Topics Risk Solutions: Issue 1/2016

TOPICS
RISK SOLUTIONS
Insurance solutions for industry
Issue 1/2016
Making light work
of controlling
heavy machinery
Digitalisation increases efficiency in the
mining industry. And introduces new risks.
PAGE 4
Reputation
Preparing for a crisis
Infrastructure projects
New analysis tool for
investments
Paris climate conference
Business opportunities
for insurers

EDITORIAL
Dear readers,
When people talk about the risks and opportunities
of digitalisation, the international mining industry
does not immediately spring to mind. But even here
the internet, sensor technology and globalisation
have long arrived. It is clear that cyber risks will also
increase along with the digital advances. These
represent a further challenge for the industry and its
insurers. Since 2014, both parties have been working
together in the non-commercial Mining Insurance
Group (report on page 9) not only to improve claims
handling and insurance terms and conditions, but
also to develop new insurance solutions for the risks
of today and tomorrow.
Digitalisation and communication, however, have
long belonged together in my opinion. We know that
you are reading more and more online, often on your
smartphones or tablets. In future, we will thus inform
you about our insurance solutions for industry in the
online magazine on our website. And as before,
you will continue to receive our newsletter at regular
intervals. If you have not already signed up for this,
please click <here>.
I wish you a stimulating read.
Torsten Jeworrek
Member of the Board of Management of Munich Re
and Chairman of the Reinsurance Committee
NOT IF, BUT HOW

Contents
Mining 4.0
Many production sites are now
monitored and controlled using
interactive displays. If the under-
lying control systems are una-
vailable or only partly functional,
severe revenue losses may
result.
Page 4
News 2
Managing the reputational risk –
an insurance solution can help 3
MINING
Heavy machines and digtal processes 4
The increasingly networked nature of machines
and processes comes with new risks.

INFRASTRUCTURE
Project Risk Rating as an investment tool 14
MEAG, Munich Re’s asset manager,
uses Project Risk Rating as a key component
in investment decisions.
COLUMN
Climate conference in Paris 18
With new insurance solutions,
many people can now be covered against increasing
losses due to weather extremes.
Imprint and preview 19
1Munich Re Topics Risk Solutions 1/2016

HSB Total Cyber™ is a unique bundle
of cyber and information security
coverages offering broader protec-
tion. These include data breach
response and liability, identity theft,
computer attack, cyber extortion,
and network security and electronic
media liability – all in one policy.
HSB Total Cyber™ is available
through independent agents and bro-
kers (pending approvals in some
states) and offers commercial cus-
tomers a more comprehensive solu-
tion to today’s growing cyber risks.
Read more at
www.munichre.com/HSB/cyber-risk
According to Munich Re’s database,
natural catastrophes have almost
quadrupled in Australia since 1980
and global warming is projected to
intensify the severity of many events.
Immense insurance and reinsurance
capacity as well as sophisticated risk
solutions are required to deal with
these changes.
With its latest publication “Expect
the unexpected”, Munich Re’s lead-
ing experts share their views on the
current situation and future outlook
regarding natural hazards and risks
in Australia and New Zealand.
Read more at
www.munichre.com/ausnz/natcat
2015, the second year in succession
to set a record for global annual
mean temperature, was also strongly
influenced on a political level by cli-
mate change: the breakthrough at
the climate conference in Paris gives
us reason to hope that climate
change can still be slowed to a level
where the risks in most regions of the
world remain manageable.
Losses from natural catastrophes
were fairly low in 2015. The natural
“climate oscillation” El Niño had a
marked influence on the patterns of
weather-related events.
You can find more analysis and a
comprehensive summary in our new
2015 edition of Topics Geo magazine at
www.munichre.com
NATURAL HAZARDS
A year of climate change
CYBER RISKS
Comprehensive insurance
for mid-size businesses
AUSTRALIA/NEW ZEALAND
Expect the unexpected
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Munich Re Topics Risk Solutions 1/20162
NEWS

