Presentation
on
Project Risk Inspection & PML
by
V.P. Sharma
Former Vice President & Head of
Property / Engg Underwriting & Risk Management,
Bajaj Allianz General Ins. Co. Ltd.
Currently working as
Mentor for Property Risk & Underwriting
Digit General Insurance Ltd , Pune
What is Risk Inspection ?
Risk Inspection is a systematic examination of risk to identify
hidden hazards, evaluate their loss potential & to suggest way &
means to Control, minimize or avoid the potential hazard.
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Why Project Risk Inspection ??
• To understand the subject matter of insurance / occupancy / nature of
project
• To elaborate risk details, process flow, construction methodology
• To identify Location hazards (STFI, Landslide, Rockslide…) & Risk elevation
• To Identify of Construction Hazards
• To find out exposure of Surrounding property, Third party Liability
• To find out alterations in scope of work, const. methodology, Design…
• To determine Delays in completion of project
• To identify Risk Exposure for Balance work
• To identify Critical works & Safety Features
• To evaluate exposures in Break-in cases
• To identify reasons for Project Extension
• To evaluate risk exposure after long
suspension of projects
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Key Persons in a typical Project Team
• Project Manager
• Planning & Design Team
• Execution team
• QA & QC Team
• Safety Team
• Plant Maintenance team
• Support Team : Accounts,
Administration, Store
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Stages of Inspection – When ?
• During Initial Stages of the Project
• During Final Stage of project or
Nearing completion (testing &
comm.)
• At the time of Policy extensions
• While covering Projects mid-way
(break-in cases)
• While Project under suspension
(temporarily)
• During Executions for ALOP As
well as following a loss reported
under ALOP.
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What to look for during Inspection ?
A) At the Initial stage of Project works :
➢Topography – Plain land / Hilly terrain
➢Site Establishment : Approach Roads, Drains, Electricity, Water.
➢Fencing of project work area / Security / Lat , Long of project site
➢Resources under mobilization, Excavation/foundation work started
➢Location hazards with Past incidents (Flood, Cyclone etc…)
➢Hazards associated with TPL, OSP
➢Project start date (actual/Likely) and project activities underway
➢Details of Contractors (to be) engaged with their past experience
• Documents to be obtained :
• Project Layout, Original project Schedule, Bar charts, ‘S’ Curves,
BOQ, Major Contractors, Transit details if Marine is also covered.
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B) Inspection at final Stage of project (testing & comm.)
• Status of Project works :
• Entire projects are completed (except pending minor works)
• Testing of individual units under way or completed
• Entire Plant ready for Final testing and commissioning
• Objective: To check and ensure
• Readiness of overall plant with completion of erection and
independent testing of all system/sub-system as per process flow,
• Completion of all pending works as per final checklist
• Rectification of past losses/damage to the satisfactory of Principal
• Fire fighting systems are operational,
• Testing and commissioning methodology in place,
• Documents to be obtained :
• Checklist of pending works, Testing & Commissioning procedure,
Installation of Fire fighting equipment.
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C) Inspection at the time of Extension of project
• Objectives : To check
• Variation in scope of cover, additional risk etc. w.r.t. original
scope
• Current project status -Details of project works completed,
• Whether any part of the same put to use or under operation ?
• Details of balance works under progress and to be taken up.
• Reason for delays – Avoidable / Unavoidable
• Revised expected date of project completion
• Documents to be obtained :
• Revised Scope with details of additional works and increase in SI
• Revised construction schedule with revised S curve.
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Inspection of Projects under suspension
• Reasons for Suspension
• Land acquisition problem
• Pending court cases, public litigation
• Protest by local people
• Pending approval of design and drawings
• Loss/damage to the project works
• Objective: To check …
• Storage conditions of critical materials/equipment.
• Details of unfinished and unprotected structures/works
• Impact of nature’s vagaries and any physical damages as visible (in
terms of rusting etc..) due to long period of suspension
• Probability of losses when project works resume till final testing and
commissioning of the project.
• Protection measures taken for unfinished and unprotected
structures/works, Theft hazards, Security, Fencing of work area
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Inspection during Executions when ALOP is given
• Reason :
• Close monitoring of the project required
• Quarterly Progress reports required by Reinsurer
• Inspection to be done at pre-defined interval depending on nature of
project.
• Aim: To find out mainly :
• Critical activities in the project and Delays in execution
• Impact of Delays on overall completion of project
• Details of work fronts under hold with reason
• Establish the reason for delays based on documents in place.
• Segregate the delays due to Insured and Uninsured perils / Events
• Documents to be obtained :
• Bar Chart, S curve, Monthly Progress Report, List of resources
deployed, List of contractors engaged and their scope works
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Key words to understand
• ‘S’ Curve
• Bar Chart , Project Construction
Schedule
• Quality Plan, Work Procedure
• Safety Plan
• Bill of Quantity (BOQ) & Billing
Schedule
• Schedule of Rate (SOR)
• Daily/Monthly Progress Report
• Resource Deployment Chart
(Labour, Plant)
• Running Account Bill (RA Bill)
• Areas of concern
• Hindrances – Land acquisition /
Labour issues, Approach road to site
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Quality of Finished structures
Housekeeping of construction materials
Important Check Points
• Storage of critical materials
• Cement to be stored inside the Godown at elevated level (no direct
contact with wall or floor)
• Reinforcement should be kept on wooden Planks so as to prevent
contact with ground)
• Stock of different sizes to be segregated so as not to get mixed up
with other stock or foreign materials
• Stockpiling of materials over the newly constructed slab to be
avoided
• Construction materials like cement, reinforcement steel to be used on
First in First out (FIFO) basis
• Project works in night shift to be avoided. Arrangement of adequate
Lighting and Safety is very important.
