insurance solutions for independent power plants … 2015/upload/scot peachey.pdf · e.g. advance...

MARSH

Insurance Solutions for Independent Power Plants Under ConstructionNovember 2015

Scot PeacheyMarsh Construction London

MARSH

Managing International Insurance Placements

• An overview of the international insurance market

– Global capacity.

– Condition of the market.

– What the future holds.

• Challenges of individual IPP risk types

– Combined Cycle (CCGT)

– Coal

– Nuclear

• Importance of reviewing and managing contractual obligations

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Overview of the International Insurance Market

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Managing International Insurance PlacementsOverview of the insurance market

• Market conditions are not only about price.

• Soft market conditions influence available:– Deductibles– Scope of Cover– Appetite for historically difficult risks:

e.g. Advance Loss of Profits (ALOP) on Hydro with tunnels

e.g. Unproven technologies

• In negotiations knowledgeable Manufacturers and Contractors will push Employers to purchase wider cover, transferring more risk at the Employers expense. e.g. Wider defective design cover

• Where are we today?

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Overview of the insurance market - 2000

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EUROPE

MIAMI

SEOUL

DUBAI

SINGAPORE

NEW YORK

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Overview of the insurance market - 2015

519 November 2015

EUROPE

NEW YORK

MIAMISEOUL

DUBAI

SINGAPORE

SAO PAULO

BEIJING

JOHANNESBURG

MARSH 619 November 201519 November 2015

Overview of the Insurance MarketMarsh Benchmarking Data

Projects

MW placed per Power Type

Gas

Coal

Nuclear

Hydro

Wind

Other

0 10,000 20,000 30,000 40,000

33,207 MW

3,948 MW

9,240 MW

2,397 MW

3,132.4 MW

8,164 MW

Asia$812,894

Africa$1,771,480

N A$946,223

M E$856,422

Pacific$833,450

Euro$891,762

LAC$706,829

MW placed per Power Type

Projects

Overview of average CCGT Rates

Average CCGT price per MW

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Overview of the insurance marketWhat does the future hold?

• New Engineering Challenges:– New Materials, New Designs and New Scales of Technology.– With new opportunity comes risk?

7November 19, 2015

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Overview of the insurance marketWhat does the future hold?

• New engineering challenges Civils– Taller.– Deeper.– Longer

• New risks– CYBER crime.– Political Violence.

• Insurance markets– Expanding Chinese market– New Latin American Hub.– Decentralisation of market.

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Managing the Technology ChoiceThermal Coal & GAS

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Power Construction RisksManaging CCGT

• Globally CCGT dominates greenfield investment.

• Gas Turbine technologies are extremely advanced and advancing.

• Complex machinery with high concentrations of values in critical components.

• Commoditised underwriting– each insurer looks at his last comparable firm

order for that specific gas turbine unit.

• Keeping track of each existing and new model is a task for insurers.

• Categorised by definition:– Proven / Unproven / Prototype

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• OEM’s will never stand still always looking for efficiency & performance

• One man’s ‘F’ class could be another’s ‘J’ class - no industry rules

• The markets perception is fluid and varies from unit to unit

• Soft market creating a positive environment

• All technologies are insurable:– Price– Cover– Deductible– Enhanced Warranty Solutions

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Power Construction RisksTechnology Advancement



CAR and DSU Premium Rates

0.0000%

0.5000%

1.0000%

1.5000%

2.0000%

0.1250% 0.1750% 0.2250% 0.2750% 0.3250% 0.3750% 0.4250% 0.4750%

CAR Rates

DSU

Rate

s

Proven Boiler Tech.



CAR and DSU Premium Rates

0.0000%

0.5000%

1.0000%

1.5000%

2.0000%

0.1250% 0.1750% 0.2250% 0.2750% 0.3250% 0.3750% 0.4250% 0.4750%

CAR Rates

DSU

Rat

es

Proven Boiler Tech. Emerging CCGT


50hz

• MHI 701 F4

• MHI 701 F5

• MHI 701 J

• GE 9F.03

• GE 9F.05

• GE 9H.A01

• Siemens SGT5 8000 H 1.3

• Siemens SGT5 8000 H 1.4

Power Construction RisksManaging the Technology Choice CCGT

As brokers we ask ourselveswill insurance be impacted by the chosen technology?

• Deductible:– Property damage EPC risk– Loss of Revenue Owners Risk

• Price variance up to 50%

• Cover LEG1/LEG2/LEG3

• Warranty– Some gas turbines require extended

manufacturer warranty solutions.

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Power Construction RisksManaging the Technology Choice CCGT

• What is the underwriting criteria?– Fleet historical performance– Experience of EPC– Involvement of the Original Equipment Manufacturer– Hot Testing Period

- 3 to 6 months is typical- Accounts for 40% - 60% of the rate

• Plus Usual:– Nat Cat exposure.– Entire project duration.– Breakdown in values.

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Power Construction RisksManaging the Technology Choice Coal• Three tiers of Technology:

– Ultra Super Critical (USC)– Super Critical – Sub Critical

• Temperatures, pressures, materials & efficiency advancing up the scale.

