5th Reunion Engineering Insurance Roundtable. June 8-10, 2015, Moscow, Russia

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1 5th Reunion Engineering Insurance Roundtable June 8-10, 2015, Moscow, Russia

2 Content Introduction 2 Participants list 3 Chapter 1. Claims overview 6 Chapter 2. Exclusion of insurance expenses from the construction contracts consequences for the insurance market 26 Chapter 3. Inherent Defects Insurance (IDI), opportunities and the application of this type of insurance in Russia Chapter 4. Assembly from mega-modules a new concept of the construction 44 Chapter 5. Turbine losses technical and monetary challenges 58 Chapter 6. Evaluation of PML for civil and industrial engineering construction case study 76 Chapter 7. Cessation of works 92 Chapter 8. Chapter 9. Insurance of system installation of wind turbines and wind farms; insurance of construction of solar parks Last year s experience and performance features of the pre-insurance survey in the Moscow metro Analytics th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia

3 Ladies and Gentlemen, We are delighted to present the essential materials of the 5th Reunion Engineering Insurance Roundtable, organised and hosted by Reunion AG in June 2015 in Moscow, Russia. As usual, we focused on various topics related to underwriting of engineering risks. While planning the roundtable discussions, we took into consideration our previous experience of running this event. The unique group of participants, who between them represented most of the main international reinsurers and the biggest players in the Russian insurance market including the national reinsurers, offered a very high level of experience and knowledge, especially in the field of construction and erection insurance. On the second day of the event participants took a break from the indoor discussion format and visited a road construction site in Moscow. We would like to pay special thanks to Gefest Insurance Co. for helping us to organize this visit. We would also like to thank all the participants who presented, which also prompted interesting discussions and debate on each of discussion subjects. Acting as an insurance and reinsurance broker Reunion maintains a constant dialog with Russian, and CIS insurers as well as international reinsurers. We believe regular meetings between professionals in this sector are useful for all parties. This roundtable is our small contribution to this process. We hope this publication will be interesting to you and we would appreciate any feedback. You can post your comments and proposals on our website This publication may also be downloaded from our website Best regards, Igor Prandetsky, CEO Reunion AG 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 2

4 Participants list ACE Europe Group Ltd, London, United Kingdom Jean-Francois Rossetto, Senior Underwriter Civil Construction AlfaStrakhovanie JSC, Moscow, Russia Sergei Korneev, Head of the Methodology and Underwriting of Technical Risks Insurance Department Allianz Global Corporate & Specialty JSC, Moscow, Russia Oleg Romanov, Director of Technical Risks Insurance Department Pavel Smirnov-Nebosklonov, Deputy Director Engineering Insurance Department Arab Insurance Group, Manama, Kingdom of Bahrain Peter Tailby, Senior Underwriter Engineering Barents Re Reinsurance Co., Inc., Moscow, Russia Denis Nikolaytsev, Deputy Head of Representation Office British Insurance House Ltd, Moscow, Russia Andrey Tikhonov, Head of Underwriting Department Cunningham Lindsey Zorn GmbH, Wülfrath, Germany Ulrich Mann, CEO and Country Manager Cunningham Lindsey Russia JSC, Moscow, Russia Evgeny Malachinsky, General Director Daniil Cherepanov, Deputy Head of Property Claims Department Alexander Mysnik, Senior Technical Expert GEFEST IJSC, Moscow, Russia Sergey Moskovskikh, Head of Department of Technical Risks Insurance Hannover Rück SE, Hannover, Germany Tomasz Zgadzaj, Underwriter Ingosstrakh OJSIC, Moscow, Russia Radiy Suleymanov, Director of Engineering Underwriting Department, Underwriting Division, Corporate Insurance IIC Euro-Policy LLC, Moscow, Russia Ilya Averin, Head of Engineering Insurance Department Pavel Lipatov, Deputy Head of Property and Liability Insurance Division Munich Re, Munich, Germany Stefan Saur, Engineering & Power Underwriter Polish Re, Warsaw, Poland Michał Żelaśkiewicz, Product Manager Property and Engineering Magdalena Czaja, Team Manager, Chief Area Manager Russia 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 3