The latest corporate scandals have again shown
us that a company’s reputation is key to its success
in business.
Current events and the increasing number of
scandals are raising companies’ awareness that the
potential for financial loss due to a scandal can be
much higher than that caused by property damage,
and even by business interruption. This is because
today, thanks to the internet and social networks,
customers have become part of an observant, critical
and powerful community. Reputational risks thus
now number among the top ten global business risks
(Allianz Risk Barometer 2016), and demand for insur-
ance cover for reputational risk is growing.
An insured company has a better chance of surviving
a crisis with the lowest possible financial damage.
The analysis of the potential risk scenarios with the
insurer often in itself leads to an improvement in risk
management. If a claim is made, the funds received
via the insurance can be used to restore the compa-
ny’s reputation. The company is free to decide on the
action it needs to take to steer its business model
back onto the path to success.
Insurance can also provide relief for a company’s
directors, as they have an obligation both to put
procedures in place to identify reputational risks and
avoid damage, and to ensure that the company is
prepared should reputational damage nevertheless
occur. In addition to risk management, a crisis
communication system and media monitoring, the
management should consider insuring against
reputational damage.
How is reputational damage quantified?
Leaving the panoply of brand valuation theories aside,
reputational damage can be calculated on the basis of
the fall in turnover when clients go elsewhere. Since
the decline in turnover has a direct effect on a compa-
ny’s cash flow, and hence on the funds it has available
to repair the damage to its reputation as quickly as
possible, it needs finance. Unplanned expenditure
and losses have to be funded from reserves or can be
covered by insurance. Cover generally encompasses
loss of profits together with financial support for
crisis management and efforts to restore the compa-
ny’s image.
In our solution, the scope of cover and the cover
triggers are individually tailored to the company’s
needs. We look forward to hearing from you.
More information at
www.munichre.com/en/reputationalrisks
Protecting reputations: Preparing for a crisis
OUR EXPERT
Ulrike Raible
Underwriter
uraible@munichre.com

A look inside the Chilean mine
El Teniente, the world’s largest
copper mine.
Topics: Mr. Becker, the world market
is currently under immense pressure.
In the past five years, mining reve-
nues have dropped continuously to
around US$ 450bn today ...
Günter Becker: The industry did
indeed flourish until around 2010.
However, the global economic and
financial crisis also had a direct
impact on the raw material volumes
sold. China in particular purchased
distinctly less raw material in recent
years than previously. 900m tonnes
of iron ore were shipped to China
alone every year. Aluminium, steel,
copper, zinc and lead are used in
every motor car; batteries contain
cobalt and lead, and the so-called
rare earth metals, such as praseo-
dymium and neodymium, as well as
tantalum, are needed for smart-
phones. As demand for raw materi-
als declines, so do their prices on the
world market. The impact on bulk
goods, such as iron ore, copper and
coal, was particularly strong in the
past two years. Since 2011, the price
of one tonne of raw iron ore has lost
more than two-thirds of its value, to
roughly US$ 45 per tonne today.
Stock values of the major mine oper-
ators, such as Glencore, BHP Billiton
and Rio Tinto, have likewise declined
significantly in recent years.
Even in the mining sector, where heavy
machines and nature are the main opponents,
processes and machines are increasingly
being networked. Mining risks expert Günter
Becker and Head of Cyber Solutions Chris
Storer talk about new risks for this traditional
industry.
Heavy machinery
and data bits
MINING
For the companies, that should surely
mean that they must now pay even
more attention to efficiency and prof-
itability. Has safety suffered as a
result?
Becker: Safety standards have
increasingly been brought into line
throughout the world in recent years.
However, that is only true of the offi-
cial mining sector. Many mines oper-
ate illegally. In China, for example,
there are probably more than 5,000
official and unofficial coal mines at
present. No one there has a complete
overview. And we do not really know
what is happening there. Although
the local companies claim to observe
international standards, 600 people
still lost their lives in mines last year,
according to official reports, and the
figure even reached 6,000 annually
in earlier years.

