Inherent Defect Insurance (IDI)Closing the Protection GapJimmy LIM Aug 2019Kuala Lumpur

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About Me.

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▪ Joined Swiss Re Nov 1998

▪ Based in Hong Kong, over 20 yearsEngineering UW experience focused in China,Hong Kong, Taiwan and Japan markets.

▪ Since Oct 2017, in charge of SwissReinsurance Asia Engineering UW (both Treatyand Fac)

▪ Prior to Swiss Re, 6 years in Power Industry,participated in several mega sized power plantconstruction projects in Hong Kong and China.

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• What have happened in Asia? - Any protection gap?

• Inherent Defect Insurance (IDI) system – a solution more than a passive protection but can improve construction quality

Agenda

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411

What have happened in Asia?

A 4-storey building collapsed after EQ (2019)

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Picture removed

Suspended Corridor collapsed 201877 injured

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Building Construction used Sea Sand

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Picture removed

Professional Misconduct happens

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“At that time, about 90% of my business was with xxxx Construction,which told me it would cut ties unless I accepted to reduce the amountof steel reinforcement.

I was under heavy pressure, but initially I refused partly because of mypride as first-class certified architect.

Because the contents were simple, I thought they would be found outwhen they were presented to inspection firms.

It’s a fact that they did not check.”

Source: BBC News, 14 December 2005

Steel Supplier

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“We deeply and sincerely apologize once again for causingsubstantial troubles to our customers, business partners,shareholders and other stakeholders due to the misconduct ofxxxx Steel Ltd and its Group.

As of October 2017, we announced that 525 of our customershad received nonconforming products from us.

After looking at details surrounding the misconduct, weconfirmed that some staff falsified inspection data as if it metcustomer specification or fabricated test data for unmeasuredproducts as if they were actually measured.”

March 2018

Does Public have proper protection?

10Time in years

Professional Indemnity

Design Phase Construction Phase3 to 5 years

Va

lue

($

)

Contractors All Risks

Pro

pe

rty

Insu

ran

ce

In case of building collapse• Does house owner have adequate insurance

protection to rebuild?

Professional Indemnity Insurance - 3rd party policy with small sub limit- lengthy and expensive legal action

Contractor All Risks-1 to 2 years maintenance cover

Property Insurance- excludes inherent defects

• Can house owner sue Contractor or Developer and get indemnity? What if concerned Developer go bankrupt?

• Will house owners continue to pay back mortgage?

What can the affected house owners do?

Operational cover

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o India – Real Estate Regulation & Development (2016), to purchase IDI as a proof for the 5 years warranty insurance

o Shanghai – All residential development projects required to purchase IDI or pay a 3% deposit fee (2015)

o Japan – Act for Secure Execution of Defect Warranty Liability (2009) to purchase IDI or pay a deposit fee

o Australia – House Owner Warranty Insurance

o ~ 10 cities in China e.g. Beijing and Shenzhen …etc. also started IDI trail

Asian Regulators are taking action

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How does IDI work?

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Inherent Defect

Insurance

Coverage10 years First party protectionfor Damage caused by an inherent structural defect.

DamageTotal or partial collapse of the building’s load-bearing structure

Inherent DefectExisting prior to the date of handing over certificate

What is IDI (Decennial Insurance) ?

Superficial Cracks are not structural damage

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15Closing the Protection Gap with Inherent Defect Insurance

Benefits

First- Party Policy

Full TSI indemnity

Optimising and fast Payout

10 years non cancellable

Improve construction quality

Enhanced Property Value

Risk of Insolvency Mitigated

Transferrable

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Schools Stadiums OfficeBuildings

Exhibition Halls

ShoppingCentre

Residential Buildings

What is Insurable

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Extensions of Cover

Closing the Protection Gap with Inherent Defect Insurance 8

Debris Removal / Demolition

cost

Weather Proofing

Loss of Rent

Liability

Closing the Protection Gap with Inherent Defect Insurance 18

Investigation Findings

Combination of multiple

factors

Lack of Redundant Supports

Poorly Placed reinforced steel

Weak outer steel struts / Concrete supports beams

IDI Claim Typical Example

Low resistance to temperatureParis Airport May 200411th month after openingIDI paid Eur100mil

Image source: https://commons.wikimedia.org/wiki/File:Terminal_2E_CDG_collapse.png

How can Insurer assess inherent defects?

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Project Owner

Insurer

Contractor

Technical Inspection

Design consultant

Regular Inspectionreports

IDI Operation

Design Phase1 Year

Construction Phase3 years

Latent Defect Insurance Period10 years

Va

lue

($

) IDI 10 years protection

Contractors All Risk Policy Period

Purchase of IDI Policy

Inception of IDI Policy on occupancy certificate and

TIS report

Technical Inspection & Reporting

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Faulty material or workmanship

Faulty design

1

2

3

4

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Reports to Insurer

Risk assessmentSoil report vs Foundation Design

Materials Supply

Witness critical worksRegular on site inspection

Technical Inspection Services (TIS)

Completion of Works Validation

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Special Characteristics

Indexation factor- Deductible, policy limit vs inflation

Systematic Risk- raw material supply- design issues

Definition of One loss

Practical IDI Insurance Issues

Definition of Defects

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IDI an important Risk Management Tool

Many investors purchase IDI as a RiskManagement tool to protect theirasset, liability and / or lost of rent dueto inherent defects

Factors for Successful Implementation of IDI

Closing the Protection Gap with Inherent Defect Insurance 13

Promote cover

alongside regulatory

support

Establish a reliable TIS

system

Tailor IDI coverage to

suit local needs

Leverage technology

Align interests amongst

stakeholders

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Legal notice

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©2019 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.