5 Rosgosstrakh Ltd, Moscow, Russia Igor Ryzhkin, Head of Property and Technical Risks Insurance Department Reunion AG, Zug, Switzerland Igor Prandetsky, CEO Nailia Jost, Associate Manager, Reinsurance Placements Reunion Insurance Broker LLC, Moscow, Russia Alexander Drugov, Executive Director Evgenia Zaytseva, Chief Executive Officer Roksana Bobrik, Head of Reinsurance Division Russian Reinsurance Company OJSC, Moscow, Russia Maria Morozova, Member of the Board of Management, Head of Business Development and Client Management Department ISLAB LLC (RusSurvey) - in association with Crawford & Company, Moscow, Russia Pavel Shaptsev, Deputy General Director Head of International Programs Department ISES LLC (RusSurvey), Moscow, Russia Dmitry Zagorsky, Leading Risk Engineer of Risk survey Department SCOR Reinsurance LLC, Moscow, Russia Vadim Bogatov, Senior Underwriter P&C Insurance Company of Gas Industry SOGAZ, Open Joint-Stock Company, Moscow, Russia Roman Emelyanov, Head of Engineering Underwriting Division Stanislav Sizarev, Head of Department of Underwriting of Pipeline Transport Swiss Re Europe S.A., Munich, Germany Ulrich Werwigk, Claims Manager Swiss Re Europe S.A., Zürich, Switzerland Franco Ciamberlano, Head EN Mediterranean, Germany, Nordics, Austria, CEE & ME Sascha Gohlsch, Head Engineering CNEE (incl. Russia and CIS) Leonhard Albrecht, Senior Underwriter Transsiberian Reinsurance Corporation OJSC, North-Western Bureau, St.Petersburg, Russia Tatiana Sotskova, Senior Underwriter Unity Re Ltd., Moscow, Russia Svetlana Chepeleva, Deputy CEO Insurance Group UralSib, Moscow, Russia Dmitry Tarasov, Head of Directorate of Underwriting of Corporate Property 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 44

6 Victoria Insurance Company JSC, Almaty, Kazakhstan Sergey Lavrentyev, Deputy Chairman of the Board VIG Re, Prague, Czech Republic Petko Koev, Underwriter VSK Insurance JSC, Moscow, Russia Olecia Ryabova, Director of the Underwriting Department for Construction/Erection Risks and Civil Liability of SRO Members Natalya Kolpakova, Director of the Underwriting Department for Industrial Risks Insurance company «VTB Insurance» Ltd, Moscow, Russia Andrey Morozov, Head of Property and Liability Insurance XL Catlin Reinsurance, Zurich, Switzerland Francesca De Rosa, Senior Underwriter Construction/Engineering Treaty and Facultative Zetta Insurance Company Ltd., Moscow, Russia Anton Kulik, Senior Underwriter Engineering 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 55

7 Claims overview 1 chapter Igor Prandetsky Thank you for coming and your support today. On behalf of the ReUnion team, I have the honor of welcoming you to the 5th ReUnion Engineering Reinsurance Roundtable. We are in Moscow this year and we have the pleasure of welcoming representatives from leading international reinsurers and Russian and Kazakhstan insurance and reinsurance companies. The topic of this session is engineering insurance. Our programme today will start with an overview of claims that have happened since our last event, held in St. Petersburg last year. Then we will discuss an issue very relevant to the Russian engineering insurance market place: the exclusion of insurance expenses from construction contracts. After the first coffee break, we will discuss inherent defects insurance, which is still an issue for the Russian insurance market. After that, there will be a presentation by Allianz called Assembly from Mega-modules, which will highlight new technology, and then another presentation by Swiss Re covering turbine losses. After the lunch break a presentation by RusSurvey will examine how to estimate Maximum Probable Loss in construction. The next topic will cover Cessation of Work and how insurers and reinsurers can deal with this risk. Participant will then look at wind turbines and wind farms installation insurance. Finally, in our last session of the day, we have an interesting report on a pre-insurance survey of the Moscow Subway provided by Cunningham Lindsey. Ladies and gentlemen, as usual I would also like to remind you that the format for today will be a short presentation followed by an open discussion. Please do not treat this event as a conference; it is an open roundtable and everyone s opinion and experience is welcome. Before the main presentations, I will just briefly tell you more about ReUnion. We are an insurance and reinsurance broker but also consultants. We are active in many different lines of business, though our core business is engineering, and we operate in regions including Russia, Azerbaijan, Kazakhstan, Ukraine, and some other regions of the former Soviet Union. We also organize specialist events for the industry. This is the fifth annual engineering roundtable we have held: the first one was in Munich in 2011; the second one in Sochi; the third in Montreux; and last year s event was in St. Petersburg. Now please allow me to invite Daniil Cherepanov, a representative from Cunningham Lindsey, discuss large claims that have happened since last year. Daniil Cherepanov Ladies and gentlemen, welcome to the Fifth ReUnion Engineering Insurance Roundtable. It has become a tradition to start this event with an overview of recent CAR and EAR claims. We will cover claims in the period of settled by Cunningham Lindsey Russia and Cunningham Lindsey, Germany. Ulrich Mann will handle that second part of the presentation. We will first describe our approach to claims handling and the features that distinguish us from the other adjusters. Then we will explain the business sectors that we specialise in and introduce the Specialist Practice Groups before looking at major and complex losses. We will then explore the definition of Major and Complex Losses (MCL) and then examine these losses at a national level. Finally, we will look at examples of CAR and EAR losses handled by Cunningham Lindsey Russia in 2013 and 2014 before showing some particular examples of same handled by Cunningham Lindsey Zorn in Germany in 2013 and We will then offer some conclusions. As the result of decades of work adjusting construction losses, Cunningham Lindsey has invaluable experience and sophisticated knowledge in this field. This has created an understanding of what our clients need, allowing us to deliver the best solutions in practice. There are five key things that set us apart from the other adjusters: our qualified and dedicated adjusters with vast experience in handling construction claims; our global network of locally based construction experts; our experts detailed knowledge of construction disciplines; our quick response and friendly cooperation; and our target-oriented staff who always complete work properly and with due care and diligence. Our range of services includes: advanced loss of profits; professional indemnity; public and employees liability; private finance initiatives; latent defects; delay in start-up; difference in conditions; contractors plant and equipment; multinational annual programmes; business interruption; third-party administration programmes; and captives. Some of the largest and most complex construction and civil engineering projects around the world have been carried out under the care of our adjusters. We have helped implement new engineering approaches and construction techniques and worked with state-of-the-art machinery, which requires sophisticated knowledge and experienced personnel when dealing with complex losses or damage. If there is a lack of a particular skill at a local level, we can call upon the support of our colleagues worldwide. This is how we distinguish ourselves from other adjusters. We find that teamwork is the most effective way to find a solution acceptable to all parties. 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 6