MINING
In May 2014, more than 300 miners
lost their lives following an explosion
in Soma, Turkey. Surely the aim is to
prevent such fatal accidents. What
preventive measures are in place?
Becker: The biggest risk in under-
ground coal mines is that of explo-
sions due to firedamp. Methane gas,
also known as coal gas, forms an
explosive mixture which can explode
with devastating effect in air with a
volume fraction between 5% and
roughly 15%, when exposed to a suit-
able ignition source. Sensors in the
workings constantly measure the
concentration of methane in the air.
Machines switch off automatically as
soon as it exceeds 2%.
If an accident occurs nevertheless
because the mine operator allows the
machines to carry on working, the
insurer must prove gross negligence
on the part of the mine operator, oth-
erwise the insurer must indemnify
the resultant property and business
interruption loss.
Mining accidents aside: a further
risk is surely that a deposit is
expected to yield more than is
ultimately extracted.
Becker: The companies’ aim is
always the same: to move only as
much earth as is necessary, in the
shortest possible time and with max-
imum profit. Every year, the world’s
biggest gold mining company,
Barrick Gold, extracts roughly six
million ounces of gold at an average
rate of three grammes of gold per
tonne of “earth”. Profitability deterio-
rates enormously if no more than one
or two grammes are recovered, since
correspondingly more “earth” has to
be moved to obtain the planned yield.
Hence the importance of core drilling
in the potential mining area so that
the amount of gold contained in a
deposit can be predicted as accu-
rately as possible. In the so-called
Bre-X scandal some 20 years ago,
the exploration company Bre-X Min-
erals found what was assumed to be
one of the largest gold deposits
worldwide in the unproven Busang
area of Borneo. The rock specimens,
however, had been massively and
systematically faked.
Screen-based work. Even in a copper
mine, many work processes are con-
trolled and monitored remotely.
6 Munich Re Topics Risk Solutions 1/2016

MINING
Insurance-related risks are different.
They concern property damage and
the resultant business interruptions.
Can you give some examples?
Becker: As the miners say, “it’s dark
ahead of the hoe”. You never know
what to expect in a mine. Regardless
of whether the business interruption
is caused by burning machines, rup-
tured conveyor belts or other prop-
erty damage, the question is always
how much saleable raw material
could have been mined in that same
period of time if operation had not
come to a standstill on account of the
property loss. Differences of opinion
between policyholder and service
recipient are inevitable here.
This is where the Mining Insurance
Group comes into play ...
Becker: It became increasingly clear
that things had to change. When a
number of Australian coal mines suf-
fered a major loss due to flooding, it
was found that the operator had con-
cluded insurance policies with more
than 20 insurance companies. Their
legal advisers fought over every last
detail, including whether or not the
word “flood” was to be written with
an initial capital: an enormous differ-
ence in English, and hence also as
regards the size of the claim. It took
years to settle the claim. In many
cases, it was not immediately clear
just which losses were actually cov-
ered. The Mining Insurance Group
has already achieved its first goal:
claims handling has been standard-
ised and can now be completed more
rapidly than in the past. In addition, a
standard wording for policies should
be available by April 2016 and can
then be used for mining throughout
the world.
Mr. Storer, mining companies are
modern, global enterprises with reve-
nues worth billions. Are cyber risks a
subject of importance for the indus-
try?
Chris Storer: They certainly are. In
the past, cyber risks might have been
considered less significant in the
mining industry than in others, such
as the retail, healthcare and the
financial sectors, where more per-
sonal data is concerned. Yet data
protection has long ceased to be the
only relevant topic for cyber.
Right now, we are seeing major
changes in the way that companies
are using data and technology. Min-
ing companies are highly complex
undertakings with extensive use of
technology in their operations. Many
operational processes have been dig-
italised, from automated production
processes to communication with
suppliers, service providers and cus-
tomers.
This gives rise to new unforeseen
risk scenarios with the potential for
considerable financial impact: for
example if the availability of a mining
company’s integrated process con-
trol systems were to be seriously
impaired. In such a case, it is highly
likely that the company would incur a
significant loss of revenue.
Can you give some more examples?
Becker: The question is how data are
used in the processes. Australia
already has fully automated mines in
which lorries, conveyor systems and
trains are managed by remote con-
trol from a distance of more than
2,000 miles. The drilling equipment
is automated, lorries with a load
capacity of 350 tonnes operate with-
out a driver, as do the trains running
from the mine to the port. These are
version 4.0 mines. All that can hap-
pen here is initially a physical (prop-
erty) loss. In addition, the mines’
mills are increasingly controlled and
serviced by their manufacturers,
such as Siemens and/or ABB, from
Switzerland and Germany via remote
access. No doubt the mine operators
are not yet fully aware of the risks
which can actually threaten them
from the World Wide Web.
The world’s largest trucks
are used in mining.

