lexpert introduction to ppp construction insurance and performance security requirements 06 december...
TRANSCRIPT
LexpertIntroduction to PPP Construction Insurance and Performance
Security Requirements06 December 2012
Presented byDavid Bowcott
Senior Vice President and National DirectorMaurice Audet
Senior Vice President
Aon Risk Solutions™Construction Services Group
Infrastructure Services
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.2
Infrastructure Ontario
2
Agenda• A Bit About Aon• Basics of P3 Insurance and Performance Security• Uninsurable Risks in Insurance and Performance Security• When Disaster Strikes – how insurance and performance security
requirements respond to various participants’ needs• IOCIP – impact on IO AFP market and the insurance market
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.3
Infrastructure Ontario
A Bit About Aon
3
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.4
Infrastructure Ontario
4
Aon’s Credentials• Our market share in Canada
– Broker and advisor to 12 of the top 15 contractors in Canada– Broker and advisor to over 50% of the Top 100 Projects– Broker and advisor to over 80% of all Canadian Public Private Partnerships– Over 2,500 construction clients
• Aon swims in the largest pool of construction risk management transactions in Canada
The following presentation reflects our perspective given our pool
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.5
Infrastructure Ontario
The Goal
5
Co
st
Insurance Brokerage and Advisory Costs
Effective Risk Communication
Insurance and Performance
Security
Cost of Construction Cost of
Capital
(100’s of Thousands) (Millions) (10’s of Millions) (100’s of Millions)
Unnecessary Risk Contingency
Cost of Operations
(10’s of Millions)
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.6
Infrastructure Ontario
Insurance and Performance Security in the World of P3s
6
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.7
Infrastructure Ontario
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Basics of PPP Insurance and Performance Security -Key Features• Keys are alignment with on time, on budget, and as per specification
objectives
Changes as a result of this alignment:1. Scope of coverage
– The broader the better– The lower the deductibles the better
2. Liquidity/Responsiveness– The faster the better
3. Better integration of covers– Eliminate the finger pointing between policies
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.8
Infrastructure Ontario
8
Basics of PPP Insurance and Performance Security – A Project Centric Approach
Sponsors
Debt Participants
Equity Participants
Designers
Contractors
The Public
Developers
Procurement Agency
Project-Centric Approach
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.9
Infrastructure Ontario
9
The Goal - No Gaps Between Buckets
Uninsured Risks
All Risks
BuildersRisk
Letter ofCredit
Pollution
Wrap-Up
Sub Default Insurance
Professional
ForceMajeure
Insurance
LiquidatedDamagesInsurance
Surety
ContractorPolicies
RiskControls
RiskControls
RiskControls
Expanded Solutions (PPP/Quality Driven)
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.10
Infrastructure Ontario
The Basics of P3 Insurance
10
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.11
Infrastructure Ontario
11
Basics of PPP Insurance and Performance Security – Products
Common Insurance Covers – A “suite” of core coverages:• COC• Wrap-Up• Professional • PI
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.12
Infrastructure Ontario
12
Basics of PPP Insurance – Alignment with Project Risks• Beyond the limits and deductibles (though they are important too)• Identify specific risks and their impact on project delivery objectives• Determine insurability based on insurance market appetite for risks and
cost for risk transfer• Then design solutions that strike the acceptable balance within the
stakeholder group• This process potentially varies within the main “camps” of a project and
within the stakeholders within these camps:– Sponsor– Project Co
› Lenders› DB Contractors and Designers› Project Co / Equity
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.13
Infrastructure Ontario
13
Basics of PPP Insurance – Key Features • Lenders:
– Financial security ratings of insurers– Control over insurance mechanics
› Control must remain with the party to whom they are lending
– Control of claims proceeds› Loss payable› Insurance Trust Agreements
– Non-cancellation› Except for non-payment of premium, suspension of project or termination of the Project
Agreement
– Non-vitiation– Exclusivity of insurance
› Not shared with risks in which they hold no financial interest
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.14
Infrastructure Ontario
14
Basics of PPP Insurance – Key Features• Sponsors
– Balance between price and coverage, though more is often better so they can transfer more risk
– Alignment with supervening events as it reduces compensation
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.15
Infrastructure Ontario
15
Basics of PPP Insurance – Key Features• Project Co/Equity
– Compliance with specifications – tick the box– Price – low bid still wins in the PPP world
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.16
Infrastructure Ontario
The Basics of P3 Performance Security
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Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.17
Infrastructure Ontario
17
Performance Security Defined
Any security used to guarantee the performance of entities contracted to complete project work
Broader definitions see all security (including insurance) as performance security
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.18