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9 To achieve this, we have specific workgroups in the Cunningham Lindsey network comprising adjusters and engineers from different countries who specialize in the same field, be it power, energy, construction, retail, engineering etc. We have about 150 dedicated construction experts throughout 46 countries united through Global Construction Specialist Practice Groups (SPG). To fully leverage our expertise, we have a new offering designed to deal with high-end major and complex losses by sharing international knowledge and experience. MCL national teams unite professional adjusters, including members of SPGs, in a variety of disciplines including construction. National team adjusters all possess full qualifications and have a minimum of ten years experience handling commercial and industrial losses. At present, the Cunningham Lindsey Group has some 700 MCL national adjusters including 50 international adjusters who handle claims outside their national territories. We define major losses are those claimed or reserved at more than $500,000. Some of the people working in MCL national groups are present today. The Construction MCL Group is represented by Alexander Mysnik and Daniil Cherepanov from Cunningham Lindsey Russia, and Ulrich Mann who is in charge of Cunningham Lindsey, Zorn, Germany. We will now look at some examples of construction losses handled by the MCL group. The first involved a series of losses at the construction of a liquid cargo terminal at the Ust-Luga port on the Baltic Sea. Periodic storms washed out the fill ground and created sink holes at the construction site. The loss occurred in late autumn when daytime is very short in that region. In order to inspect the site during daylight, we had to assign two experts to survey the vast premises. The claim totaled 850,000 and was supported by extensive technical documentation and repair estimates. Experts checked the restoration work and took note of abnormally huge amount of fill used for restoration. Adjusters conducted a geodesic survey, which confirmed their preliminary opinion: the examination showed a lack of fill ground volumes before the loss occurred. No indemnity was ultimately recommended. The next example relates to a meteorite explosion in the Chelyabinsk region in February This Act of God caused damage to a rolling mill under construction at a metallurgical plant. The shock wave following the explosion damaged windows, sliding doors, and wall of steel profile sheet. The insured claimed $650,000. They planned to purchase foreign-made materials for the repair works. Cunningham Lindsey Russia made enquiries in the domestic market and found similar materials at lower prices. Adjusters prepared calculation of loss on this basis and the loss fell below the policy deductible. The result was the insured withdrew the claim. The next project involved the construction of a new port terminal in the Kaliningrad region. A quay wall was damaged after soil subsidence. The insured claimed 300,000 for the replacement of sheet piles and soil banking. In the course of the investigation, it was established that the damage resulted from the faulty design of sheet piles, which was excluded from the coverage. Therefore, the costs of replacing the sheet piles were not covered and the claim related to the soil banking fell below the deductible. No settlement was recommended. The next project relates to the construction of a new plaster board manufacturing plant and mining facility. During commissioning works, the membrane walls of sediment pools were damaged. Experts studied the project papers and concluded that the water mixers were not properly installed and the membrane not properly fixed due to bad workmanship. The claim was for 250,000. The insured planned to replace the membrane, geogrid, concrete pool walls and mixing chamber. Having analyzed the nature and extent of loss, adjusters concluded that the cost of the membrane replacement was outside coverage due to bad workmanship. The restoration of the concrete pool walls and mixing chamber were separate insured events. The costs of replacing the geogrid was covered but fell below the deductible. No indemnity was recommended. The next project involves the construction of a PVC chemical plant. There were a series of losses between April and October 2014 to 500 tools and instruments and there was a further delay in start-up. But each particular occurrence was not properly recorded by the insured. The damages claim was 850,000 while the delay in start-up claim was not specified. The project was widely covered by the media and supervised by the state. Adjusters came under pressure but explained to the insured that the investigation should be done fully and without prejudice, in accordance with Russian law. The Cunningham Lindsey Russia adjusters, in close cooperation with Cunningham Lindsey UK, carried out investigation. They concluded that the loss should be split into a number of separate events due to the different locations of damaged items, the different nature of damages and the different contractors. In the long run, following lengthy negotiations, the insured withdrew the claim. The next project related to the construction of the Olympic stadium in Baku, Azerbaijan. The roof and facade of the stadium were fitted with Texlon foil cushions, 28 of which were punctured by a heavy storm. The estimate to replace the cushions was $500,000 while $50,000 in expenses had already been incurred. The investigation is still in progress, however, it will be considered upon the submission of supporting documentation relating to the incurred expenses. The status of the adjustment is «Pending». Now I would like to hand over to my colleague Ulrich Mann from Cunningham Lindsey, Zorn. Ulrich Mann Good morning, ladies and gentlemen. It is an honor for me to join this ReUnion roundtable for the second time. I am a country manager for Cunningham Lindsey in 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 8

