INSURANCE : AN EFFECTIVE RISK TRANSFER VEHICLE

1. INSURANCE: AN EFFECTIVE RISK TRANSFER VEHICLE PROJECT RISK MANAGEMENT & ALLIANCE FOUR POINTS BY SHERATON HOTEL SHANGHAI, CHINA OCTOBER 22-23, 2009 CARLOS H. YTURZAETADirector, E&RM Phils., Inc.

2. PRESENTATION OVERVIEW PROJECT RISK MANAGEMENT & ALLIANCE • Presentor’s Perspective • EPC Projects/Types of EPC Projects • EWRM: Foundation of INSURANCE • Project Players Concerns • CREDITORS • CONTRACTORS • PROJECT OWNERS • INSURERS • EPC Project Activity/Project Participants • Some Common Loss Exposures in EPC Projects • INSURANCE Solutions/Benefits/Claims Administration • Post Loss Objectives • No substitute for a Comprehensive EWRM.

3. PRESENTOR’S PERSPECTIVE PROJECT RISK MANAGEMENT & ALLIANCE • As an Insurance Officer – Project Owner • As a Risk Manager – Project Owner • As an Insurer/Reinsurer/Reinsurance Broker • As a Claims Manager • As an Auditor/Accountant/Compliance Officer

4. Major infrastructure that costs over US$1 Billion. Projects attracting high level public attention.* Projects inviting high level political interest.* Substantial direct and indirect impacts on the community and environment.* Projects with large magnitude of tasks involved in planning, developing and management.* Design and Construct; Turn-key Basis; Design and Build; Lump-sum PROJECT RISK MANAGEMENT & ALLIANCE EPC PROJECTS:MEGA PROJECTS *Maybe below US$1 billion but the impact is great.

5. PROJECT RISK MANAGEMENT & ALLIANCE EPC PROJECTS According to Ownership • GOVERNMENT – OWNED (Petronas, Pertamina, PNOC, PTT, PROC, etc) • Wholly-financed by government • Partly government and partly private • PRIVATELY -OWNED/PRIVATELY- FINANCED • May have different ownership structure - JVs, SPVs, • JOINT VENTURE – PRIVATE AND GOVERNMENT • Wholly - private but with government investment/financing • Partly private and partly government but managed by privately NOTE: SOME PROJECTS ARE SELF-MANAGED

6. ENERGY POWER PLANTS TRANSMISSION LINES OIL AND GAS (UPSTREAM, DOWNSTREAM) PETROCHEMICALS MINING & EXPLORATION GEOTHERMAL & COAL WINDPOWER HYRDRO & WINDPOWER PLANTS UTILITIES WATER SUPPLY WATER DISTRIBUTION ELECTRIC DISTRIBUTION HUGE SUBSTATIONS DESALINATION PLANTS MASSIVE IRRIGATION SYSTEMS PROJECT RISK MANAGEMENT & ALLIANCE EPC PROJECTSAccording to Purpose

7. TRANSPORT ROADS & BRIDGES MASS RAIL TRANSPORT AIRPORTS TUNNELS & WATERWAYS HARBORS & PIERS VESSELS TELECOMS TELEPHONE LINES TELECOMS TOWER INTERCONTINENTAL CABLES AND LINES SATELLITES EPC PROJECTSAccording to Purpose PROJECT RISK MANAGEMENT & ALLIANCE

8. PROJECT RISK MANAGEMENT & ALLIANCE EWRM: THE FOUNDATION OF INSURANCE RISK MANAGEMENT 101

9. ENTERPRISE-WIDE RISK MANAGEMENT The Total Approach to the protection of assets, earnings, liabilities, reputation, and personnel against predictable and unpredictable losses in order to achieve the maximum efficiency at minimum cost. Modern definition of Risk Management or Enterprise-wide Risk Management. The old definition simple dealt with insurable assets that were insurable.