• Some carriers not quoting USC

• T24 alloy an issue for underwriters– Applies to some Ultra Supercritical Boilers– Alloy 625c– Cracking in boiler tubes– Can be managed effectively but questions will be asked

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Power Construction RisksManaging the Technology Choice Coal

Underwriting challenges:

• Long periods - over 4 years is common

• Extensive wet works– Coal handling up to 5km offshore

• Large Capital Investment – High property damage limits– High DSU sums insured (+ USD1b)

• Less interest in ST Gen set than GT Gen Set but prototypes are possible

• Mine of mouth investment managed through integrated programs:– Mine assets and Power assets often separate SPV– Interdependency of assets protection is key (no gaps)– Managed through single program or clauses linking multiple policies

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Managing the Technology ChoiceNuclear


Power Construction RisksManaging Nuclear

Nuclear Renaissance

• 437 Reactors worldwide

• 31 Countries

• In 2014 - 2411 Billion Kwh 11%

In Construction

• 60 Reactors worldwide

• 13 Countries

• 300MW – 2000MW reactors

• A challenge for today’s insurance market?

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Profile Hinkley point C

• USD 36,000,000,000

• 2 units

• 10 year construction term

• 1800MW ST

• Large government subsidy

Karachi Coastal Power

• USD 9,500,000,000

• 2 units x 1100MW

• + 6 year construction term

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Nuclear risks can be an underwriting challenge:

1. Long periods up to 12 years (multiple reactors)

2. High PML introducing mega ALOP exposures

3. Nuclear Island New Designs High cost materials Post criticality inflated repair costs

4. Conventional island New Designs Largest Turbines in the world (half speed) 72’ last stage blades

5. Requirement for unique integrated program


Managing the Technology ChoiceConclusions Nuclear

• Market appetite: – Quality control differentiates the risk (positive)– Small group of lead market experts– Large capacity– Generating strong competition

• Wordings:– If drafted correctly offer perfect integrated cover with nuclear pools– NMA1975A managed effectively– Constant developments in CAR since TVO Finland– Decontamination expenses

• Rates:– Falling

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Managing Contractual Obligations

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The Construction Contract is a legally binding agreement, between the parties privy to the contract, formally recording:

• Definitions

• Technical Scope

• Contractor’s Responsibility

• Owner’s Responsibility

• Compensation & Payment

• Acceptance & Testing

• Change Orders

• Warranties

• Remedies

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• Care of the Works

• Indemnity Clauses

• Insurance

• Dispute Resolution

• Suspension & Termination

• Force Majeure

• Confidentiality

Its important to read the entire contract, individual sections or clauses

will be inconclusive

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• Standard Checks:– Risk of Loss Provisions EPC has full care of the works

– Third Party Indemnities Mutual and fair

– Force Majeure and or Employers Risks Terrorism

– Insurance obligations and scope Lines of cover Insuring party scope of cover

• Beware the devil is in the detail

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Managing Contractual ObligationsRisk of loss

Who buys insurance should not impact risk of loss:The Parties agree to bear the deductibles, exclusions or excepted risks of policies by way of an added Indemnity: – (a) Policies taken out as per Clause 18.3 (Contractors insurances):

deductibles, exclusions or excepted risks of the policies shall be covered exclusively by the Contractor

– (b) Policies taken out as per Clause 18.4 (Owners insurances including works): deductibles, exclusions or excepted risks of the policies shall be covered by Owner

• If not amended the owner will be retaining risk of loss for all uninsured losses

• EPC has no risk of loss save to the extent its insured.

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Managing Contractual ObligationsWaivers of subrogation manufacturers

• Increasingly OEM’s are pushing for full waivers of subrogation

• EPC contract definitions of Subcontractor:

"Subcontractor" means any person to whom the carrying out of any part of the Works, including any person providing design, procurement or construction services and any supplier or vendor of the EPC Contractor (or its subcontractors) is subcontracted directly or indirectly by the EPC Contractor in accordance with the Contract and includes the subcontractor's subcontractors and the subcontractor's legal representatives, successors or permitted assigns.

• Supply Contract - absolute waiver:

Each of seller (OEM) and its subcontractors and vendors of every tier under this contract shall be included as an additional insured and the policy shall waive subrogation rights against each of the additional insured.

• This could be a problem!

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Managing Contractual ObligationsWaivers of subrogation (General)

We do need waivers of subrogation:

• Waivers are normal and need to be considered.

• Both parties shall ensure that all insurers‟ rights of subrogation against all co-insured for losses or claims arising out of the performance of the Contract shall be waived under such policy

• Add – save to the extent such party has committed a vitiating act under such

policy. – Such waiver shall not extend to include vendors, suppliers and other

professional consultants in respect for their offsite activities and or equipment supply warranty obligations;

• Drafted to capture warranty obligations

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Managing Contractual ObligationsWaivers of Subrogation Manufacturer Warranties

Common EPC Drafting:

• Original equipment manufacturer or supplier warranties primary to insurance.

Preferred Drafting:

• Insurers will retain rights of subrogation against all manufacturers and suppliers of equipment to the extent that any such manufacturer or supplier has a contractual liability to any other insured party

Typical Warranty application of no benefit to insurers:

1. Limited Warranty - Defective part only no opening and closing costs.

2. Standard Warranty - Defective part including opening and closing costs.

3. Full Warranty - Defective part plus collateral damage – Only time warranty should be primary to insurance

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Managing Contractual ObligationsConclusions

• EPC bid stage is the best time to review a contract

• Obligations on both sides should be clear and detailed– Full Insurance schedule not heads of terms– All major conditions listed– All limits disclosed

• Allowances should be made for– Technology– EPC and OEM Domicile – Western vs Eastern negotiations will take a different direction

• Consider the contractual risk landscape across the contracts, each must comply with the other to create the minimum contractual obligations

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