10 Germany. Our headquarters are in Wulfrath, very close to Dusseldorf. We have two additional offices in Berlin and Munich. We have 26 people, 18 of them adjusters and the rest engineers. I would like to talk about a coal fired power plant in the North of Germany. It is typical for as much as 1.2 billion to be invested in this new generation of power plants. This one has a gross power output of 790 MW. It was insured under a typical London market CAR/EAR policy including DSU. Some 54 claims have been made since 2008 but I will talk only about the claims in the last two years. We are always in discussion with the insured companies, and 10 claims had been refused due to faulty workmanship or design. It is our task to translate claims into the London Market. The dotted lines on the slide represent cooling water pipelines. The two red lines lead to the outfall diffuser and the blue lines to the intake riser. It s a distance of 1.7 kilometers. The cooling water pipeline is made of polypropylene with a diameter of 3.4 meters. They are pre-fabricated in 50 meter-long strings and laid and fitted together in sockets. On these cooling water pipelines alone, seven claims were notified worth 40 million. The biggest claim related to the sockets. On 50 out of 70 sockets, gaps were detected by a remotely operated vehicle. There were long discussions about whether they were faulty or not during erection but our investigation showed it was faulty workmanship and design. There is still no agreement but the insurers are happy that there is no DSU claim because repairs take more than six months. The power plant also had a lot of issues with the boiler steel T24, which is a well-known issue, but this was not a claim. The next loss was on the step-up transformer, the biggest type of transformer fabricated at Siemens in Nurnberg. Damage caused by a flash over meant the copper coils melted. Such losses are complex because the transformer weighs nearly 600 tonnes and can only be transported by ship. But waiting for a repair slot in a workshop was more expensive. Because of this, a spare transformer was organized. It was not easy but it was possible. The total material damage was 5.9 million, the cost of the spare transformer included. There was a small DSU claim related to the higher deductible of 90 days. Another loss, though a very small occurrence, caused massive loss to the boiler. A steel sheet fell and made holes in titan pipes. There was only a small amount of damage but these pipes contain sea water for cooling the boiler. The accident caused sea water ingress into the boiler and this caused microcracks on the boiler pipes. The material damage is estimated at 50 million and the DSU will be more than 30 million. The repair will take more than six months. The last loss I will cover involved the collapse of a wind measuring mast. It was not an expensive loss the cost of repair will be around 200,000 but the cause was interesting. This mast was erected in a wind park in the Czech Republic, more than a thousand meters above the sea level. The height of the mast was 170 metres and equipment for measuring wind speed, wind direction, moisture content, and web cameras was attached to it on five levels. It collapsed in the winter but there was no hint to the cause. There was no wind, not a lot of snow fall. But the photos from the web cameras were interesting. Several hours before the mast collapsed they showed ice on the steel profiles. It looked like a deep freezer with an open door. There was very high moister content in the air and the temperature was around zero, which is dangerous. Because of the ice, the vertical load on the mast became too high. That was the cause of the collapse. Daniil Cherepanov Thank you, Ulrich that was very interesting. Now I will make some conclusions. The English say: «One Man, No Man», which means that he or she who works or fights alone cannot cope with the task. The 21st century is the age of development: of telecommunication, technologies and globalization. To be successful this age means having more interaction on a country-to-country level in all spheres of life including economics and insurance. I hope that ReUnion can help with this task. Thank you for attention, your questions are welcome. 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 9

