INSURING EPC PROJECTS.FINAL

EPC PROJECT RISK MANAGEMENT: MAXIMIXING USE OF INSURANCE : 

CARLOS H. YTURZAETA Director, E&RM Phils., Inc. EPC PROJECT RISK MANAGEMENT: MAXIMIXING USE OF INSURANCE MARCUS EVANS CONFERENCE RENAISSANCE HOTEL, KUALA LUMPUR, MALAYSIA OCTOBER 13-14, 2008

PRESENTATION OVERVIEW : 

PRESENTATION OVERVIEW Presentor’s Perspective EPC Projects/Types of EPC Projects EWRM: Foundation of INSURANCE Project Players Concerns CREDITORS CONTRACTORS PROJECT OWNERS INSURERS EPC Project Activity/Project Participants Some Common Loss Exposures in EPC Projects INSURANCE Solutions/Benefits/Claims Administration Post Loss Objectives No substitute for a Comprehensive EWRM.

PRESENTOR’S PERSPECTIVE : 

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

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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.* Design and Construct; Turn-key Basis; Design and Build; Lump-sum EPC PROJECTS:MEGA PROJECTS *Maybe below US$1 billion but the impact is great.

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EPC PROJECTS According to Ownership GOVERNMENT – OWNED (Petronas, Pertamina, PNOC, PTT, PROC, etc) Wholly-financed by government Partly government and partly private PRIVATELY -OWNED/PRIVATELY- FINANCED May have different ownership structure - JVs, SPVs, JOINT VENTURE – PRIVATE AND GOVERNMENT Wholly - private but with government investment/financing Partly private and partly government but managed by privately NOTE: SOME PROJECTS ARE SELF-MANAGED

EPC PROJECTSAccording to Purpose : 

EPC PROJECTSAccording 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 PROJECTSAccording to Purpose : 

EPC PROJECTSAccording 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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EWRM: THE FOUNDATION OF INSURANCE RISK MANAGEMENT 101

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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. The old definition simple dealt with insurable assets that were insurable.

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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 3rd party experts Ocular and physical inspection Table top discussion/interview with key personnel

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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

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RISK MEASUREMENT/ANALYSIS Improbable Regular Negligible Catastrophic RETENTION LOSS CONTROL and PREVENTION INSURANCE Bus. Continuity Plan Disaster Mgnt Plan Emergency Mgnt Plan CRISIS MGMNT Good Governance Bus Continuity Plan Disaster Recovery Plan 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 RISK FINANCE - Provides fund if and when losses occur.

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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

CONTROL(Avoid, Prevent, Reduce) : 

CONTROL(Avoid, Prevent, Reduce) FINANCE (Retain or Transfer) CONTROL OR FINANCE: STRIKE A PERFECT BALANCE

EPC PROJECTS RISK MANAGEMENT TRANSFER : 

EPC PROJECTS RISK MANAGEMENT TRANSFER INSURANCE EAR, CAR Guarantees and Bonds ALOP following EAR, CAR, Marine Cost Overrun Repayment Guarantees Errors and Ommissions, Professional Indemnity Reinsurance Non-insurance transfers contractual transfers hold harmless outsourcing or subcontracting-use of 3rd party experts.

RETAINED/FUNDED RISK (Deductibles, Funded Self Insurance, etc) : 

RETAINED/FUNDED RISK (Deductibles, Funded Self Insurance, etc) TRANSFERRED RISKS (Insurance and Hold Harmless) RETENTION OR TRANSFER: A BALANCING ACT

RISK CONTROL or RISK FINANCE?RETENTION or TRANSFER? : 

RISK CONTROL or RISK FINANCE?RETENTION or 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.

EPC PROJECTS RISK MANAGEMENT : 

EPC PROJECTS RISK MANAGEMENT MAXIMIZING THE USE OF INSURANCE

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EPC CONTRACTOR SUB-CONTR OPERATOR POWER PURCHASERS DISTRIBUTORS HOST GOVERNMENT SUPPLIERS EQUIPMENT MANUFCTRS FEEDSTOCKS ADVISORS LEGAL/EWRM CREDIT/FINANCE ENGRS/CONSULT INVESTORS CREDITORS LENDERS INSURERS REINSURERS GUARANTORS PROJECT OWNER* EPC PROJECT PARTICIPANTS *COULD TAKE MANY DIFFERENT FORMS: JV, MULTIPLE OWNERS, SPVS, INVESTORS ONLY DURING CONSTRUCTION, ETC.

