18 March 2015

Meggyn Marot | Principal BrokerAon Professional Riskst +27 11 944 7914 | f +27 86 639 2771meggyn.marot@aon.co.za

About Aon

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#1 Rated risk services broker, reinsurance intermediary, and human resource consulting and outsourcing provider

66,000 Number of Aon colleagues around the world

500 Number of global offices

120 Number of countries

$11,8B Total revenue generated by Aon in 2013

There is a 1 in 2 chance that your mobile phone was produced by an Aon client Aon clients are responsible for designing and manufacturing 70% of the world’s 20 best-selling

pharmaceutical products Aon placed film insurance for five of the Oscar winners at the annual Academy Awards. In total Aon

placed insurance for 16 of the 26 Academy Award-nominated films Aon has the largest share of the worldwide space insurance market One in every 2 bananas in the world is shipped by a company insured through Aon Seven of the world’s top 10 airlines are Aon clients

Aon Beauty in Numbers

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Our Global Presence

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Large multi-national groups Large national groups Medium – large organisations State owned enterprises Small organisations Individuals

Client Profile

15 Branches (incl. Sandton & Roodepoort locations)

Aon South Africa

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State of the professional indemnity market

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SA building industry has been in a slump for the past 7 years not being able to recover from the robust growth experienced in the build-up to the Soccer World Cup. Investment in building contracted in 2008 and plummeted in 2010 by 11.8% . Since then average increase of 0.2% in 2011 to 2013.

Q1 2014 worsened as investment in non-residential buildings slowed to 0.6% and the decline in residential buildings quickened to 3.1%.

Business confidence continues to move sideways which dampens the outlook for private sector investment. SA needs to show more meaningful and sustained recovery. For this to happened shelved projects need to get of the ground.

The civil engineering industry in SA didn’t show any real benefit in the run-up to the 2014 elections as experienced in the previous elections in which tender activity increased. The slow start to the economy , weakened by labour strikes and contraction in the manufacturing sector raised fears that government will not be able to deliver on the promised infrastructure programme in the 2014/2015 budget speech.

The industry remains challenged with the slow roll out of projects, further threatened strikes, low industry confidence combined with economic uncertainty may result in a lower than expected turnover in 2014 and a stronger than expected slowdown for 2015.

The slow rate of growth in the industry directly influenced the moderate growth on fee turnover of some of the CESA member firms in 2014 with moderate increased revenue forecasted for 2015.

Local Market Overview

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The decade long soft market ensured rates remained largely flat in most instances in 2014 but have decreased moderately on profitable risks to as much as 10% due to increased competition in the market. Firms with reduce fee income experienced reduced premiums.

Nominal rates increases experienced by firms with adverse loss ratios and higher minimum deductibles imposed on certain risks.

Insurers in 2014 continued to incentivize firms for adhering to a QMS qualifying for a 25% discount on the deductible payable on a claim. Firms have definitely seen the benefit in these incentives.

Firms that limited their liability in terms of a professional services agreement qualified for a 50% discount in the deductible payable on a claim.

Where a firm finds itself qualifying for both on a particular claim then a 75% reduction in the deductible payable becomes applicable.

PI claims are long-tailed and mature after 60 month period. The 2005 to 2008 on average remain profitable years for insurers as they attempted to recover from the huge losses in the preceding years which ran at loss ratios in excess of 150%.

Post the construction boom claims frequency and severity increased significantly.

Local PI Market Overview

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Claims trends: inexperienced engineers and lack of supervision, inadequate or lack of site supervision, fast tracking of projects, cost overruns and failure to clearly define scope of services at contract stage. Legal defence costs incurred by insurers have increased significantly especially Arbitration costs.

Current unresolved large claims under project specific PI policies combined with an increase in PI claims across the professions together with the CESA Structured Portfolio claims are bound to influence the local market adversely however there are no immediate signs in the short term of the market turning to a hard cycle.