MINING
Namely?
Becker: When raw material is
shipped, the consignee receives an
analysis documenting the iron con-
tent, for example. If these analyses
are rigged and the iron content on
arrival at the destination is lower
than stated, this would mean a loss
of revenue. Another example: what if
an outsider were to tamper with the
methane gas values recorded in the
mine and set the value there to less
than 1%? The machines would
remain in operation despite the
potential hazard, thus consciously
accepting the risk of an explosion
occurring ...
Storer: The problem for risk manag-
ers is the ability to get their arms
around such a complex topic that
concerns many stakeholders and
touches numerous corners of their
organisation. It is important to
understand the most critical scenar-
ios for their company and analyse the
true financial impacts of a cyber inci-
dent. This differs from company to
company and can have major impli-
cations on balance sheets and
financing capabilities, through to
dealing with regulators and rating
agencies. Risk managers need help
to assess this.
How exactly does Munich Re help?
Storer: A risk must be understood
before it can be transferred via insur-
ance. For this reason, we work very
closely with clients, as well as our
own internal experts such as the
Mining Engineers from Günter’s
team in order to fully understand
how the respective business oper-
ates, what the key processes are, and
what the most critical risk scenarios
are that need transferring. We then
develop a bespoke policy with cover-
ages and limits tailored towards the
clients’ specific needs. Such an exer-
cise requires a very close collabora-
tion between underwriters, the client
and their IT experts.
The unique aspect of cyber, however,
is that the risk is as complex as it is
individual. Not only must every
industry be considered individually:
even the risks specific to each com-
pany differ considerably. That is why
each company must be considered
on an individual basis. A standard
approach would not work.
OUR EXPERTS
Günter Becker
Head of the Mining Section
Corporate Insurance Partner
gbecker@munichre.com
Chris Storer
Head of Cyber Solutions,
cstorer@munichre.com
Are cyber risks already included in
the policies?
Becker: At present, business inter-
ruptions are only covered if a prop-
erty loss has occurred. In other
words, if a train derails owing to
interference via the internet, or a
self-driving lorry falls down an
embankment, that loss would be
insured. We cover these losses,
which may be attributable to data
manipulation. A completely different
situation arises, for example, if the
methane gas concentration figures
are rigged by outsiders, leading to a
business interruption without caus-
ing a property loss. We refer to this
as a “non-damage business interrup-
tion due to cyber”.
Storer: Traditional policies were
developed at a time when cyber risks
were very different and less relevant
to organisations, and they were never
intended to specifically respond to
such incidents. What is important
today is that companies understand
their specific cyber risk, and seek
coverage that is fit for purpose for
their individual enterprise.
That is the only way to ensure that
their policies react as intended in the
event of a major cyber incident.

