September Presentation at Pacific Countries Ports Conference. Structuring An Effective Ports Insurance Programme.

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Presentation at Pacific Countries Ports

Conference

September 2010

www.marsh.com.au

Structuring An Effective Ports Insurance

Programme

Presented by:

David Wardle

National Manager – Due Diligence

Marsh Pty Ltd

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Presentation Contents

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Yacht Delivery

Welcome to Marsh

Insurance Market Cycles

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Risk Assessment Approach to Insurance

Port Authority Insurance

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Yacht Delivery

65' custom - built Motor Yacht complete with four staterooms, a

state-of-the-art galley, GPS System and radar or navigation, twin

supercharged diesel engines, etc:

$2,474,793.00

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Champagne, chocolate covered strawberries with cream and music

dockside for the excited 'soon to be owners' and a small group of friends:

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Yacht Delivery

Two corporate representatives,

crane, and rigging complete with

faulty Ubolt:

$2,500/hour

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Yacht Delivery

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Watching your dreamboat nose dive

into the harbor, accompanied by two

corporate Representatives just prior to

'inking' the final paperwork…

(Note the owner in the stern / back of the yacht)

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Yacht Delivery

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So,

how was your

day?...

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So ,

Is Insurance the

solution or risk

management?

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Welcome to Marsh

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Marsh & McLennan Companies (MMC)

MMC is a publicly-held company with approximately 50,000 employees

worldwide and annual revenue exceeding US$10 billion, MMC provides

analysis, advice and transactional capabilities to clients in more than 100

countries.

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Marsh Global Footprint

Marsh is the world's leading insurance broker and risk advisor.

Marsh has more than 26,000 employees in approximately 400 offices in over

70 countries worldwide.

Marsh was established in Australia in 1953.

With over 1000 staff, Marsh Australia operates from offices in every State

and Territory producing annual revenues in excess of $220 million and

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and Territory producing annual revenues in excess of $220 million and

placing close to $2 billion in premium volumes into the local and international

insurance markets.

Marsh provides insurance broking and/or risk advisory services to more than

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Insurance Market Cycles

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Key events

Global/European Financial Crisis

– US Government bailed out AIG to the tune of $US180b – Equity markets tumbled

– Local cash rates fall and government introduced a $42b stimulus package

– Credit spreads widened considerably, driving much lower investment returns for insurers

Weather Events

Financial Year 2009/10 in Review

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Internationally, the Global Financial Crisis had a significant negative impact on industry _{investment returns. In Australia, bushfires, storms and floods curtailed underwriting}

profitability, particularly in personal lines.

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Weather Events

– Victorian Bushfires

– Storms, floods and hail – NSW, Qld, Melbourne, Perth – Swine Flu Epidemic

– Icelandic Volcano

New Capital

Market Pricing

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15% 20% 25%

Historical Return on Equity for Australian P&C Insurers

30 year average ~

10%

Average ‘03-’07 ROE ~ 19%

In the 5 years to 2007 the Australian market produced record returns at levels equating to twice the long-term average, in stark contrast to the 25 year period prior (1978-2002) where there were just two years that delivered ROE’s above 15%. The market ROE

dropped significantly in 2008 as the effect of the Global Financial Crisis hit the equity markets, significantly curtailing investment returns.

Market Profitability

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11 Marsh -10% -5% 0% 5% 10% F Y 7 8 F Y 8 0 F Y 8 2 F Y 8 4 F Y 8 6 F Y 8 8 F Y 9 0 F Y 9 2 F Y 9 4 F Y 9 6 F Y 9 8 F Y 0 0 F Y 0 2 F Y 0 4 F Y 0 6 F Y 0 8

Source: APRA (and predecessors regulators), Finity Consulting, Deutsche Bank. Data is for year ending December. June 09 ROE was 9.4%.

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In Australia, the impact of severe weather events on the industry continues to be significant, and the severity of weather related events is increasing due to concentration of risks in

areas more susceptible to weather related events.

Natural Perils

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Market Cycle

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13 Marsh 2010 Liability 2010 Property

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Risk Assessment Approach to

Insurance

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Structuring an effective Port Insurance Programme

Physical Assets

Revenue sources

Liabilities of the business

Workforce benefits

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Considerations

Valuation of Assets (usually replacement value)

Ensuring survival of the business (catastrophic risks and adequate limits)

Security of Insurer ( a promise to pay!)

Breach of coverage

Experienced Insurer (knowledge of marine law and liabilities)

Use an experienced Insurance broker

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Risk Tolerance

What do we mean by this?

Do you purchase insurance based on lowest deductible?

Have you considered your “pain threshold” in a financial year?

Risk not just Insurance deductibles

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Marsh Risk Tolerance Model

Note: NPAT = Net Profit After Tax. Earnings Before Interest and Tax may also be used.

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Insurer Expectations

Good Property Loss Control

Appropriate fire protection and detection

Security

Contractor controls

Hot work permits/controls

Training and ERT

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Adequate repairs and maintenance

Cyclone preparedness

Disaster recovery planning

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What type of Port

Landlord Port Authority, or

Operational Port

Full disclose of activities

What other activities? - Dredging/Tugs/Pilotage - Aircraft landing

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Port Authority Insurance

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Bundled versus specific Insurance

Benchmarking suggests few Ports take full bundled package

TT Club offers bundled solution

Summary review of what is insurable

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Standard Risks

– Customer liabilities (ships and cargo)

– Errors and Omissions liabilities (customers financial loss)

– Third party liabilities (injury, damage and compensation under “conventions”) – Fines and Duty (due to breach of regulations)

– Costs Clause (legal costs, wreck removal, pollution clean-up) – Loss or damage to handling equipment.

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Port Authority Insurance

Additional Risks

– Building, Plant and Infrastructure – Business Interruption

Can include Berth Blockage (NB not Port Blockage)

– Carrying Equipment (containers etc) – Ship Repairers liability

– Marina Operators liability

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– Marina Operators liability

– Advice (financial loss by third parties) – Property (liability for leased buildings)

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Port Ships Risks

– Hull and Machinery (your ships) – Collision liabilities

– Other third party liabilities – Fines and costs

– Pollution liability

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Conclusion

Investment in loss control can improve insurance pricing

Consider the insurers financial strength

Use your financial strength wisely with your insurance purchasing

Bundled insurance is not always the total solution

Work with an experienced risk insurance adviser

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