Infrastructure Ontario
18
Key to Contractor Performance Security – Striking the Balance
ContractorBalance Sheet
Constraints
Acceptance ofSecurity by
Debt (and Equity)
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.19
Infrastructure Ontario
19
Basics of PPP Construction Performance Security – The Options
Common P3 Performance Security• Parental company guarantees (PCGs)• Letters of credit
– Traditional and EDC Performance Security Guarantees• Cash reserves• Surety bonds - Traditional performance bond and payment bond• Subcontractor default insurance (Subguard®)
Future Potential Solutions• Liquid surety – Performance bond with loss advance• Cap Assure – DB contractor cover with sub default insurance
NOTE: There are several others (be aware)
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.20
Infrastructure Ontario
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Basics of PPP Performance Security
Some Helpful Hints• Know all the performance security options• Read all agreements to ensure alignment of performance security
requirements• Read the actual performance security documents
– Watch for conditionality that doesn’t conform with agreements• Watch carrier ratings• Use performance security consultants/brokers
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.21
Infrastructure Ontario
The Uninsurable
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Infrastructure Ontario
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Traditionally Perceived Uninsurable Risks…• Defect
– Design, labour and materials• Force majeure
– Strikes, lockout, embargo• Weather events
– Weather events causing pure delay without causing property damage• Economic
– Commodity price, currency and labour cost fluctuation• Delay or cost overrun
– Schedule slippage
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.23
Infrastructure Ontario
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…but the lines are getting blurry• Fifty Shades of Grey…• Lines between uninsurable and insurable are less clear because of
coverage innovation
Case Study No. 1: Construction Defect (Faulty workmanship)• Scenario 1 - During construction defect discovered• Scenario 2 - Defect causes damage to project• Scenario 3 - Defect during completed operationsCase Study No. 2: Project Delay• Scenario 1 – Damage to project during construction• Scenario 2 – Supply chain disruption• Scenario 3 – Contractor or subcontractor failure
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.24
Infrastructure Ontario
When Disaster Strikes – Selected Examples
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Infrastructure Ontario
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When Disaster Strikes – How Insurance and Performance Security Responds
Case Study No. 1: Hurricane Hazel ReduxBackground:• 1954: Hurricane Hazel spills over to GTA, Don River floods• 2007: ORC begins construction of Flood Plain Landform (FPL), taking
area from West Don Lands to Bay Street from the 300 yr. floodplain• 2011: Construction begins of Pan Am Athletes’ Village – an AFP project
and part of major overall waterfront redevelopment in the area• 2011 and 2012: New York City sustains direct hits from 2 hurricanes• What if Toronto is next?Discussion and Analysis:• If coverage properly crafted:
– Flood coverage– Windstorm coverage– Pollution liability coverage
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.26
Infrastructure Ontario
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When Disaster Strikes – How Insurance and Performance Security Responds
Case Study No. 2: Insolvency of Major SubcontractorBackground:• Currently over 20 Social Infrastructure APFs under construction• Valuations into the billions of dollars• On social infrastructure M&E could represent 30% to 40% of contract• In the large space there are limited options for M&E• What if one of them becomes insolvent?Discussion and Analysis:• Focus on performance security
– surety, sub default insurance, LCs, PCGs, etc:• Things to look for:
– Look closely at the wording of the instruments (conditionality is an issue)– Liquidity and responsiveness is vital (secure the people, status of payments)
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.27
Infrastructure Ontario
IOCIP Explained
27
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.28
Infrastructure Ontario
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What is IOCIP?• Infrastructure Ontario Construction Insurance Program (IOCIP)• “Suite” of project-specific construction insurances:
– Builders’ Risk– “Wrap-Up” CGL– Pollution – Professional
• Concept developed and in place since 2008• Transactional construction insurance services on IO AFP infrastructure
projects through a “sponsored program” concept• IO mandates Project Co purchase their main construction insurances
through IOCIP but retains control of administration and claims management
• Over 27 projects and $10.5 billion in construction values have passed through
Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc.29
Infrastructure Ontario
29
IOCIP Benefits• Lower insurance costs – benchmarked at delivering rates better than
30% lower than best-in-market transactions – generating over $35 million in savings since 2008
• More comprehensive coverage – over 90 coverage innovations automatically included – many have rewritten the book on construction insurance in Canada
• Flexibility – all asset classes, all proponents are eligible • Consistency – since inception, no premium increases or reductions in
coverage; program is locked in by contract with insurers
Aon Risk Solutions™Construction Services GroupInfrastructure Services
20 Bay Street, Toronto, OntarioTel:
Thank you