2005 and 2006 year of insurance matured and expected to conclude with a loss ratio of 87% and 85% respectively.

2007 closed with a loss ratio of 26%.

2008 and 2009 have matured and is expected to close at 21% and 122% respectively.

2010 - 2014 year haven’t matured as yet however 2011 is of concern with current incurred loss ratio’s of almost 200%.

Last 12 months Insurers have paid R23,000,000 in claims and legal defence costs on the CESA Structured Portfolio.

The CESA Structured Portfolio was underwritten by Stalker Hutchison Admiral on behalf of Santam.

Local PI Market Overview

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Capacity in the PI Market1. SHA

2. Leppard

3. GPLA

4. Manwood

5. AC&E

6. AIG

7. Camargue Underwriters

8. Hollard

9. Zurich SA

10. ACE Insurance

11. Arch Insurance

12. Allianz

13. Abelard

Total

R 500,000,000

R 200,000,000

R 50,000,000

R 35,000,000

R 100,000,000

R 100,000,000

R 100,000,000

R 250,000,000

R 400,000,000

R 200,000,000

R 100,000,000

R 300,000,000

R 50,000,000

R2,385,000,000

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CESA PI Structured Portfolio Premium Collected

Year of Account

No. of Policies Nett Premium Gross Fees Premium as %

of Gross Fees

2005 355 R 31,911,493 R3,100,000,000 1.03%

2006 381 R40,516,012 R3,929,000,000 1.03%

2007 380 R48,182,273 R4,846,000,000 0.99%

2008 387 R54,604,156 R6,347,000,000 0.86%

2009 369 R48,337,601 R9,456,000,000 0.51%

2010 356 R43,515,438 R9,714,000,000 0.45%

2011 362 R39,393,556 R7,802,000,000 0.50%

2012 377 R34,566,424 R8,768,000,000 0.40%

2013 387 R29,935,247 R9,183,000,000 0.33%

2014 380 R30,000,000 R9,000,000,000 0.33%

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CESA PI Structured Portfolio Claims

2012 Design error- electrical reticulation R 2 642 979 Design error – cooling towers R 1 603 905 Design error – roof collapse R 1 418 185

2011 Design error – commercial structure R28 500 000 Design error – commercial structure R28 500 000 Error in specification of damp proofing R 1 608 008

2010 Design error – runway R 4 390 350 Design error – commercial structure R 3 817 327 PM error – excess material ordered R 2 343 442 Desgn error – underdesign of columns R 1 643 859

2009 Cost overrun R17 522 910 Design error – structural steelwork R 7 859 493 Design error – structure- staircase R10 028 493 Design error – fuel pipeline R 5 276 582

2008 Defective design – pavement failure R 1 737 698 Delay damages claim R 936 287 Design error – electrical specification R 800 000

2007 Inadequate design of slab R 5 286 796 Design error in block paving R 1 623 755 Error in design of floor panels R 757 361

3 Largest Claims (2007 – 2012)

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Net Premium Against Claims Incurred 2005 - 2014Mil

0

5

10

15

20

25

30

35

40

45

50

55

60

2005 2006 2008 2009 2010 2011 2012 2013 2014

Net Premium Claims Incurred

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Accumulated Premium Against Claims Incurred

Mil

0

50

100

150

200

250

300

350

400

450

20052006

20082009

20102011

20122013

2014

Net Premium Claims Incurred

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Number of Claim Notifications

0

20

40

60

80

100

120

2005 2006 2008 2009 2010 2011 2012 2013 2014

91

72

119

107

54

95

85 85

33

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Claims Split by Disciplines 2005 -2014 ( 835 notifications)

Structural/55%Civil/25%

Mechanical/3%

Electrical/5%

Project Management/5%

Fee Recovery/4% Other/3%

Structural

Civil

Mechanical

Electrical

ProjectManagement

Fee Recovery

Other

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Claims Incurred by Disciplines 2005 – 2014 (Total Incurred R280,000,000)