• Observe the contractor’s attitude or seriousness towards timely
completion of the project without compromising on QUALITY.
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Storage of Reinforcement steel at construction site
Important Points while taking Photographs
• Photographs of the projects should clearly show the PROGRESS of
works particularly of Major/Critical structures.
• Highlight the exposure of Third party property with clear distance
from the nearest insured property.
• Owner’s surrounding property if any.
• Highlight safety concern and action taken by the insured
• Highlight also the Good features of the project in terms of quality
of finished structures, housekeeping etc…
• Drainage facility at site and their conditions
• Temporary Electrical wirings and associated fire hazards
• Storage conditions of Critical and inflammable construction
materials
• Use of modern Plants and Equipment for execution of works
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Third Party Exposure
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Collapse of structure
• The most common cause of structural
collapse during construction are:
• Excessive construction loading;
• Temporary material or system
weaknesses
• Collapse Results into major losses to:
• Permanent works
• Personal injury and death
• Severity may be Very High-Total loss
• Buildings and Bridges are particularly
vulnerable to structural failure during
construction.
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What is PML for project Insurance ???
"The Probable Maximum Loss is an estimate of the monetary loss which
can be sustained by insurers on a single risk as a result of a single
fire/explosion/Collapse due to Construction faults/Bad workmanship or
Faulty design/ Faulty material considered by the underwriters to be within
the realms of probability ignoring the presence of fire protection systems
& other fire suppressing systems. The estimate ignores such remote
coincidences and catastrophes as may be possible but remain unlikely.“
Under CAR Policies: PML is measured at the final stages of
completion when an accident will cause max.
possible loss.
Under EAR Policies: PML is measured at the time of testing when
plant is ready for Handing over to Principals.
For ALOP policies: PML is measured based on Estimated sum insured
& Indemnity period chosen by insured.
How to calculate PML for project Insurance ?
Under CAR Policies :Normally it ranges from 80% to 100% depending
upon nature of project.
Under EAR Policies :PML is measured at the time of testing when full
sum insured is at risk & plant is ready for Handing
over to Principals. In case project is subdivided into
various building duly segregated, the PML shall be
the Reinstatement Value of the block having
highest concentration of assets.
For ALOP policies :PML is taken as full sum insured for 12 months IP.
It is to be adjusted proportionately based on IP
selected by Insured.
Importance of PML
a) To Determine Underwriting capacity ??
How ??
a) Find out the Risk PML ( PD + BI) say 1500 crs
b) Reinsurance Treaty capacity say 600 crs on PML basis
c) Underwriting capacity = 600/1500 x 100 = 40%
d) Available capacity 35% ( keeping a margin for future plant
expansion / Production capacity enhancement during the
policy period.
Conclusion :
a) A company can safely write a share of 35% in the risk
irrespective of sum insured so long the PML of the risk is Rs
1500 crs.
b) It will have to arrange for FAC support if the participation
exceeds 35%
b) To Determine Facultative requirement ??
How ?? Example 1
Let us assume that risk PML is 1500 crs for a Rs 5500 crs power plant.
XYZ company writes a share of 60%. Calculate the FAC requirement if
the automatic treaty capacity is 600 crs ?
Company’s share of PML = 60% of 1500 = 900 crs
Treaty capacity = 600 crs.
Cessions to Treaty = 600 / 1500 x 100 = 40% of 100%
Hence, the FAC requirement ( 60 – 40) = 20% of 100%
Total placement = 60% of 100% i.e full share
Or
Cessions to Treaty = 600 / 900 ( our share) = 67% of 60%
Fac Requirement = 300/900 or (100 – 67) = 33% of 60%
Total placement = 100% of 60%
b) To Determine Facultative requirement ??
How ?? Example 2
Let us assume that risk PML is 2500 crs for a Rs 5500 crs power plant.
ABC company writes a share of 50%. Calculate the FAC requirement if
the automatic treaty capacity is 400 crs
Company’s share of PML = 50% of 2500 = 1250 crs
Treaty capacity 400 crs.
Cessions to Treaty = 400 / 2500 x 100 = 16% of 100%
Hence, the FAC requirement ( 50 – 16) = 34% of 100%
Total placement = 50% i.e full share
Or
Cession to Treaty 400/1250 ( our share) = 32% of 50%
Fac Requirement 850/1250 or (100 – 32) = 68% of 50%
Total placement = 100% of 50% ( our share
b) To Determine Facultative requirement ??
How ?? Example 3
Let us assume that risk PML is 2500 crs for a Rs 5500 crs power plant
but Insured opts for a policy loss limit of 1500 crs. ABC company writes
a share of 40%. Calculate the FAC requirement if the automatic treaty
capacity is 400 crs
Company’s share of Loss limit = 40% of 1500 = 600 crs
Treaty capacity 400 crs.
Cessions to Treaty = 400 / 1500 = 26% of 100%
Or = 400/600 = 67% of 40% share
Hence, the FAC requirement ( 40 – 26) = 14% of 100%
Or (100 – 67) or (200 / 600) = 33% of 40% share
Total placement = 40% of 100%
or 100% of 40% share
•Any Thanks, Any Questions?
