TRANSMISSION LINES OIL AND GAS (UPSTREAM, DOWNSTREAM) PETROCHEMICALS MINING & EXPLORATION GEOTHERMAL & COAL WINDPOWER HYRDRO & WINDPOWER PLANTS UTILITIES WATER SUPPLY WATER DISTRIBUTION ELECTRIC DISTRIBUTION HUGE SUBSTATIONS DESALINATION PLANTS MASSIVE IRRIGATION SYSTEMS

EPC PROJECTS According to Purpose:

EPC PROJECTS According to Purpose TRANSPORT ROADS & BRIDGES MASS RAIL TRANSPORT AIRPORTS TUNNELS & WATERWAYS HARBORS & PIERS VESSELS TELECOMS TELEPHONE LINES TELECOMS TOWER INTERCONTINENTAL CABLES AND LINES SATELLITES

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EPC CONTRACTOR OPERATOR POWER PURCHASERS DISTRIBUTORS HOST GOVERNMENT SUPPLIERS EQUIPMENT RAW MAT ADVISORS LEGAL/EWRM CREDIT/FINANCE INVESTORS CREDITORS GUARANTORS INSURERS REINSURERS PROJECT OWNER EPC PROJECT PARTICIPANTS

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EWRM: THE FOUNDATION OF INSURANCE RISK MANAGEMENT 101 WORLD ENGINEERING CONGRESS: EPC PROJECTS RISK MANAGEMENT

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ENTERPRISE-WIDE RISK MANAGEMENT The Total Approach to the protection of assets , earnings , liabilities , reputation , and personnel against predictable and unpredictable losses in order to achieve the maximum efficiency at minimum cost. Modern definition of Risk Management or Enterprise-wide Risk Management.

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THE RISK MANAGEMENT PROCESS

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RISK IDENTIFICATION METHODS (Risk Profiling) Survey or questionnaire Going through the Company’s financial records Review of contracts, audit reports and surveys Flowcharting of operations Consulting/Engaging 3 rd party experts Ocular and physical inspection Table top discussion/interview with key personnel

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SOME OF THE RISK/LOSS EXPOSURES SUBSTANTIAL BENEFIT SHORTFALLS BANKRUPTCY OF PROJECT OWNER/CONTRACTOR/OPERATOR WITHDRAWAL OF LENDERS CANCELLATION OF HOST GOVERNMENT PERMITS POLITICAL RISKS LIKE WAR AND TERRORISM. WITHDRAWAL/BANKRUPTCY OF INSURERS AND REINSURERS DELAY START UP AND DELIVERY. DELAY IN EQUIPMENT PROCUREMENT AND DELIVERY. LOSSES DURING CONSTRUCTION LOSSES DURING COMMISSIONING AND TESTING. WITHDRAWAL OF POWER PURCHASER OR DISTRIBUTOR CURRENCY FLUCTUATIONS UNSTABLE LEGISLATION, LEGAL SYSTEM, REGULATORY FRAMEWORK, PRICING ERRORS IN DESIGN AND RESULTANT SPECIFICATIONS

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RISK MEASUREMENT/ANALYSIS Frequency - probability or chance/likelihood - Workshop/Brainstorming - Loss History - Forecasting Severity - impact of losses/adverse effects - Workshop/Brainstorming - PML, EML, mathematical models - Impact on 3rd parties - Simulation models (oil majors, service providers)

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RISK MEASUREMENT/ANALYSIS Improbable Regular Negligible Catastrophic RETENTION LOSS CONTROL and PREVENTION INSURANCE Bus. Continuity P. Disaster Mgnt Emergency Mgnt CRISIS MGMNT Good Governance Bus Continuity Plan Disaster Recovery S e v e r i t y F r e q u e n c y

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RISK MANAGEMENT TECHNIQUES RISK CONTROL – Stop losses from happening or if it happens, reduce the effects and impact of the loss. OR/AND RISK FINANCE - Provides fund if and when loss occurs.

