Risk. Reinsurance. Human Resources.

Aon Risk Solutions Global Broking Centre | Construction

In this Issue1 Raising the game in EMEA

2 Riyadh Metro: rapid transit

2 When any one claim might not be the best approach

3 Measuring the political risks facing your project

3 Building differentiation: an underwriter’s view

4 Key contacts

Construction NewsletterForeword

We continue to see that the global economy remains dynamic with a very real impact on the insurance market. Oil prices have fallen by 50% in a relatively short period of time and the previously booming energy industry is witnessing a decline in new projects as companies cancel or postpone development plans and take stock of the situation.

This has had a ripple effect on the wider economy, but having said this, we do continue to see major projects going ahead, particularly in the power and infrastructure sectors. Contractors continue to move to where the business is – and often in difficult locations - as they compete hard to retain their market shares.

In the insurance market, competition remains intense, with an oversupply of capacity looking to underwrite quality risks. This is good news for clients and efforts to improve and enhance risk management is being recognised by the insurance market. At this stage, we see no sign of a change of direction in the insurance market.

In this newsletter, we focus on the successes of our clients and provide insights into risk management tools that are available to both project developers and contractors as they seek to minimise their total cost of risk. We also provide the views of one of the market’s leading construction underwriters on how he sees the market now and into the future.

We hope you will find this newsletter to be of interest.

James MacNeal Managing Director of Construction and Power

Raising the game in EMEAAon has the world’s largest construction risk advisory group in the world. The level of understanding that we have of the risks faced by contractors as they expand globally is market-leading. Senior members of our EMEA construction team will meet in London on 30 June along with key members of the Construction Service Group to review how we can further improve our collective value to our clients, offering advice and solutions that will help our clients succeed.

Construction Newsletter | Issue 2, 2015 2

Riyadh Metro: rapid transit

When any one claim might not be the best approach

The Saudi city of Riyadh has global ambitions and its planned Riyadh Metro forms the backbone of a major expansion of the city’s public transport system. Aon has been at the forefront of developments since the inception of the project back in 2012 and has since been appointed by the FAST consortium to broker coverage of its section of the project.

The planned metro comprises 85 stations and six lines, with more than 168 kilometres of track serving the city centre, King Khalid International Airport and the King Abdullah financial district. Construction is due to be completed by 2018, with the project expected to create 15,000 jobs.

The scope of the project includes the construction of 64.6 kilometres of rail track, 29.8 kilometres of viaduct, 26.6 kilometres of underground track and 8.2 kilometres of overground track. The consortium’s contract is worth USD 7.8 billion. The consortium is led by FCC Construccion, and includes Samsung, Alstom, Strukton, Freussinet Saudi Arabia, Typsa and Setec.

Aon has placed coverage for a 60 month construction phase and a 24 month maintenance phase, delivering insurance for the design, construction, operation and maintenance of Package 3 of the Riyadh metro.

In late 2012 and early 2013 Aon Spain began working with the FAST consortium in the initial bid phase, providing invaluable insurance advice for the project team. Our team was able to walk FAST’s project manager through the Q&A process with Riyadh Metro’s principal, helping to create clarity around the exposures and expectations associated with the project.

Later in 2013, we went to market with FAST’s risk and found there to be significant market appetite to take on the project, sourcing a number of binding quotations. The level of support that we were able to secure led to FAST opting for Aon and later that year we were chosen as the broker of choice by the consortium.

Typically the limit of liability or indemnity relates to the maximum amount of compensation achievable for a claim. It includes costs incurred in the defence of the claim, payable within the limit of liability or indemnity or in addition to the compensation.

Conventional wisdom would suggest that any one claim coverage for exposures would offer the most complete coverage. In practice it is extremely rare for multiple claims to be paid for the full liability or indemnity during a given year. In fact, there are situations where the definition of what constitutes a claim actually inhibits how much can be recovered.

The potential weakness of any one claim coverage is in the definition of what a claim is and/or the series clause that will seek to link similar claims arising from the original mistake.

Insurers in the construction sector recognise that when projects are undertaken a single aggregate limit does not always provide the comfort required, and that alternative options need to be considered.

Single project liability or indemnity coverage can often deliver the protection required, but it will only be an aggregate solution, one that is at a higher cost than an annual practice policy.

A reinstatement of the annual practice policy’s limit can be an option, but the method by which it is reinstated is critical, and clarity as to what is an unrelated claim is complex. A simple solution is to purchase a separate aggregate limit — where contractually required — for each project within the annual arrangement.

The size of professional liability and indemnity claims has increased over the years, whereas the frequency of such claims has remained fairly constant. As such, frequency of severity should drive considerations and encourage a shift away from low any one claim amounts towards higher aggregate limits.

With professional liability and indemnity insurance proving plentiful in the current market, there is a strong argument that any one claim coverage is in fact not in the best interests of client. GBP 5 million of any one claim coverage does in fact provides less certainty than GBP 10 million of aggregate coverage – and interestingly the cost of these two alternatives are approximately the same.

Riyadh Metro: in figures Riyadh: 8 million population by 2020

Riyadh Metro: 168 kilometres of track

Riyadh Metro: 85 stations

Package 3: USD 7.8 billion price tag

Driverless metro system: USD 1.5 billion price tag

Construction Newsletter | Issue 2, 2015 3

Measuring the political risks facing your project

Building differentiation: an underwriter’s view

In March, Aon London launched its 2015 Political Risk Map. The map addresses the evolution of political risk in emerging economies, with the fall in oil prices and associated instability in oil exporting countries topping the list of risks facing global investors.