EPC PROJECTS: PHASES OF ACTIVITIES : 

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

EPC PROJECTS: PHASES OF ACTIVITIES (Con’t) : 

EPC PROJECTS: PHASES OF ACTIVITIES (Con’t) TURN OVER TO OPERATOR AND/OR MANAGEMENT COMPANY COMMERCIAL OPERATIONS/ACCOMPLISHMENT OF OBJECTIVES OF THE PROJECT FULL PAYMENT AND CONTINUOUS OPERATIONS TURNOVER/ACCEPTANCE BY PROJECT OWNER/COMPANY GENERATING INCOME/PAYMENT TO LENDERS/INVESTORS

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EPC PROJECTS RISK MANAGEMENT SOME OF THE RISK/LOSS EXPOSURES SUBSTANTIAL COST OVERRUNS >50% OF ORIGINAL COST. 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 LAWS, LEGAL &, REGULATORY FRAMEWORK, PRICING ERRORS IN DESIGN AND RESULTANT SPECIFICATIONS

EPC PROJECT RISK MANAGEMENT: CREDITORS’/LENDERS’ CONCERNS (Bankability/Acceptability of Project) : 

EPC PROJECT RISK MANAGEMENT: 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 & Retention. Security from Contractor (Consortium and its Head Offices): Back to Back Guarantees

EPC PROJECT RISK MANAGEMENT: CREDITORS’/LENDERS’ CONCERNS (continued) : 

EPC PROJECT RISK MANAGEMENT: 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)

EPC PROJECT RISK MANAGEMENT: CONTRACTOR’S CONCERNS : 

EPC PROJECT RISK MANAGEMENT: 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

EPC PROJECT RISK MANAGEMENT : PROJECT OWNER’S CONCERNS : 

EPC PROJECT RISK MANAGEMENT : 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 LEASE 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

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EPC PROJECTS RISK MANAGEMENT INSURANCE COVERAGES

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EPC PROJECTS RISK MANAGEMENT OWNER-CONTROLLED INSURANCE PROGRAM Over-all Control of the EPC reinsurance program. Seamless transition from construction to Operational phase. Coverage as least cost due economies of scale. Delay in Start Up (DSU) or ALOP can be easily effected Owner has choice of insurer security – Class A & Industry Claims paid directly to Owner or JV Owners. Interface with Owners existing insurance program. Where handover is on phase-by-phase basis. Elimination of redundant insurance services & expenses. All Project parties covered for same risks – single point responsibility- back-to-back guarantees. Control of Claims/Coordinated Claims Admin. Safety/Loss Control services from Insurance providers.

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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. INSURANCE IN A PROJECT BECOMES A FORM OF Collateral Enhanced form of security 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. EPC PROJECT RISK MANAGEMENT

EPC PROJECTS RISK MANAGEMENT RESPONSIVE CLAIMS MANAGEMENT : 

EPC PROJECTS RISK MANAGEMENT RESPONSIVE 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 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 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

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EPC PROJECTS INSURANCE INSURERS EXPECTATIONS COMPREHENSIVE PROJECT SURVEY REPORT Nature of Project: Turn-key, Lump Sum, Design & Build Exposures: Natural and Man-Made/Terrorism & Sabotage Risk Management Program Project Owner’s Management Culture especially OHSSE SELECTION OF RISKS Class A, Above Average Risks of the Project Long-term relationships Integrity of Project Owner and other parties to the EPC Project Integrity/Track record of all other players: contractors, operators, lenders, operators Host government’s exposure to political risks/current legislations PROJECT STANDARDS Local government, international Industry standard Fire Codes; Materials Standards

LOSS EXPERIENCE CYCLE : 

LOSS EXPERIENCE CYCLE ABNORMAL BUSINES CYLE EPC PROJECT RISK MANAGEMENT *ONLY possible if there is a comprehensive insurance program that is in place.

EPC PROJECTS RISK MANAGEMENT SOME STATISTICS ON LOSSES : 

EPC PROJECTS RISK MANAGEMENT SOME STATISTICS ON LOSSES IN THE AIRLINE INDUSTRY 70% OF THE ACCIDENTS WERE CAUSED BY HUMAN ERRORS. IN THE SHIPPING INDUSTRY 65% OF THE ACCIDENTS WERE CAUSED BY HUMAN ERRORS 50% OF THE ACCIDENTS TOOK PLACE ON A CLEAR DAY. IN THE OIL & GAS BUSINESS 50% WERE DUE TO NEGLIGENCE WORK PERMITS, POOR HOUSEKEEPING, CHANGE MGNT.

EPC PROJECTS RISK MANAGEMENT POST-LOSS OBJECTIVES : 

EPC PROJECTS RISK MANAGEMENT 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

EPC PROJECT RISK MANAGEMENT NO SUBSTITUTE FOR A SOUND RISK MANAGEMENT PROGRAM : 

EPC PROJECT RISK MANAGEMENT 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

INTERVENTIONS & INITIATIVES : 

INTERVENTIONS & INITIATIVES IN SUMMARY: 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.

CARLOS H. YTURZAETA : 

CARLOS H. YTURZAETA Certified Public Accountant (CPA) Ex-Licensed Underwriter & Reinsurance Broker, Insurance Officer, Risk Manager Lecturer, Insurance Institute of Asia & the Pacific/Marine Underwriters Asso of the Phils. 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 and community development

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THANK YOU. ENJOY THE REST OF THE WEEK. CARLOS H. YTURZAETA DIRECTOR, E&RM PHILS., INC. and MUAP LECTURER/TRAINOR, Enterprise Wide Risk Management, Insurance and Reinsurance, Captive Insurance, BCP, DMP Email Address: <yturzaeta@hotmail.com> MARCUS EVANS CONFERENCES