Structural/40%

Civil/50%

Mechanical/2%

Electrical/3%

Project Management/3%Fee Recovery/1% Other/1%

Structural Civil Mechanical Electrical Project Management Fee Recovery Other

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66%

22%

12%

Civil & Structural Mechanical & Electrical Other

Contribution to Premium Pool by Disciplines

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Notifications by stage of Project

Design Stage 50%

Construction Stage 25%

Establishment of Site 16%

Incomplete Brief / Definition ofServices 4%Others 5%

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Claims by method of resolution

Negotiated Settlements 85%

Judgements 8%

Expert Determination 2%

Mediation 5%

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Broking services - Underwriting team

Claims handling

LRMS Team

Limits of indemnity – trend by CESA Structured Portfolio members to take higher deductibles to get premium saving on the back of the QMS and limitation of liability discounts.

Retired Sole Practitioners:- PAID FOR BY AON SOUTH AFRICAInsurer : Santam Limited Limit of Indemnity : R5m EECDeductible : R25 000 EEC

2015 CESA Structured Portfolio

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Member firms with adverse loss ratios will either see a nominal rate increase or a higher minimum deductible imposed or both dependant on the extent of the loss ratio. This will lessen the impact on cross subsidisation within the CESA Structured Portfolio.

No rate increases with moderate rate reductions on profitable risks by way of magnitude growth discounts.

Greater discounts afforded to firms that have greater appetite for large deductibles. Coverage is for legal liabilities that the Insured becomes legally obliged to pay in the conduct of

the business and/or profession Coverage is for negligent acts or omissions in the course of the practice and is on a “claims

made” basis i.e. The policy that is in force at the time the claim is made (or in place when potential claim first notified) responds to the claim. This is subject to the retroactive date as stated on the policy schedule.

The policy is based on a “Claims Made” Wording. Limits of Indemnity and Deductibles are in respect of each and every claim and inclusive of

costs and expenses. Deductibles payable will only be applicable against damages and not to legal defence costs.

Pollution is not covered, unless it is caused by a sudden, unintended and unexpected happening or arising out of your services.

Jurisdiction: Worldwide excluding USA & Canada and all countries that operate under the laws of North America.

2015 CESA Structured Portfolio

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The following extensions are included:– Your liability arising out of Sub-contracted Duties– Your liability arising out of your participation in a Joint Venture or Consortium– Liability following employee dishonesty Follows PI Limit– Fee Recovery R1 000 000– Loss of Documents R1 000 000– Criminal & Statutory Defence Costs R5 000 000– Defamation R5 000 000– Wrongful Arrest R5 000 000– Mitigation of loss Follows PI Limit– Rectification costs extension Follows PI Limit

Public Liability cover provided at no additional cost and will follow the PI limit on an each and every claim basis.

This policy continues to provide the extension to the PI policy relating to liability arising from appointments as Health & Safety agents.

A defects in contract works extension to be included for EPC, EPCM and turnkey type appointments on a case by case basis.

2015 CESA Structured Portfolio (continued)

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All Sub-Consultants need to have their own Professional Indemnity in place, you need to review their cover on an annual/regular basis. Should their PI cover not been in place this could affect cover under your Professional Indemnity for your company.

Directors & Officers liability insurance as protection against the new Companies Act will be offered as an option via a separate standalone policy were requested.

Continue to provide products liability cover for protection against the Consumer Protection Act subject to a sub-limit of R2m in the aggregate

Dispute resolution clause to be included providing for an independent review by a senior Advocate on difference in interpretation of the insurance policy.

QMS compliant member firms looked upon more favourably. Currently 70% of member firms who are clients of Aon have declared that they have a QMS.

25% discount on deductible for QMS adherence continued to be offered. 50% discount on deductible payable on claims were liability has been capped in terms of a

written professional services contract to a multiple of the fee earned or a fixed amount. 75% discount for firms who qualify for both incentives.

