Lexpert Introduction to PPP Construction Insurance and Performance Security Requirements 06 December 2012 Presented by David Bowcott Senior Vice President and National Director Maurice Audet Senior Vice President Aon Risk Solutions™ Construction Services Group Infrastructure Services

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 2 Infrastructure Ontario Agenda A Bit About Aon Basics of P3 Insurance and Performance Security Uninsurable Risks in Insurance and Performance Security When Disaster Strikes – how insurance and performance security requirements respond to various participants’ needs IOCIP – impact on IO AFP market and the insurance market 2

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 3 Infrastructure Ontario A Bit About Aon 3

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 4 Infrastructure Ontario Aon’s Credentials Our market share in Canada –Broker and advisor to 12 of the top 15 contractors in Canada –Broker and advisor to over 50% of the Top 100 Projects –Broker and advisor to over 80% of all Canadian Public Private Partnerships –Over 2,500 construction clients Aon swims in the largest pool of construction risk management transactions in Canada The following presentation reflects our perspective given our pool 4

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 5 Infrastructure Ontario The Goal 5 Cost Insurance Brokerage and Advisory Costs Effective Risk Communication Insurance and Performance Security Cost of Construction Cost of Capital (100’s of Thousands) (Millions)(10’s of Millions)(100’s of Millions) Unnecessary Risk Contingency Cost of Operations (10’s of Millions)

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 6 Infrastructure Ontario Insurance and Performance Security in the World of P3s 6

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 7 Infrastructure Ontario Basics of PPP Insurance and Performance Security - Key Features Keys are alignment with on time, on budget, and as per specification objectives Changes as a result of this alignment: 1.Scope of coverage –The broader the better –The lower the deductibles the better 2.Liquidity/Responsiveness –The faster the better 3.Better integration of covers –Eliminate the finger pointing between policies 7

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 8 Infrastructure Ontario Basics of PPP Insurance and Performance Security – A Project Centric Approach 8

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 9 Infrastructure Ontario 9 The Goal - No Gaps Between Buckets Uninsured Risks All Risks Builders Risk Letter of Credit Pollution Wrap- Up Sub Default Insurance Professional Force Majeure Insurance Liquidated Damages Insurance Surety Contractor Policies Risk Controls Risk Controls Risk Controls Expanded Solutions (PPP/Quality Driven)

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 10 Infrastructure Ontario The Basics of P3 Insurance 10

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 11 Infrastructure Ontario Basics of PPP Insurance and Performance Security – Products Common Insurance Covers – A “suite” of core coverages: COC Wrap-Up Professional PI 11

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 12 Infrastructure Ontario Basics of PPP Insurance – Alignment with Project Risks Beyond the limits and deductibles (though they are important too) Identify specific risks and their impact on project delivery objectives Determine insurability based on insurance market appetite for risks and cost for risk transfer Then design solutions that strike the acceptable balance within the stakeholder group This process potentially varies within the main “camps” of a project and within the stakeholders within these camps: –Sponsor –Project Co ›Lenders ›DB Contractors and Designers ›Project Co / Equity 12

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 13 Infrastructure Ontario Basics of PPP Insurance – Key Features Lenders: –Financial security ratings of insurers –Control over insurance mechanics ›Control must remain with the party to whom they are lending –Control of claims proceeds ›Loss payable ›Insurance Trust Agreements –Non-cancellation ›Except for non-payment of premium, suspension of project or termination of the Project Agreement –Non-vitiation –Exclusivity of insurance ›Not shared with risks in which they hold no financial interest 13

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 14 Infrastructure Ontario Basics of PPP Insurance – Key Features Sponsors –Balance between price and coverage, though more is often better so they can transfer more risk –Alignment with supervening events as it reduces compensation 14

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 15 Infrastructure Ontario Basics of PPP Insurance – Key Features Project Co/Equity –Compliance with specifications – tick the box –Price – low bid still wins in the PPP world 15

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 16 Infrastructure Ontario The Basics of P3 Performance Security 16

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 17 Infrastructure Ontario Performance Security Defined Any security used to guarantee the performance of entities contracted to complete project work Broader definitions see all security (including insurance) as performance security 17

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 18 Infrastructure Ontario Key to Contractor Performance Security – Striking the Balance 18 Contractor Balance Sheet Constraints Acceptance of Security by Debt (and Equity)