10. THE RISK MANAGEMENT PROCESS

11. RISK IDENTIFICATION METHODS (Risk Profiling) • Survey or questionnaire • Going through the Company’s financial records • Review of contracts, audit reports and surveys • Flowcharting of operations • Consulting/Engaging 3rd party experts • Ocular and physical inspection • Table top discussion/interview with key personnel

12. RISK MEASUREMENT/ANALYSIS • Frequency - probability or chance/likelihood • Workshop/Brainstorming • Loss History • Forecasting • Severity - impact of losses/adverse effects • Workshop/Brainstorming • PML, EML, mathematical models • Impact on 3rd parties • Simulation models

13. RISK MEASUREMENT/ANALYSIS F r e q u e n c y Improbable S e v e r i t y Regular LOSS CONTROL and PREVENTION Negligible RETENTION CRISIS MGMNT Good Governance Bus Continuity Plan Disaster Recovery Plan INSURANCE Bus. Continuity Plan Disaster Mgnt Plan Emergency Mgnt Plan Catastrophic

14. RISK MANAGEMENT TECHNIQUES • RISK CONTROL – Stop losses from happening or if it happens, reduce the effects and impact of the loss. • AND/ OR • RISK FINANCE - Provides fund if and when losses occur.

15. RISK MANAGEMENT TECHNIQUES RISK CONTROL RISK FINANCING 1. Retention through - Deductibles - Reserve/Funds - Current Expensing - Borrowing - Self-Insurance - Captive Insurance 2. Transfer through - INSURANCE - Hold Harmless/Outsource 1. Risk Avoidance 2. Loss Prevention 3. Loss Reduction 4. Segregation of Risks 5. Combination • Diversification • Outsourcing

16. RISK MANAGEMENT TECHNIQUETRANSFER • INSURANCE • EAR, CAR • Guarantees and Bonds • ALOP following EAR, CAR, Marine • Cost Overrun • Repayment Guarantees • Errors and Ommissions, Professional Indemnity • Reinsurance • Non-insurance transfers • contractual transfers • hold harmless • outsourcing or subcontracting-use of 3rd party experts.

17. QUESTION:RETAIN OR INSURE? RETAINED/FUNDED RISK (Deductibles, Funded Self Insurance, etc) TRANSFERRED RISKS (Insurance and Hold Harmless) IDEAL: PERFECT BALANCE

18. CONTROL OR FINANCERETAIN OR TRANSFER? • CORPORATE CULTURE • FINANCIAL STRENGTH • LOSS HISTORY • MARKET CONDITION • MANAGEMENT STYLE Note: Management may set a policy on risk retention and transfer once the EWRM is set in place.

19. PROJECT RISK MANAGEMENT & ALLIANCE MAXIMIZING THE USE OF INSURANCE

20. EPC PROJECT PARTICIPANTS HOST GOVERNMENT SUPPLIERS EQUIPMENT MANUFCTRS FEEDSTOCKS EPC CONTRACTOR SUB-CONTR OPERATOR ADVISORS LEGAL/EWRM CREDIT/FINANCE ENGRS/CONSULT PROJECT OWNER* POWER PURCHASERS DISTRIBUTORS INVESTORS CREDITORS LENDERS INSURERS REINSURERS GUARANTORS *COULD TAKE MANY DIFFERENT FORMS: JV, MULTIPLE OWNERS, SPVS, INVESTORS ONLY DURING CONSTRUCTION, ETC.

21. EPC PROJECTS: PHASES OF ACTIVITIES PLANNING/DESIGNING/COST BENEFIT/FEASIBILITY/SELECTION OF FINANCIAL ADVISORS/LENDERS/INVESTERS ESTABLISHING PROJECT OWNER/COMPANY/EITHER EXISTING OR NEW ENTITY FINANCIAL CLOSING/BIDDING OF PROJECT/CONCLUSION OF CONTRACTS SHIPMENT OF MACHNERIES & EQUIPMENT/CONSTRUCTION COMMISSIONING AND TESTING

22. EPC PROJECTS: PHASES OF ACTIVITIES (Con’t) TURNOVER/ACCEPTANCE BY PROJECT OWNER/COMPANY TURN OVER TO OPERATOR AND/OR MANAGEMENT COMPANY COMMERCIAL OPERATIONS/ACCOMPLISHMENT OF OBJECTIVES OF THE PROJECT GENERATING INCOME/PAYMENT TO LENDERS/INVESTORS FULL PAYMENT AND CONTINUOUS OPERATIONS