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27 Exclusion of insurance expenses from the construction contracts consequences for the insurance market 2 chapter Igor Prandetsky An important event that took place recently, which substantially influenced the Russian engineering insurance market: the decision by the Ministry of Construction of the Russian Federation to exclude budgets for insurance from construction contracts. Representatives of direct insurance companies in attendance will know more about the implications. There are three representatives of Russian insurance companies here. Would Sergey from Gefest comment? Sergey Moskovskikh I believe all Russian insurers will support me in saying that the decision by the Construction Ministry undermined insurance companies, including CAR/EAR insurance. It was a hasty decision, which can be the Russian way, unfortunately. They addressed the problem of insurance costs in a simple way: no costs, no problem. Insurers had started to respond to the government s call for insurance costs optimization but then this decision was made to leave those costs out of construction budgets. The problem is that, under the Russian law, it is the contractor that must bear these costs as it faces property damage and destruction risks until the project is commissioned. Bearing in mind that construction costs have to be reduced, the contractor can runs out of cash to pay for insurance. As a result, the vast majority of construction companies and certainly those that have taken CAR/EAR policies before and, absent a loss, received no indemnity from insurers, opt out of insurance. Some customers who perhaps realise the contractor will not make a big profit on a construction project also tend to exclude the insurance obligation from the contract. CAR/ EAR business is shrinking as a result. Unfortunately, since CAR/EAR insurance was introduced in Russia, contractors have failed to appreciate its importance. Their assessment is based on a generalized comparison between insurance premiums paid and total remunerations received from insurance companies. Of course, premiums paid are never matched by remunerations, otherwise insurance companies would not be in business. The outcome for Gefest has been a 50% drop in premiums compared with previous years. Igor Prandetsky Thank you very much, Sergey. That is a big reduction in premium income and a very important factor in the market s development. Oleg Romanov While there is hope of having insurance costs back in the construction budget, is it possible to address this problem by including insurance requirements in the contract? Maybe not 1%, as was the case before, but something realistic. Sergey Moskovskikh Efforts are now being made by insurance companies to bring those costs back. The government is beginning to realize they went too far. To reverse the decision work must be done. We need to prove there will be optimization and show how it can be achieved. As for contractor costs, financially, those should be the customer s costs. There is a legislative mismatch which places all risks on the contractor, but it is the customer that determines the initial cost. If that initial cost did not include insurance, given the costs optimization occurring, it is quite possible that the overall number of projects will drop and the market will experience a shortage of work. Bidders for construction contracts will be expected to cut costs, and, as insurance is not included, it would be difficult for them to add to an already limited budget. Igor Prandetsky Thank you. Ladies and gentlemen, who would like to add to the subject? Igor Ryzhkin I would like to point out that CAR/EAR insurance has been the most expensive type of insurance related to construction. As such, it was difficult to sell those policies. After the Construction Ministry issued the letter with the costing guidelines for federal construction projects that included the insurance item, many insurers could make attractive offers to organizations awarding state/municipal contracts. With insurance costs (previously they could be as much as 2% of total construction costs) removed from project estimates, customer organizations lost incentive. We now see some interest among contractor managers but whether the process will come back to normal is difficult to say. I believe what is happening now is irreversible. Should we panic? The tariffs charged in the Russian CAR/EAR insurance market were drifting towards those you find in Western markets. Judging from the information and statistics found on the IMIA website, we are approaching loss ratios similar to the major capitalist economies. 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 26

28 We should seek some kind of self-organization between the major insurance companies offering CAR/EAR insurance products to avoid dumping behavior. In the last six months, a number of large insurance companies have been cutting CAR/EAR policy prices. I think this may trigger a crisis in this line of business. Peter Tailby In Western markets the lender usually insists insurance protection is provided. Are lenders in Russia not concerned about the lack of insurance? Igor Prandetsky It is a good question but what has happened in Russia influences only publicly funded projects. Only government money is affected by this decision so far. But that is a large amount, currently 80 percent of all projects in Russia. A substantial segment of the market has been affected. As far as privately funded projects are concerned, there is no change. 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 27