Digging deeper to improve
mining claims resolution
A series of extremely large and complex losses in the mining sector
in 2007/2008 and their subsequent difficult resolution sparked the idea
of forming an industry-wide initiative to improve cooperation between
mining companies, insurance carriers and other stakeholders:
the Mining Insurance Group (MIG).
In early 2012, a global broking house invited inter-
ested parties from the mining insurance community
to investigate ways to make claims negotiations less
cumbersome. This initiative attracted the interest of
some 70 professionals from all corners of mining
insurance to gather in London in late January 2012.
Risk managers, insurers and reinsurers, brokers, loss
adjusters, lawyers and other service providers entered
into two days of open and lively discussion about an
appropriate mining insurance product.
Although the interests of individual stakeholders
continued – and continue – to differ, all agreed that
something had to change. In the very first meeting,
a steering group was formed to facilitate the creation
of what is now MIG – the Mining Insurance Group.
Mining risks come with their own set of special chal-
lenges. Yet traditionally insurers have not dedicated a
specific line of business to mining, unlike with oil and
gas risks for example. Insurance policies for mining
risks have been derived from policy forms for “ordinary”
property risks in other industries, with mining-specific
addenda endorsed to provide for more – or less –
clarity. But product development has clearly failed to
hold pace with the needs and risks of this booming
industry.
The mining loss events of 2007 and 2008 made this
discrepancy painfully apparent. In September 2007,
there was a breakdown of a crusher in the processing
plant of a copper mine in the Andes. As there was
no second crushing facility on the site, the expected
downtime for repair and the resultant loss of produc-
tion implied a potential loss in the hundreds of millions
of US dollars. The mine had multiple owners and sev-
eral different insurance carriers. To add to the com-
plexity, one of the insureds was hit by flood losses in
Australia during the same policy period, in January
and February 2008. This drove up the potential for
total claims to the range of one billion US dollars.
During the protracted claims settlement process –
the most complex claim took until June 2012 to be
settled in mediation – the measures employed in claims
handling and settlement, stemming from “ordinary
property” claims, proved insufficient for complex min-
ing claims. Insurance buyers and underwriters alike
were very dissatisfied with the expectations on the
one side and the deliverables on the other.
MINING
Mining is a sector with its own
special set of risks, which were not
adequately handled for a very long
time.

MINING
The final version of the MIG Claims Protocol is
characterised by five important features:
– Pre-agreed, neutral loss adjuster
– Agreed loss management plan
– Inclusion of realistic target times
– Transparent communication of issues
– Resolution procedure as the “circuit breaker“
A neutral loss adjuster
One of the main improvements to the mining claims
process established in the MIG Claims Protocol is the
appointment of a pre-agreed, neutral loss adjuster.
The loss adjuster is a named individual responsible
for facilitating an efficient, transparent and fair dia-
logue between the relevant stakeholders, using a pro-
ject management approach throughout the entire
claims process. The adjuster’s main tools are the use
of agreed samples for requests for information and
loss management plans as well as efforts by the rele-
vant stakeholders to work towards realistic target
times for the delivery of their tasks.
One of the parties’ mutual commitments is to inform
counterparts early of any significant issues that
may evolve during the adjusting process. This should
begin with a detailed notification, followed by peri
odic discussions. In the event that the claims process
does not progress as envisaged, dialogue between the
stakeholders comes to an impasse or the adjustment
process stalls, the Claims Protocol sets out a resolu-
tion procedure with a neutral third party acting as the
“circuit breaker”. Alternative options for dispute reso-
lution, such as arbitration, remain open.
Applying the Claims Protocol – as either a binding
part of the insurance contract or as a best practice –
lowers costs for claim resolution, enhances financial
outcomes for all parties and helps to foster sustain
able relationships between the stakeholders. Given
these advantages, it is not surprising that the MIG
Claims Protocol has already been implemented in
insurance programmes for several mining companies.
During the two years between the launch of the initia-
tive and the first official Annual General Meeting of
the non-incorporated association in February 2014, a
considerable amount of work was put into the two ini-
tial objectives: claims handling and bespoke policy
wording for mining.
The MIG Claims Protocol
A key aim identified in the early days of the MIG
initiative was the introduction of a claims protocol.
Generally found in insurance programmes for large
and international risks in different lines of business,
claims protocols set out a detailed procedure that
the stakeholders involved in claims handling should
follow.
It was agreed that the protocol should be specifically
tailored to mining risks, independent of their size,
to overcome challenges including distrust and lack of
communication between the stakeholders, lack of
transparency, wasted resources due to overreliance
on experts, and drawn-out claim resolution. The MIG
initiative formed a Working Group for Claims Protocols,
led by Munich Re and made up of participants from
the different stakeholder groups, including insurance
buyers. Specifically, Munich Re’s industrial insurance
specialist unit CIP was instrumental in developing the
wording and claims protocol.
The Working Group for Claims Protocols identified four
guiding principles for best practice claims handling:
– Efficiency
– Transparency
– Fairness
– Mutual cooperation
The Mining Insurance Group (MIG)
The Mining Insurance Group (MIG) is a non-
commercial undertaking organised by a committee
drawn from professionals with extensive experience
of mining risks and claims. It is a cooperative forum
enabling ongoing improvements in the underwrit-
ing, risk management and claims processes, along
with the exchange of views, experiences and dis-
semination of knowledge. MIG was established by
mining companies, risk managers, underwriters,
claims adjusters, brokers and other service providers
involved in risk management and insurance-related
activities in the mining industry.
More information at
www.mininginsurancegroup.com