23. EPC PROJECTS RISK MANAGEMENT SOME OF THE RISK/LOSS EXPOSURES • SUBSTANTIAL COST OVERRUNS >50% OF ORIGINAL COST. • SUBSTANTIAL BENEFIT SHORTFALLS • BANKRUPTCY OF PROJECT OWNER/CONTRACTOR/OPERATOR • WITHDRAWAL OF LENDERS • CANCELLATION OF HOST GOVERNMENT PERMITS • POLITICAL RISKS LIKE WAR AND TERRORISM. • WITHDRAWAL/BANKRUPTCY OF INSURERS AND REINSURERS • DELAY START UP AND DELIVERY. • DELAY IN EQUIPMENT PROCUREMENT AND DELIVERY. • LOSSES DURING CONSTRUCTION • LOSSES DURING COMMISSIONING AND TESTING. • WITHDRAWAL OF POWER PURCHASER OR DISTRIBUTOR • CURRENCY FLUCTUATIONS • UNSTABLE LAWS, LEGAL &, REGULATORY FRAMEWORK, PRICING • ERRORS IN DESIGN AND RESULTANT SPECIFICATIONS

24. EPC PROJECT RISK MANAGEMENT:CREDITORS’/LENDERS’ CONCERNS (Bankability/Acceptability of Project) • Project completion as scheduled: normally tied up with off –take agreements or income generation. • Stable contract price; Cost overruns provided • Provision for Extension of Project Costs and Project Completion date • Output/Off-take Guarantees (ALOP/DLD) • Limited liability of Project Owner to Contractor • Performance & Surety Bonds – 20% performance and 10% surety for design & latent defects & Retention. • Security from Contractor (Consortium and its Head Offices): Back to Back Guarantees

25. EPC PROJECT RISK MANAGEMENT:CREDITORS’/LENDERS’ CONCERNS (continued) • Viability of project maintained until operation. • All changes/milestones communicated to Lenders. • Lenders named as additional co-insured. • Limited design and techno risks • Lowest Country, political and credit risks. • Comprehensive Insurance Cover (seamless cover) • Guaranteed Payment of Loan. • Smooth Certifications Process (acceptance, commissioning & testing, governments, environmental, international standards)

26. EPC PROJECT RISK MANAGEMENT:CONTRACTOR’S CONCERNS • COMPREHENSIVE INSURANCE PROGRAM • SEAMLESS INSURANCE PROGRAM • OWNER CONTROLLED INSURANCE PROGRAM • HOST COUNTRY LAWS, REQUIREMENTS. • LOCAL EXPERTISE –SUPERVISORY & LABOR • LOCAL MATERIALS & EQUIPMENT • LOCAL SUB-CONTRACTORS—ENGINEERING & SUPPORT SERVICES • REASONABLE PROJECT OWNER

27. EPC PROJECT RISK MANAGEMENT :PROJECT OWNER’S CONCERNS • THE MOST APPROPRIATE PROJECT THAT WILL GIVE THE DESIRED BENEFITS/OBJECTIVES • AN IDEAL CONTRACTOR/MANAGER/SUPPLIER • ATTRACTIVE FINANCING SCHEME & LIBERAL CREDIT TERMS AND CONDITIONS. • SEAMLESS INSURANCE PROGRAM • LEASE COST • EFFICIENT CLAIMS ADMINISTRATION • TECHNICAL SUPPORT SERVICES • CLASS ‘A’ REINSURERS • Munich Re, Allianz, Hanover Re, General-Cologne Re • Swiss Re, Zurich Financial Services • SCOR, AXA • GARD; Scandinavian RI • Lloyds Syndicates/Bermuda RI • AIG/Hartford

28. EPC PROJECTS RISK MANAGEMENT INSURANCE COVERAGES

29. EPC PROJECTS RISK MANAGEMENT OWNER-CONTROLLED INSURANCE PROGRAM • Over-all Control of the EPC reinsurance program. • Seamless transition from construction to Operational phase. • Coverage as least cost due economies of scale. • Delay in Start Up (DSU) or ALOP can be easily effected • Owner has choice of insurer security – Class A & Industry • Claims paid directly to Owner or JV Owners. • Interface with Owners existing insurance program. • Where handover is on phase-by-phase basis. • Elimination of redundant insurance services & expenses. • All Project parties covered for same risks – single point responsibility- back-to-back guarantees. • Control of Claims/Coordinated Claims Admin. • Safety/Loss Control services from Insurance providers.