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1. Risk Avoidance 2. Loss Prevention 3. Loss Reduction 4. Segregation of Risks 5. Combination Diversification Outsourcing 1. Retention through - Deductibles - Reserve/Funds - Current Expensing - Borrowing - Self-Insurance - Captive Insurance 2. Transfer through - Insurance - Hold Harmless/Outsource RISK CONTROL RISK FINANCING RISK MANAGEMENT TECHNIQUES

WORLD ENGINEERING CONGRESS 2009 RISK TRANSFER:

WORLD ENGINEERING CONGRESS 2009 RISK TRANSFER Reinsurance Non-insurance transfers -contractual transfers -hold harmless -outsourcing or subcontracting-use of 3 rd party experts. INSURANCE (EAR, CAR, ALOP, Bonds, Guarantee Payment, Cost overrun, E&O, Professional Indemnity, etc. )

CONTROL (Avoid, Prevent, Reduce):

CONTROL (Avoid, Prevent, Reduce) FINANCE (Retain or Transfer) QUESTION: CONTROL OR FINANCE? IDEAL : PERFECT BALANCE

WHAT IS A PERFECT BALANCE? ( To Control or Finance, To Retain or To Transfer ):

WHAT IS A PERFECT BALANCE? ( To Control or Finance, To Retain or To Transfer ) CORPORATE CULTURE FINANCIAL STRENGTH LOSS HISTORY MARKET CONDITION MANAGEMENT STYLE Note: Management may set a policy on risk retention and transfer once the EWRM is set in place .

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INSURANCE AS AN EFFECTIVE RISK TRANSFER VEHICLE WORLD ENGINEERING CONGRESS: EPC PROJECTS RISK MANAGEMENT

CREDITORS’/LENDERS’ CONCERNS (Bankability/Acceptability of Project):

CREDITORS’/LENDERS’ CONCERNS (Bankability/Acceptability of Project) Project completion as scheduled: normally tied up with off–take agreements or income generation. Stable contract price; Cost overruns provided Provision for Extension of Project Costs and Project Completion date Output/Off-take Guarantees (ALOP/DLD) Limited liability of Project Owner to Contractor Performance & Surety Bonds – 20% performance and 10% surety for design & latent defects. Security from Contractor (Consortium and its Head Offices): Back to Back Guarantees.

CREDITORS’/LENDERS’ CONCERNS (continued):

CREDITORS’/LENDERS’ CONCERNS (continued) Viability of project maintained until operation. All changes/milestones communicated to Lenders. Lenders named as additional co-insured. Limited design and techno risks Lowest Country, political and credit risks. Comprehensive Insurance Cover (seamless cover) Guaranteed Payment of Loan. Smooth Certifications Process (acceptance, commissioning & testing, governments, environmental, international standards)

CONTRACTOR’S CONCERNS :

CONTRACTOR’S CONCERNS COMPREHENSIVE INSURANCE PROGRAM SEAMLESS INSURANCE PROGRAM OWNER CONTROLLED INSURANCE PROGRAM HOST COUNTRY LAWS, REQUIREMENTS. LOCAL EXPERTISE –SUPERVISORY & LABOR LOCAL MATERIALS & EQUIPMENT LOCAL SUB-CONTRACTORS—ENGINEERING & SUPPORT SERVICES REASONABLE PROJECT OWNER

: PROJECT OWNER’S CONCERNS:

: PROJECT OWNER’S CONCERNS THE MOST APPROPRIATE PROJECT THAT WILL GIVE THE DESIRED BENEFITS/OBJECTIVES AN IDEAL CONTRACTOR/MANAGER/SUPPLIER ATTRACTIVE FINANCING SCHEME & LIBERAL CREDIT TERMS AND CONDITIONS. SEAMLESS INSURANCE PROGRAM LEAST COST EFFICIENT CLAIMS ADMINISTRATION TECHNICAL SUPPORT SERVICES CLASS ‘A’ REINSURERS Munich Re, Allianz, Hanover Re, General-Cologne Re Swiss Re, Zurich Financial Services SCOR, AXA GARD; Scandinavian RI Lloyds Syndicates/Bermuda RI AIG/Hartford

INSURANCE OF EPC PROJECTS:

INSURANCE OF EPC PROJECTS PLANNING/DESIGNING/COST BENEFIT/FEASIBILITY/SELECTION OF FINANCIAL ADVISORS/LENDERS/INVESTERS ESTABLISHING PROJECT OWNER/COMPANY/EITHER EXISTING OR NEW ENTITY FINANCIAL CLOSING/CONCLUSION OF CONTRACTS SHIPMENT OF MACHNERIES & EQUIPMENT/CONSTRUCTION TESTING AND COMMISSIONING

INSURANCE OF EPC PROJECTS (CONTINUED):

INSURANCE OF EPC PROJECTS (CONTINUED) TURN OVER TO OPERATOR AND/OR MANAGEMENT COMPANY COMMERCIAL OPERATIONS TRANSFER TO GOVERNMENT/PUBLIC SECTOR TURNOVER/ACCEPTANCE BY PROJECT OWNER/COMPANY PAYMENT TO LENDERS/INVESTORS