29 Inherent Defects Insurance (IDI), opportunities and the application of this type of insurance in Russia 3 chapter Denis Nikolaytsev I am Deputy Head of the Barents Re Russian office and the Head of Engineering and Property. I will speak about inherent defects insurance (IDI). It s a very interesting topic but quite tricky here in Russia due to a lack of experience. Today I will give a short overview of IDI what is it and how it works. I will discuss some aspects of underwriting and claims handling and examine some big claims that have occurred worldwide. Finally, I will discuss IDI opportunities in Russia how we could better organize this type of insurance and the obstacles and development issues here. Some of the other terms for this type of insurance are: Inherent Defects, Latent Defects and Decennial Insurance. As with many forms of insurance, there is a historical footprint for it. IDI as a sort of defects guarantee first emerged 3,800 years ago in Babylonia, but the modern view of it is based on the Napoleonic Civil Code (19th century) when the initial legal requirements regarding this guarantee appeared. In the middle of the 20th century, this type of insurance developed mostly in French-speaking regions such as France, Belgium, French-Speaking African countries. In the late 1980s IDI cover was first offered in the UK market and many economically advanced countries followed in developing this type of insurance. There are four markets where this type of insurance is growing and developing. The first is in countries where there is no compulsory builder s liability for insurance of this type. Secondly, countries where the law does require builders liability are seeing growth. These include the Netherlands, parts of Canada, Jordan, the Philippines and Russia. I included Russia because now we have some legal requirements regarding contractors liability insurance, which is a first step to developing compulsory lines. The third type of market is where compulsory builders liability does exist but there is no compulsory reinsurance. But some of these countries have a well developed voluntary IDI market. Finally, the most advanced group of countries is where there are both voluntary and compulsory insurance markets. There are two main ways IDI can develop: because of legal requirements where a contractor is forced to insure such liability, and from the bottom up when the market proposes solutions and products. IDI covers damage to property caused by defective design, materials or workmanship undiscovered at completion. This type of insurance is quite complex. It includes so-called non-pd claims where there is a defect but no property damage. It could be because of a lack of performance such as, for example, poor sound-proofing, waterproofing or quality of glass. Where IDI is applicable? It is used for commercial buildings, residential properties, social housing developments, self-build projects and completed housing & commercial projects. This type of insurance is applicable to privately financed projects. The basic coverage includes structural defects, water damage, subsidence, the threat of imminent collapse and work to prevent damage caused by a defect. There are two types of coverage: basic and extended. Basic includes total or partial collapse and the solidity/ stability of the structure. Additional coverage could include the waterproofing of roof and walls and seepage. This line of business is complicated. A lot of effort should be made to underwrite everything in a proper manner, to investigate all possible risks, and to provide a client with a really effective solution. Here are some basic underwriting principles. First of all, you need strict and constant engineering monitoring at every stage of construction even in the pre-construction period. Second, you need the application of comprehensive statistic information available worldwide. Third, full risk information must be provided including equipment specifications. Forth, you need adequate rates, deductibles and sublimits, which in emerging markets should be based on global statistics. Fifth, there is an issue around the period of this coverage. It is usually a ten-year policy, but in some markets it is possible to insure IDI risks on an annual basis as an extension to a CAR policy. Finally, the coverage of costs associated with avoidance of further imminent damage can be an issue. There are many underwriting aspects to consider and they very much depend on market specifics and experience. So, how does this policy work? If the insured is the principal or owner of the building, the typical IDI period is 10 or sometimes 20 years. The insurance premium plus audit costs totals around 1 percent of the value but it varies globally. I will offer some of things to remember. The policyholder does not have to prove the negligence of a third party. A policy is taken out at the start of a project and does not need to be renewed. It is an important issue because a policy cannot be cancelled even in the case of a loss. If it is taken before construction, it lasts until the end of the period. A policy is not affected by the insolvency of any member of the construction team. All projects should be subject to an engineering audit performed during all stages of construction by highly experienced engineers. Finally, design documents should be audited and onsite inspections performed throughout the construction period. 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 28