There is however grounds for cautious optimism in certain parts of the world – particularly in Latin America – with the 2015 map seeing a reduction in risk rating for the Dominican Republic, Ecuador and Panama, as well as Georgia, Laos, Philippines, Swaziland and Zimbabwe.

The strength of the dollar - largely as a result of falling oil prices – has seen many emerging markets drained of foreign currency, increasing non-payment risk. This problem is particularly acute in the CIS, where currencies have been affected by the collapsing rouble. Non-payment risks are further exacerbated by the sudden collapse in revenues flowing to commodity exporters more generally.

Project cancellations and even nationalisation risks are likely to follow in the wake of sudden budgetary constraints, as the harsh light of

economic reality forces exporting nations to re-assess spending decisions taken during the boom years.

More obviously, there is a huge increased in political violence risk associated with conflicts in Iraq, Libya, Ukraine, West Africa and Yemen, and there is potential for those conflicts to spread further, particularly if ISIS moves into power vacuums in other conflict areas, notably in Libya.

Experience in construction-specific risk

Aon’s political risk team currently has five live insurance claims, three of which relate to the construction sector. They consist of two non-payment claims and one for the loss of a construction plant following the outbreak of civil war.

The team is experienced in arranging coverage for investors and contractors, including risks such as non-payment, confiscation, political violence and non-honouring of arbitration awards. Our map is part of a range of analytics tools that enable clients to establish and monitor their political risk exposures.

Jon Wiegand, Head of Engineering and Construction in London for Swiss Re Corporate Solutions, talks us through the state of the London construction market, the importance of risk selection to insurers and how carriers can differentiate their offering in the current market.

The construction insurance market continues to be affected by the extended hang-over associated with the global economic downturn of 2008. Construction projects fell away precipitously for several years after the crash and whilst the sector has shown some improvement in recent years, the sector is still yet to fully recover.

This recovery has more recently been stifled by weak energy prices, stalled growth and global austerity – all of which are having a continued impact on international construction projects.

At the same time, the strong returns achieved by insurers in recent years have attracted considerable amounts of new capital into the sector, much of it from institutional investors on the hunt for returns. This additional capital and the pursuit of diversification have meant that the number of insurers offering construction capacity in London alone has trebled over the last 10 years, creating fierce competition in the market.

Regional capacity has also grown significantly as insurers look to build closer relationships with clients in order to win and retain construction business. London continues to maintain its strong position by offering differentiated products such as bespoke policy wordings and a continued appetite for construction projects ranging from millions to billions in insured values and from technically simple to complex multinational projects.

Risk selection The current soft market conditions are encouraging insurers to focus even more closely on the active risk selection approach followed by the top tier insurers, providing increased appetite, broader coverage and more competitive prices for the best managed and presented risks. Few are pursuing the portfolio approach which is more suited to hard market conditions.

Risk selection tends to be made on the basis of the quality of the underwriting submission in addition to the client’s willingness to retain risk and thereby demonstrate the strength of their risk management. The clients attracting the best terms and conditions for their projects are typically those who engage closely with insurers – through technical project presentations and insurer risk surveys. For those clients able to satisfy the highest risk selection criteria, they can expect to benefit from competitive terms and greater participation of higher quality insurers which will in turn result from more efficient policy administration and claims handling.

Insurers also place great value on clients looking to build and maintain long term partnerships across multiple lines of business including engineering.

Jon Wiegand Head of Engineering and Construction, London Swiss Re Corporate Solutions

The value of the broker cannot be underestimated and they should add value throughout all stages of the placement – from submission to closing. The current level of fierce market competition also extends to brokers as they fight for client’s business. Clients need to be diligent in their broker selection process to ensure that they benefit not only from the best coverage and security available, but also from an accurate policy wording that will reduce the chances of misinterpretation of cover and help clients and insurers avoid costly litigation which is in all parties best interest.

Insurer differentiation When it comes to how insurers differentiate their offerings, the quality of their security remains a critical factor. Clients also need to consider the longevity of their insurers – if they are looking to benefit from long term partnerships with insurers, they need to consider whether their

insurers will still be participating in the construction market in three or four years’ time.

Best in class insurers need to not only demonstrate a client-focused claims handling philosophy, which will be responsive and effective should the worst happen, but also offer product innovation and the ability to support clients across multiple lines of business.

These insurers will stand by their clients throughout the project lifecycle and be able to tailor the insurance policy to the dynamic nature of construction projects. Insurers should also look to contribute to the success of the project such as the provision of an insurer risk management program, which can help provide the project with a qualified external perspective regarding lessons learned from other projects throughout the world.

Simon Simpson UK Construction +44 (0)20 7086 2003 simon.simpson@aon.co.uk

Warren Beardall PPP +44 (0)20 7086 4328 warren.beardall@aon.co.uk

Mark Holt Surety +44 (0)20 7086 0576 mark.holt@aon.co.uk

Michael Earp Professional Indemnity +44 (0)20 7086 4414 michael.earp@aon.co.uk

James MacNeal Construction, Power +44 (0)20 7086 4353 james.macneall@aon.co.uk

Bob Humphreys International Construction +44 (0)20 7086 0653 robert.humphreys@aon.co.uk

Peter Rudd International Construction +44 (0)20 7086 4332 peter.rudd@aon.co.uk

Charles Keville Technical Director, PRI +44 (0)20 7086 3098 charles.r.keville@aon.co.uk

Key contacts

About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and

human resources solutions and outsourcing services. Through its more than 69,000 colleagues worldwide, Aon unites to

empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our

capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com.

© Aon plc 2015. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that

such information is accurate as of the date it is received or that it will continue to be accurate in the future.

No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Aon UK Limited is authorised and regulated by the Financial Conduct Authority.

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