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 19 Infrastructure Ontario Basics of PPP Construction Performance Security – The Options Common P3 Performance Security Parental company guarantees (PCGs) Letters of credit –Traditional and EDC Performance Security Guarantees Cash reserves Surety bonds - Traditional performance bond and payment bond Subcontractor default insurance (Subguard®) Future Potential Solutions Liquid surety – Performance bond with loss advance Cap Assure – DB contractor cover with sub default insurance NOTE: There are several others (be aware) 19

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 20 Infrastructure Ontario Basics of PPP Performance Security Some Helpful Hints Know all the performance security options Read all agreements to ensure alignment of performance security requirements Read the actual performance security documents –Watch for conditionality that doesn’t conform with agreements Watch carrier ratings Use performance security consultants/brokers 20

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 21 Infrastructure Ontario The Uninsurable 21

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 22 Infrastructure Ontario Traditionally Perceived Uninsurable Risks… Defect –Design, labour and materials Force majeure –Strikes, lockout, embargo Weather events –Weather events causing pure delay without causing property damage Economic –Commodity price, currency and labour cost fluctuation Delay or cost overrun –Schedule slippage 22

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 23 Infrastructure Ontario …but the lines are getting blurry Fifty Shades of Grey… Lines between uninsurable and insurable are less clear because of coverage innovation Case Study No. 1: Construction Defect (Faulty workmanship) Scenario 1 - During construction defect discovered Scenario 2 - Defect causes damage to project Scenario 3 - Defect during completed operations Case Study No. 2: Project Delay Scenario 1 – Damage to project during construction Scenario 2 – Supply chain disruption Scenario 3 – Contractor or subcontractor failure 23

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 24 Infrastructure Ontario When Disaster Strikes – Selected Examples 24

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 25 Infrastructure Ontario When Disaster Strikes – How Insurance and Performance Security Responds Case Study No. 1: Hurricane Hazel Redux Background: 1954: Hurricane Hazel spills over to GTA, Don River floods 2007: ORC begins construction of Flood Plain Landform (FPL), taking area from West Don Lands to Bay Street from the 300 yr. floodplain 2011: Construction begins of Pan Am Athletes’ Village – an AFP project and part of major overall waterfront redevelopment in the area 2011 and 2012: New York City sustains direct hits from 2 hurricanes What if Toronto is next? Discussion and Analysis: If coverage properly crafted: –Flood coverage –Windstorm coverage –Pollution liability coverage 25

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 26 Infrastructure Ontario When Disaster Strikes – How Insurance and Performance Security Responds Case Study No. 2: Insolvency of Major Subcontractor Background: Currently over 20 Social Infrastructure APFs under construction Valuations into the billions of dollars On social infrastructure M&E could represent 30% to 40% of contract In the large space there are limited options for M&E What if one of them becomes insolvent? Discussion and Analysis: Focus on performance security –surety, sub default insurance, LCs, PCGs, etc: Things to look for: –Look closely at the wording of the instruments (conditionality is an issue) –Liquidity and responsiveness is vital (secure the people, status of payments) 26

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 27 Infrastructure Ontario IOCIP Explained 27

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 28 Infrastructure Ontario What is IOCIP? Infrastructure Ontario Construction Insurance Program (IOCIP) “Suite” of project-specific construction insurances: –Builders’ Risk –“Wrap-Up” CGL –Pollution –Professional Concept developed and in place since 2008 Transactional construction insurance services on IO AFP infrastructure projects through a “sponsored program” concept IO mandates Project Co purchase their main construction insurances through IOCIP but retains control of administration and claims management Over 27 projects and $10.5 billion in construction values have passed through 28

Aon Risk Solutions™ is a trademark licensed for use by Aon Reed Stenhouse Inc. 29 Infrastructure Ontario IOCIP Benefits Lower insurance costs – benchmarked at delivering rates better than 30% lower than best-in-market transactions – generating over $35 million in savings since 2008 More comprehensive coverage – over 90 coverage innovations automatically included – many have rewritten the book on construction insurance in Canada Flexibility – all asset classes, all proponents are eligible Consistency – since inception, no premium increases or reductions in coverage; program is locked in by contract with insurers 29

Aon Risk Solutions™ Construction Services Group Infrastructure Services 20 Bay Street, Toronto, Ontario Tel: Thank you