30 The main exclusions are quite standard: anticipated or planned for movement, settlement or expansion; abnormal use of overloading; wear and tear or inadequate maintenance; ageing and damage to surface coatings; and there are some standard exclusions around contractual obligations, politic risks, nuclear and electronic risks. There are some optional additional covers that insurers may propose to their clients. The most interesting, and risky, is the loss of rent or income. It is a sort of BI cover that can be extended for: removal expenses; the cost of working from alternative premises; waterproofing above and below ground; an annual indexation of the sum insured and excess; the waiver of subrogation rights; phased cover; and cover for non-structural components including mechanical and electrical. There is also an interesting product called MIDI (Machinery Inherent Defects Insurance), which can be purchased in addition to the general IDI policy, although it does not exist everywhere. The biggest market for this product is the UK. MIDI is designed to insure inherent defects in different types of equipment and machinery including boilers, heaters, water supply and sewage systems, ventilators, lifts and escalators, building maintenance units and different types of electrical and electronic systems within the building. This coverage is only available for new buildings under construction, shell and core building refurbishments, and buildings less than two years old. It is an interesting product that needs to be underwritten and assessed by engineers because, as you know, commercial buildings are all very different and the equipment installed may not be adequate. So it s very important to have all the information to hand and make an assessment before installing such equipment. The claims handling process can be tricky in IDI because of a lack of practice both judicial and insurance underwriting practice. There can be obstacles to defining the reason for a defect and this becomes more difficult with time. The involvement of professional surveyors can be restricted in some types of construction. The study of a loss calculation and documentation could be complex because of an absence of such documentation or restricted access to a site. There may be cases of insurance fraud after several years of operation. All parties must minimize possible damage and defect expansion. This can be tricky. Here are some examples of what can happen. You might find defectively designed floor slabs or walls, the omission of wind posts, subsidence, defective cladding, a failure of basement tanking, a failure of the roofing, or a failure of a rain screen allowing water to penetrate. Interestingly, in some markets (mostly French-speaking markets with a long history of this$ type of insurance) IDI sometimes covers a peril called unfit for its intended purpose (non-pd claims). These can include: inadequate sound-proofing, inadequate insulation against excessive solar heat, inadequate air-conditioning, an inadequate number of lifts in an office building, inadequate emergency facilities. I will now share with you some incidents and claims we have seen. A very famous one was the collapse of Royal Plaza Hotel in Thailand. In ten seconds, the huge six-story building was totally destroyed, with 137 people killed. The problem stemmed from the fact it was initially built as a fourstory building in Two years later, two more were added without properly considering the structure and soil stability. There were two conferences being held at the same time and, because the structure was overloaded, the building collapsed. Another famous incident was the collapse of a part of the terminal at Charles de Gaulle Airport in France in May There was fast cracking and deformation of the section and six people died. The defect was due to defective materials and faulty design. A very famous incident in Russia was at the Transvaal aqua park. In 2004, the roof collapsed due to excessive snow load and faulty design. The chief architect was found guilty but pardoned in an amnesty that marked the anniversary of Parliament. The next example features the collapse of a trade center in Riga, Latvia. It is a famous incident because of the good quality of the project. Many respectable international companies were involved in the construction process. But the roof and two walls collapsed and a lot of people died. The next one is very interesting because it is example features a type of a non-pd claim. It involved the so-called Walkie-Talkie skyscraper in London or Fryscraper as Londoners called it. In the summer of 2013, solar glares and reflection from the building caused some minor third-party damage to vehicles, bicycles and doors were damaged. A fault in design was discovered, namely that the solar glares were six times brighter than direct sunlight. Interestingly, there was no damage to the building, only third party damage. But the defect was covered and fixed by installing a permanent awning on the south side of the higher floors, plus some non-reflective film was glued on the glass surface. To summarise, I believe that in Russian there are opportunities to develop this line of business. It is difficult to expect the government to develop this new line, which is complex. But I believe insurers will create effective products and propose it selectively to clients. Such a product would be supported by international practice based on international statistics, and supported by risk engineers and reinsurers. It will be interesting to hear other views from Russian insurance companies and international reinsurers. Igor Prandetsky Thank you, Denis, for a great presentation. I think there is no doubt that this product is needed as additional protection for property owners. We are always asked: what happens when CAR/EAR policies expire? I think IDI is a subject of 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 29

31 discussion in professional circles. I would be very interested to hear the opinions of others. Radiy Suleymanov Last year we had a discussion around engineering risks coverage being within the framework of existing long-term warranty programmes. CAR/EAR policies include a poststartup warranty coverage extending between three to five years. Our Western partners have said this is not an engineering risk but another class of business. And such risks are difficult to assess because they are extended over time. If there were defects in the construction phase, even with the best engineering survey, one can hardly assess the probability of impacts that can materialize five or seven years later. And this is just one limitation. But it makes it very difficult to introduce this type of insurance in Russia. Price is another challenge. Under an annual property damage policy, the insured will normally pay 0.015% % p.a. on the all risk property damage terms. If the IDI price is 1% over 10 years then it s 3 to 5 times the price of a standard PD programme in Russia, with a comparable sum insured. Will the owner want to buy insurance which is so expensive? Igor Prandetsky But there is a difference in coverage. Radiy Suleymanov There certainly is. And coverage has its problems as well: it is very broad, encompassing damage to the final project, during the operation phase and third party damage, including financial risks associated with loss of profit. This is a comprehensive coverage. I see two problems. One is adequate risk assessment in Russia and the lack of a long claims history, and the other is unclear legal regulation. We have just seen examples of losses but no loss ratio statistics in countries where IDI is obligatory. Knowing those figures would be useful to help understand how premium collection in those countries correlates with claims paid or reported, and whether the suggested tariffs are adequate. I know it works where it is obligatory. But we have been discussing voluntary insurance in Russia. So I cannot definitely expect it to work in Russia any time soon, even with regulation being introduced which obliges selfregulated organisations to buy liability insurance. This type of insurance is very different from the scope of coverage offered through this product. Igor Prandetsky What might drive this form of insurance forward, the availability of insurance or clients requirements? What are the necessary circumstances for this product to work in Russia? Radiy Suleymanov At present it is problematic. Ten years ago, we thought about launching a similar product but we found there was no demand. We see many issues with the quality of construction work and materials, permits issue procedures and construction practices. The customer cannot have an independent engineer at every construction site to record irregularities and issue recommendations. He cannot be sure that irregularities will be fixed. And highly skilled specialists are in short supply anyway. There is a general skills shortage. The other unanswered question is how you evaluate damage and set tariffs so that they are consistent with the expected loss ratio. For these reasons it remains unclear to us that this product will be in demand in Russia. I believe it will not, for now. Igor Prandetsky I would like Oleg Romanov to share his opinion. Oleg Romanov I believe the environment for introducing this type of insurance is getting increasingly conducive. First, our government is giving up its support function to fix many types of problems, starting with health and education. It may stop paying compensation for losses emerging from buildings and structures. So who will pay for such losses if they are caused by construction defects? The government is working on a solution to cover such losses. Second, you pointed to a lack of statistical data and, hence, an inability to calculate tariffs. Why don t you take data from the Western market, analyze it and use it as a starting point on pricing? Then just make adjustments. Third, I believe this type of insurance should be made obligatory in Russia to ensure there is a guaranteed pool of premiums. It should be based on a general obligation, supported by a control mechanism and independent engineering supervision. You mentioned skills shortage. The skills are there but because of low demand they tend to disappear. There are plenty of professional engineers here, they are just not paid enough and they seek jobs elsewhere. As soon as their services are in demand they mobilize very quickly. Igor Prandetsky There was a similar situation with valuation: when demand increased, valuators emerged in great numbers. Francesca De Rosa I wanted to share the Italian experience. In Italy, the product has been available since the 1980s. It was not compulsory and it was therefore only sold where it was compulsory in a contract. 5th Reunion Engineering Insurance Roundtable, June 8-10, 2015, Moscow, Russia 30