30. EPC PROJECT RISK MANAGEMENT BENEFITS OF A COMPREHENSIVE INSURANCE PROGRAM • PROTECTION IS ASSURED IF COVERAGE IS SEAMLESS • FUNDS DELAYS IN PROJECT COMPLETION. • ENHANCES PROJECT CREDIT. • INSURANCE IN A PROJECT BECOMES A FORM OF • Collateral • Enhanced form of security • ENHANCED CONFIDENCE OF LENDERS • REDUCTION OF PROJECT FINANCE COSTS • REDUCTION IN PROJECT OVERHEADS. • STAKEHOLDERS CONFIDENCE • PEACE OF MIND OF ALL PLAYERS. • DELIVERY OF DESIRED PROFITABILITY FOR ALL.

31. EPC PROJECTS RISK MANAGEMENTRESPONSIVE CLAIMS MANAGEMENT • PRIOR TO THE LOSS • --Proper Property Valuation/Appraisal • --Adequate Bonding Requirement • --Specific Job Description/Deliverables • --Loss simulation; Drills and exercises; Training & Education; Emergency Preparedness, • --Loss History; Loss Forecasting • DURING THE LOSS • -- Reliable and capable adjusters with integrity • -- Disaster Management/Disaster Recovery • -- Salvage and subrogation values and rights. • -- Preservation of evidence and securing of witnesses • POST LOSS • -- Submission of documents and evidences. • -- Close coordination among claimants, adjusters, insurance companies, brokers and other third parties if any. • -- Policy interpretation; Questions on clauses • -- Payment on Account; Settlement in 30 days • -- Negotiation skills; compromise and ex-gratia settlement. • -- Subrogation/Recoveries. • -- Business Continuity

32. PROJECT RISK MANAGEMENT & ALLIANCE INSURERS EXPECTATIONS • COMPREHENSIVE PROJECT SURVEY REPORT • Nature of Project: Turn-key, Lump Sum, Design & Build • Exposures: Natural and Man-Made/Terrorism & Sabotage • Risk Management Program • Project Owner’s Management Culture especially OHSSE • SELECTION OF RISKS • Class A, Above Average Risks of the Project • Long-term relationships • Integrity of Project Owner and other parties to the EPC Project • Integrity/Track record of all other players: contractors, operators, lenders, operators • Host government’s exposure to political risks/current legislations • PROJECT STANDARDS • Local government, international • Industry standard • Fire Codes; Materials Standards

33. PROJECT RISK MANAGEMENT & ALLIANCESOME STATISTICS ON LOSSES • IN THE AIRLINE INDUSTRY • 70% OF THE ACCIDENTS WERE CAUSED BY HUMAN ERRORS. • IN THE SHIPPING INDUSTRY • 65% OF THE ACCIDENTS WERE CAUSED BY HUMAN ERRORS • 50% OF THE ACCIDENTS TOOK PLACE ON A CLEAR DAY. • IN THE OIL & GAS BUSINESS • 50% WERE DUE TO NEGLIGENCE • WORK PERMITS, POOR HOUSEKEEPING, CHANGE MGNT.

34. LOSS EXPERIENCE CYCLE PROJECT RISK MANAGEMENT & ALLIANCE ABNORMAL BUSINES CYLE *ONLY possible if there is a comprehensive insurance program that is in place.