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EPC PROJECTS AVAILABLE INSURANCE COVERAGES

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BENEFITS OF A COMPREHENSIVE INSURANCE PROGRAM PROTECTION IS ASSURED IF COVERAGE IS SEAMLESS FUNDS DELAYS IN PROJECT COMPLETION. ENHANCES PROJECT CREDIT MINIMIZE LEGAL ISSUES/CONFLICTS INSURANCE IN A PROJECT BECOMES A FORM OF Collateral Enhanced form of security

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BENEFITS OF A COMPREHENSIVE INSURANCE PROGRAM .. Part 2 of 2 ENHANCED CONFIDENCE OF LENDERS REDUCTION OF PROJECT FINANCE COSTS REDUCTION IN PROJECT OVERHEADS. STAKEHOLDERS CONFIDENCE PEACE OF MIND OF ALL PLAYERS. DELIVERY OF DESIRED PROFITABILITY FOR ALL.

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INSURERS EXPECTATIONS COMPREHENSIVE PROJECT SURVEY REPORT Nature of Project: Turn-key, Lump Sum, Design & Build 2. Exposures: Natural and Man-Made/Terrorism & Sabotage 3. Risk Management Program 4. Project Owner’s Management Culture especially Occupational, Health, Safety & Security and Environment.

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INSURERS EXPECTATIONS… Part 2 OF 3. SELECTION OF RISKS Class A, Above Average Risks of the Project 2. Long-term relationships 3. Integrity of Project Owner and other parties to the EPC Project 4. Integrity/Track record of all other players: contractors, operators, lenders, operators 5. Host government’s exposure to political risks/current legislations

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INSURERS EXPECTATIONS…. Part 3 of 3. PROJECT STANDARDS International Standards, Certifications 2. National Standards, Local Government 3. Industry standard, Professional Ethics, Best Practices 4. Fire Codes, Materials Standards, ISO

BUSINESS CYCLE: RISK MANAGEMENT:

BUSINESS CYCLE: RISK MANAGEMENT ABNORMAL BUSINES CYLE WORLD ENGINEERING CONGRESS 2009 * In most cases, this can be possible if there is a comprehensive insurance program that is in place with equally responsive claims administration program.

RESPONSIVE INSURANCE CLAIMS MANAGEMENT :

RESPONSIVE INSURANCE CLAIMS MANAGEMENT PRIOR TO THE LOSS Proper Property Valuation/Appraisal Adequate Bonding Requirement Specific Job Description/Deliverables Loss simulation; Drills and exercises; Training & Education; Emergency Preparedness, Loss History; Loss Forecasting

RESPONSIVE INSURANCE CLAIMS MANAGEMENT ….PART 2 OF 3:

RESPONSIVE INSURANCE CLAIMS MANAGEMENT ….PART 2 OF 3 DURING THE LOSS Reliable and capable adjusters with integrity Disaster Management/Disaster Recovery Salvage and subrogation values and rights. Preservation of evidence and securing of witnesses

RESPONSIVE INSURANCE CLAIMS MANAGEMENT …PART 3 OF 3 :

RESPONSIVE INSURANCE CLAIMS MANAGEMENT … PART 3 OF 3 POST LOSS Submission of documents and evidences. Close coordination among claimants, adjusters, insurance companies, brokers and other third parties if any. Policy interpretation; Questions on clauses Payment on Account; Settlement in 30 days Negotiation skills; compromise and ex-gratia settlement. Subrogation/Recoveries. Business Continuity

LIMITATIONS OF INSURANCE:

LIMITATIONS OF INSURANCE LIMITED COVERAGE LIMITED LIABILITY EXCLUSIONS WARRANTIES LIMITED RECOURSE CURATIVE RATHER THAN PREVENTIVE DOES NOT COVER CRIMINAL & ADMINISTRATIVE LIABILITIES

POST-LOSS OBJECTIVES:

POST-LOSS OBJECTIVES SURVIVAL CONTINUITY OF OPERATIONS STABILITY OF EARNINGS GROWTH POTENTIALS HUMANITARIAN CONDUCT/CSR ENVIRONMENTAL IMPACT INVESTMENT RETURNS TO ALL PARTIES ATTAINMENT OF THE PROJECT OBJECTIVES/BENEFITS WORLD ENGINEERING CONGRESS 2009

SOME LOSS STATISTICS:

SOME LOSS STATISTICS AIRLINE INDUSTRY 70% of the accidents and losses were caused by human error SHIPPING INDUSTRY 60% of the accidents and losses were caused by human error More than 50% took place on a clear day. OIL, GAS & PETROCHEMICAL - More than 60% were caused by human errors namely due to poor housekeeping, deficient repairs and maintenance, strict adherence to work permits, response to change management. WORLD ENGINEERING CONGRESS 2009

NO SUBSTITUTE FOR A SOUND RISK MANAGEMENT PROGRAM:

NO SUBSTITUTE FOR A SOUND RISK MANAGEMENT PROGRAM PLANNING, DESIGN, CONTRACT SIGNING RESPONSIBILITIES OF ALL PARTIES TRACK RECORD/EXPERIENCE OF ALL PARTIES INVOLVEMENT OF REINSURERS from beginning CONTRACT REVIEW-Mismatched related contracts (b2b clause) LOSS CONTROL MEASURES-CONSTRUCTION PREVENTION/REDUCTION BUSINESS CONTINUITY PLAN/EMERGENCY RESPONSE DISASTER MANAGEMENT & RECOVERY DEVELOP CULTURE OF RISK MANAGEMENT CONTROL OF INSURANCE (OCIP) INSURANCE/REINSURANCE/RETENTION SEAMLESS INSURANCE COVER CLAIMS ADMINISTRATION GOOD GOVERNANCE/ BEST PRACTICE

INTERVENTIONS & INITIATIVES:

INTERVENTIONS & INITIATIVES IN SUMMARY: EPC RISK MANAGEMENT ENTAILS CONTINUOUS ENTERPRISE-WIDE RISK MANAGEMENT PROGRAM/ADMNIN

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ACKNOWLEDGEMENTS/REFERENCE MATERIALS USED Risk and Insurance Management Association of the Phils (RIMAP)– various annual conferences from 1991-1993. Risk and Insurance Management Society of North America (RIMS)-various annual conferences in Winnipeg, Florida and San Francisco from 1992-1995. International Federation of Risk and Insurance Management Association of Asia and Pacific (IFRIMA) discussion meetings in Florida, Cologne, San Francisco from 1994 - 1995 Federation of Asia Pacific Association of Risk Management Organizations (PAFARMO) annual conferences – Malaysia, Singapore, Sydney, Philippines from 1993-1997. Presentation of Wolfgang Zimmermann of Allianz AG, Industrial Division-Engineering/Marine, 2004. Books written by George Head of Insurance Institute of USA and Prakash A. Shimpi of Swiss Re New Markets. EPC Projects Risk Management, Marcus Evans, Renaissance Hotel, Kuala Lumpur, Malaysia, October 2008 Oil & Gas Legal Contracts Excellence, Marcus Evans, The Prince Plaza Hotel, Kuala Lumpur, Malaysia, July 2009 Project Risk Management & Alliance, Shanghai Four Points Hotel, sponsored by Marcus Evans, October 22-23, 2009

CARLOS YTURZAETA:

CARLOS YTURZAETA Certified Public Accountant ( CPA ), Bachelor of Science in Commerce in Accounting Ex-Licensed Underwriter & Reinsurance Broker Lecturer , Insurance Institute of Asia & the Pacific/Marine Underwriters Asso of the Phils., Phil. Institute of Certified Public Accountants/Phil. Institute of CPAs. Consultant/Speaker Trainor on Enterprise Wide Risk Management/Captive Insurance/ Accounting, Audit and Tax/Property Management/Estate Planning, DMP, Crisis Mgnt, Claims Admin. Systems and Procedures, Emergency Management, Business Continuity. Established the first Philippine Captive in Bermuda (Overseas Ventures Insurance Corp.or OVINCOR)‏ Established/Gen. Manager of-the first “controlled” Phil. Insurer (Petrogen Insurance Corporation), a fronting company for OVINCOR. 25 years in the largest energy conglomerate in the Philippines consisting of Petron, PNOC , PNOC-Energy Development Corp, PNOC-Shipping & Transport Corp., PNOC-Coal Corp, PNOC-Exploration Corp, PNOC-Tankers Corp—in various capacities. Social work, charity and community development thru Rotary Club Makati Edsa-District 3830 and Jose Carlo P. Yturzaeta Memorial Foundation, Inc.

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THANK YOU. ENJOY THE REST OF THE WEEK. CARLOS H. YTURZAETA Director , E&RM PHILS., INC. Chairman , Marine Underwriters Assoc of the Philippines, Inc Email Address: yturzaeta@hotmail.com WORLD ENGINEERING CONGRESS EPC PROJECTS RISK MANAGEMENT