2015 CESA Structured Portfolio 2015 CESA Structured Portfolio (continued)

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CESA Structured Portfolio will continue to be underwritten by SHA as the premier insurer of choice and alternate markets will be approached as and when required by member firms.

Case Studies – Ivor Evans

Participation on following:i. Representation on the Quality and Risk Management Committeeii. Representation on the Supply Chain Management Committeeiii. Representation on the Construction Regulations Task Teamiv. Representation on the FIDIC Risk and Liability Committeev. CESA Legal Forumvi. Risk Management to Individual Firmsvii. Quarterly reporting on claims experienceviii. Collaboration with the school of Consulting Engineersix. Indentifying, formulating and disseminating Case Studies on professional liability claims.x. Assist CESA with the revision of advisory notes when required.xi. Sponsorship of the Excellence Awards.xii. Place and pay for the sole practitioners run-off policy

2015 CESA Structured Portfolio (continued)

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Limits of Indemnity - CESA (387 Firms)

R2mil Cover 10%

R2.5mil to R5mil Cover 30%

R5.5mil to R10mil Cover 33%

10.5mil to R25mil Cover 20%

Above R25mil Cover - 7%

R2mil Cover R2.5mil to R5mil Cover R5.5mil to R10mil Cover R10.5mil to R25mil Cover Above R25mil Cover

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Legal Risk Management Services (LRMS)• The Legal Risk Management Service (LRMS) continues to grow with the demand for the service, and

consists of:

Siva Naidoo (Senior Legal Risk Advisor); andSamantha Jordaan ( Legal Risk Advisor)Meggyn Marot (Principal Broker);

• The number of contractual queries dealt with had increased in 2014. In the last year LRMS has vetted in excess of 570 contracts for various consulting firms. These reviews have included issues such as letters of appointments, joint venture and sub-consultancy agreements, signing duty of care undertakings to client’s financiers and appointment of Consultants as OHS Agents.

• This year we have continue to focus our efforts on collaborating with more private bodies which impact on the built environment professionals, in particular large corporations who regularly procure the services of professionals, to ensure that their documentation is appropriate whether in the Financial, Health or Mining sectors, and I believe we have been quite successful.

• Several very important Practice Notes are in the process of being reviewed and we continue to be available to CESA’s Contractual Affairs Manager for queries members may have, including those of a statutory nature. We remain part of the CESA Legal Forum which is an effort to use the collective knowledge of various firms legal advisors to assist CESA in promoting good legal risk practices for their members.

LRMS continues to present road shows to various member firms with various risk awareness topics exposing hundreds of Professional Engineers to crucial risk management issues. The presentations are accredited with Continued Professional Development (CPD) points, and we will continue with these and new presentations on topical industry related subjects, going into 2015. A pertinent topic we have created awareness on is the new Construction Regulations.

Further to the above we continue to remain in touch with the industry through our involvement in various committees of CESA and FIDIC.

LRMS have had an enormously positive response from members, who have found the information and service we provide, invaluable in their operations and Legal Risk Management Services remains one of the many advantages of being a CESA member.

For 2015 we are poised to take on the tremendous growth we experience each year with fresh approaches, through technologies available and annual seminars will be reintroduced in each major city centre and we aim to ensure that we reach each and every member of CESA who are Aon clients.

Legal Risk Management Services (LRMS)

Conclusion

The past decade has seen a sustained soft cycle in the PI insurance market which has bottomed out over 2013 and 2014.

This is due to an oversubscription in capacity in the local PI market.

Although claims frequency and severity are on the increase there seems to be no immediate signs of a turning market and therefore predict a soft market in 2015 as well.

We predict that this soft cycle will continue certainly for the next few years unless a major catastrophe affects the global liability market.

The question that remains is how long the PI industry can sustain the current persistent low rates which points at unsustainable levels. This is anyone's guess at the moment.

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