Project Finance & Insurance. Christopher Cook November 2012

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1 Project Finance & Insurance Christopher Cook November 2012

2 JLT SpecialtyLimited Financiers Insurance Due Diligence Team - Jardine Lloyd Thompson Group largest non USA insurance broking & consultancy globally - JLT Group 5,000 plus, JLTL 800 plus. - FIDD: 8 dedicated Lender Insurance Advisory consultants; - Well over 400 mandates undertaken by current team members collectively; - All sectors (Infrastructure, Natural Resources, Energy, Process Industries, Petrochemicals, Power, Renewables, & Space); - Primarily EMEA, but global (EX USA except offshore wind).

3 JLT Specialty Limited Financiers Insurance Due Diligence Team - Peter Le Vey (30 years); - Crispin Blakey (41 years); - Nick Smith (35 years) - Christopher Cook (26 years); - Martin Dockrill (24 years); - Peter Symes (23 years); - Sabbir Khandokar (10 years) - Monika Takuska (8 Years) - Average = 22.3 years in insurance

4 Project Finance & Insurance

5 Insurance participants in a Project Financing Lenders Insurance Adviser Insurance Adviser LENDERS Loans Interest & Repayments Dividends Investors/ Sponsors Capital Unitary Payment Concession Agreement AUTHORITY Facility Services SPV Building Contract Insurance Broker O&M Contract Construction Claims Insurers Premium Operation and Maintenance Insurance Adviser Insurance Adviser

6 Structure of an Insurance Policy Schedule Insured parties Period of insurance Business and/or property insured Deductibles Sums Insured Operative Clause Exclusions Extensions Conditions (express terms, conditions precedent, and warranties)

7 Material" Project Insurance Revenue Asset Consequential loss: Delay in Start-up / Advance loss of revenue Business Interruption Insurance Material Damage: Construction Erection All Risk / Property Damage/Industrial All Risks Insurance Liability Third Party Public Liability Insurance

8 Breadth & Scope Exclusions Deductible levels As wide as is available at reasonable and commercial terms but taking into account contractual and technical risk mitigation (e.g. contractor creditworthiness and ld regime).

9 Breadth & Scope Non Political Force Majeure (Earthquake, Storm, Flood, F,L,EX, A); Political Force Majeure (S&T, SRCC, Munitions, War) Non Force Majeure (accidental damage, breakdown, Defective design, plan specification or workmanship etc); Design Risk Interfaces EMLs

10 Asset Insurances CAR / MD Cost of reinstatement Additional coverage includes: Temporary repairs Shoring up Debris removal Plans and documents Professional fees Authority requirements Inflation on incomplete works Inflation on reinstatement value Expediting expenses Additional Costs of Completion

11 Marine Cargo Insurance

12 Revenue Insurances DSU / BI SPV loss of Gross Revenue less variable costs i.e. to cover debt service? (Sustained loss) Key issues: CAR or MD policy triggered SPV and Financiers interests only Indemnity Period DSU / BI Deductible Additional exposures such as alternative accommodation or alternative waste transport costs insurable here

13 Project Company Control DSU Why not Contractor or supplier? Procurement issues: Replication of Insurance Requirements from Loan Agreement into Contract (including counterparty ratings) - Time consuming, painful; Negotiating scope of cover, policy wording, lender clauses via Contractor s brokers etc Time consuming, painful, delay FC; Cost control highly problematic; Surmountable obstacles?

14 Third Party Legal Liability Project derived legal liability of the Insured arising from: - Third Party Property Damage - Third Party bodily injury Best practice is covering all project parties in Construction Gives comfort of quicker claims handling (less concerned in Operational phase) Cross liabilities extension needed Contractual Liability should be included

15 Lender Clauses Waivers Waivers of rights of subrogation (including vitiating acts?); Waiver of rights of offset; Waiver of duty of disclosure (Finance Parties); Waiver of rights of contribution; (Waiver rights of average/underinsurance).

16 Lender Clauses Vitiation and non invalidation Risk of non compliance with implied and express terms and conditions especially duty of disclosure; Non Invalidation protection and restriction of insurers rights against the party that invalidates.

17 The Insurance Market Cycle Macro Movements Tohoku (Japan) Earthquake and Tsunami Christchurch Earthquake Brisbane Floods The Underwriter July 2003 SCOR and Gerling downgraded to BBB+ (since been upgraded again) Feb/July 2003 Independent June 2001 HIH March 2001 Reliance NIC Jan 2001 Copenhagen Re UK Dec 2000 ARIG 22 Dec 1999 Impact Doubling of premium from soft to hard market in Healthcare Increase of perhaps 50% on road transportation Schools vary but still significant variation dependent on cycle Total explosion Toulouse 21/9/ th September 2001 Sri Lanka Airport July 2001 PetroBras Rig sinks April El Nino 2000/ (Europe Floods)

18 The Market Cycle Increased capacity Increased surplus Increased competition New Investment 5-7 Years Reduced rates Broader coverage Increased profit Increased rates Reduced coverage Key Variables Interest Rates Catastrophes Legislation changes Investment income Reduced profit Reduced Investment Reduced competition Reduced surplus Reduced capacity

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21 Project Finance & Insurance Q&A