32 For the past15 years it has been compulsory for all public work ranging from buildings to harbors to tunnels a wide range of engineering projects. I agree the engineering skills are available, but the statistics, especially for Italy, are not so reliable. There are accounting issues you must also consider because it depends on how you account for claims. In addition, there are new technologies that engineers need to be being updated on. In the Italian market, the technical inspection surveys during construction have been critical. When you link the activation of the coverage to the results of a technical inspection, you have an advantage because if a loss happens you have detailed reports from the construction period. Finally, our experience is that many contractors are not working anymore since the crisis. The deductible has to be taken into consideration because you cannot always charge it to the owners. Igor Prandetsky Thank you very much, Francesca. I will ask Vadim to share ideas on that. Vadim Bogatov I see some prospects for this type of insurance in Russia. As for tariffs, by the way, the difference is not 50 times, it s somewhere around five. Taking your example with 0.02% annual and 1% decennial, the difference will be just five times. SCOR offers this coverage in many countries including Western Europe. We have some experience that my colleagues will be happy to share. It has a future in Russia but only if, as Oleg said, the product is launched on a mass scale. Western reinsurers are unlikely to be interested in a few occasional projects but they will be encouraged by a trend and that will lead to the accumulation of a certain volume of reinsurance premium to sustain this new product on the Russian market. Igor Prandetsky Vadim, what will it take to offer this product on a mass scale? Vadim Bogatov One of the key drivers would be the introduction of obligatory inherent defects insurance. It could be just five years to begin with. If it is voluntary, I don t think it will work. On the underwriting, as Denis pointed out, one needs to see project data before execution begins, that is, before any excavators dig a foundation pit. I have the impression it is possible in Russia to start construction work before permits are obtained. So both insurers and reinsurers will face a dilemma when the client says: I have the foundations laid, now I want insurance. Igor Prandetsky As legislative support appears vital for this type of insurance, can the insurers/reinsurers do something to make the legislators aware of the need? Vadim Bogatov My colleagues from SCOR have visited Russia to meet with ministerial officials and present this type of insurance cover. Western reinsurers are certainly interested. They could help to lobby for the product. Anton Kulik Since this type of insurance is somewhat unusual in Russia, is there a generally accepted wording for it, similar to the Swiss Re and Munich Re wording for Contractors All Risks. SCOR has such wording, but do other major players? Franco Ciamberlano Before considering the price and deductibles it is important to define the cover and how you want it to apply. We are talking about inherent defects insurance, decennial, which is related very strongly to France, and latent defects. All those policies have different cover extents. We are also talking about basic cover like collapse and the imminent threat of collapse, based only on loadbearing parts. Do we cover things like non-material damage or not-fit-for-use risks, which are completely different? If you are talking about inherent/latent defects insurance, first establish the coverage you really want to have. There are standard wordings including Swiss Re s IDI and SCOR s wording. But it s important that you define that right from the beginning. Having said that, IDI is linked to a legal obligation in many countries so that in France, you have to go with the French wording, in Italy you have to go with the Italian wording. In other countries you can go with a standard policy and try to do it on a non-legal basis. But it is then much more difficult to sell. What is the motivation of different countries to introduce IDI? The motivations seem completely different. In France there were some problems with the collapse of homes, which led to this being introduced. In Spain, it was because a lot of British citizens wanted to buy a second home in Spain but they did not trust Spanish construction methods. They wanted additional coverage and that s why IDI was developed in Spain. In Italy it was a completely different motivation. We have problems with corruption on sites, especially in statefinanced projects. 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