MINING
In addition to drafting a claims protocol, developing
special policy wordings for mining was also high
on MIG’s agenda. Andrew Weare, a member of the
wording group, talks about the excellent progress
the initiative has made in this area.
Back in 2012, prior to joining Munich Re and whilst
still working as a wordings broker, I was asked to get
involved in the MIG initiative. In those early stages, I
anticipated a protracted and difficult road ahead. After
all, how can you expect consensus in a room filled with
different underwriters, brokers, insureds, lawyers and
adjusters each coming at the issue from their own
opposing and self-interested position? One of the first
meetings was at Munich Re’s offices in Munich. Back
then the wording group was comparatively small, as
most attendees had opted for the claims protocol group.
But this did not mean that the debate was any less
passionate, with each participant eager to unpack a list
of issues, recommendations and demands. Despite the
obvious differences in perspectives represented, it was
clear that this group’s members were all professionals
with a common dissatisfaction in the flawed policy
wordings that had produced uncertainty of coverage
and expensive disputes. The bluster and bombast soon
gave way to reasoned debate and the will to work as a
team. Such was the hopeful start of a new and influen-
tial force in mining insurance wordings.
From those early beginnings in Munich, many more
meetings have taken place and the wordings participa-
tion has grown considerably. Original group members
have come and gone, become friends or even switched
employers. But as a group, we have retained a collec-
tive and growing commitment to our goal of clarity,
transparency and certainty in policy wordings, knowing
that this is as much desired by insurance buyers as it is
by underwriters.
Two years later at the most recent meeting in London,
I was happy to be presenting the product of the draft-
ers’ efforts. Some months earlier, a group of four under-
writers and brokers had been invited to produce a suit-
able form based on the ISR Mark IV Policy.
We had locked ourselves away and distilled the wider
group’s contributions into the first MIG form with
clauses tailored for the Australian mining market.
This slim document is not just a milestone in the work
of MIG. It is living proof that diversity of participation
and opposing positions can create a forum where
industry issues can be fiercely debated, understood
and, ultimately, resolved.
The Baralaba Mine, flooded by
the Dawson River.