35. PROJECT RISK MANAGEMENT & ALLIANCEPOST-LOSS OBJECTIVES • SURVIVAL • CONTINUITY OF OPERATIONS (normal capacity?) • STABILITY OF EARNINGS • GROWTH POTENTIALS • HUMANITARIAN CONDUCT/CSR • ENVIRONMENTAL IMPACT • INVESTMENT RETURNS TO ALL PARTIES • ATTAINMENT OF THE PROJECT OBJECTIVES/BENEFITS

36. PROJECT RISK MANAGEMENT & ALLIANCENO SUBSTITUTE FOR A SOUND RISK MANAGEMENT PROGRAM • PLANNING, DESIGN, CONTRACT SIGNING • RESPONSIBILITIES OF ALL PARTIES • TRACK RECORD/EXPERIENCE OF ALL PARTIES • INVOLVEMENT OF REINSURERS from beginning • CONTRACT REVIEW-Mismatched related contracts (b2b clause) • LOSS CONTROL MEASURES-CONSTRUCTION • PREVENTION/REDUCTION • BUSINESS CONTINUITY PLAN/EMERGENCY RESPONSE • DISASTER MANAGEMENT & RECOVERY • DEVELOP CULTURE OF RISK MANAGEMENT • CONTROL OF INSURANCE (OCIP) • INSURANCE/REINSURANCE/RETENTION • SEAMLESS INSURANCE COVER • CLAIMS ADMINISTRATION

37. IN SUMMARY: PROJECT RISK MANAGEMENT ENTAILS: ALLIANCES OF RESOURCES CONTINUOUS ENTERPRISE-WIDE RISK MANAGEMENT PROGRAM/ADMNIN

38. ACKNOWLEDGEMENTS/REFERENCE MATERIALS USED Risk and Insurance Management Association of the Phils (RIMAP)– various annual conferences from 1991-1993. Risk and Insurance Management Society of North America (RIMS)-various annual conferences in Winnipeg, Florida and San Francisco from 1992-1995. International Federation of Risk and Insurance Management Association of Asia and Pacific (IFRIMA) discussion meetings in Florida, Cologne, San Francisco from 1994 - 1995 Federation of Asia Pacific Association of Risk Management Organizations (PAFARMO) annual conferences – Malaysia, Singapore, Sydney, Philippines from 1993-1997. Presentation of Wolfgang Zimmermann of Allianz AG, Industrial Division-Engineering/Marine, 2004. Books written by George Head of Insurance Institute of USA and Prakash A. Shimpi of Swiss Re New Markets.

39. CARLOS H. YTURZAETA • Certified Public Accountant (CPA) • Ex-Licensed Underwriter & Reinsurance Broker, Insurance Officer, Risk Manager • Lecturer, Insurance Institute of Asia & the Pacific (IIAP)/Marine Underwriters Asso of the Phils.(MUAP)/Philippine Institute of CPAs (PICPA) • Consultant/Speaker Trainor on Enterprise Wide Risk Management/Captive Insurance/ Accounting, Audit and Tax/Property Management/Estate Planning, DMP, Crisis Mgnt, Claims Admin. Systems and Procedures, Emergency Management, Business Continuity. • Established the first Philippine Captive in Bermuda (Overseas Ventures Insurance Corp.or OVINCOR)‏ • Established/Gen. Manager of-the first “controlled” Phil. Insurer (Petrogen Insurance Corporation), a fronting company for OVINCOR. • 25 years in the largest energy conglomerate in the Philippines consisting of Petron, PNOC, PNOC-Energy Development Corp, PNOC-Shipping & Transport Corp., PNOC-Coal Corp, PNOC-Exploration Corp, PNOC-Tankers Corp—in various capacities. • Social work, cooperatives, and community development thru Rotary Club Makati Edsa (District 3830) & Jose Carlo P. Yturzaeta Memorial Foundation, Inc.

40. MARCUS EVANS CONFERENCES THANK YOU. ENJOY THE REST OF THE WEEK. CARLOS H. YTURZAETA DIRECTOR, E&RM PHILS., INC. CHAIRMAN, MUAP LECTURER/TRAINOR, Enterprise Wide Risk Management, Insurance and Reinsurance, Captive Insurance, BCP, DMP Email Address: yturzaeta@hotmail.com & <carlos_yturzaeta@yahoo.com.sg>