MINING
Andrew Weare is In-house
Counsel in CIP and advises their
Mining and Oil Gas teams on
wordings and other legal mat-
ters. He has over 20 years of
experience in the international
insurance and reinsurance
marketplace.
aweare@munichre.com
A forum for open dialogue
MIG was an idea founded upon an
honest and open discussion of the
issues associated with the mining
insurance industry and, in particular,
buyers’ dissatisfaction with insurers’
response to complex major losses.
MIG acted as a “circuit breaker”
between insurance buyers, sellers
and associated service providers,
allowing a forum for open dialogue
on the issues and acting as an objec-
tive mechanism for solutions with all
stakeholders having a say.
Despite a largely self-insurance strat-
egy, BHP Billiton proudly remains
associated with the insurance mar-
ket and has made a conscious deci-
sion to actively lead, contribute and
support the Mining Insurance Group
for the benefit of all mining insurance
stakeholders. It fully supports MIG
and was an early adopter of the
Claims Protocol, which is actively
used to adjust losses to their captive
and for the insurance placement for
their joint venture partners. It also
supports the introduction of a stand
ard mining insurance wording, which
could be used as an option for insur
ance buyers where cover is intended
to be clear and concise.
BHP Billiton is delighted that Munich
Re has taken a leadership role in MIG
and itself remains committed to
MIG’s journey, helping the industry
“collaborate, learn and create”.
Matthew Frost is Vice President, Risk
Finance at BHP Billiton, the world’s
largest natural resource company. He
has had a more than 30-year career in
insurance and risk management
working on three different continents.
He is Vice Chairman of MIG.
Dr. Andre Knoerchen heads the
New Risk Solutions Team in CIP.
Prior to this, he was Head of
Claims in CIP, where he was res-
ponsible for energy, mining,
engineering, casualty and special
enterprise risk claims.
aknoerchen@munichre.com
OUR EXPERTS
Günter Becker heads the Mining
Section in Corporate Insurance
Partner (CIP) and has hands-on
industry experience as a mining
engineer and twenty years’
underwriting experience.
He is Chairman of MIG.
gbecker@munichre.com
Martina Christ is a legal consul-
tant for CIP Claims, specialising
in the engineering, energy and
casualty lines of business.
Since 2009, Martina has worked
on some of the largest mining
claims in the industry.
mchrist@munichre.com

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NOT IF, BUT HOW

Each infrastructure project has its own
specific challenges, be it the location,
technology, implementation of the
construction work, operation, environ‑
mental conditions or natural hazards.
Easier assessment of risks
involved in construction and
industrial projects
Munich Re has joined forces with TÜV SÜD to develop a new rating
system which makes it possible to assess the risks involved in
construction and industrial projects. This product is now a key element
of MEAG’s due diligence process. The next step will be to make the
product available to a select group of Munich Re clients.
INFRASTRUCTURE

MEAG is one of the largest asset managers in the
European finance sector and manages nearly all the
assets of Munich Re and ERGO. MEAG also manages
the assets of non-Group partners and has garnered
several asset management awards. In the Munich Re
(Group) infrastructure investment programme, know-
how from Munich Re’s core business is harnessed to
assess the risk of investment opportunities, generat-
ing synergies within the Group. Alongside its equity
commitments, the Group also provides outside capi-
tal. A Group-wide investment volume of up to €8bn is
planned for this purpose in the coming years. Due to
the long terms to maturity, these investment risks
must be analysed and assessed as effectively as pos-
sible.
Project Risk Rating – An established part of risk
assessment
The rating service developed by TÜV SÜD and
Munich Re is an excellent supplementary risk assess-
ment tool which has been available to MEAG since
October 2014. “Our team is well occupied at present,”
says project manager Franz Vogt. “Rating has
become an important part of the analysis. Coupled
with external certification expertise and a structured
assessment process, Munich Re’s internal risk experi-
ence supports sound investment decisions. Mean-
while, we too are becoming more experienced, and
can optimise processes and enhance the content.”
There is a regular flow of feedback from the ordering
party – the internal Munich Re unit Asset Liability
Management (ALM) – and MEAG, the client. This
feedback is then channelled into the product’s further
development. It is fascinating to observe just how var-
ied Munich Re’s internal know-how is: the assessment
of a port, for example, is based, among other things,
on the empirical know-how of a sea captain.
Gernot Löschenkohl, Senior Consultant with ALM,
emphasises: “Project Risk Rating is an innovative
product with considerable potential. For its core busi-
ness, Munich Re has at its disposal a heterogeneous
pool of experts with extensive operational know-how.
As a result, individual risks can be described swiftly,
interdependent relationships pinpointed and their
impacts mapped out beyond the bounds of the indi-
vidual project. These findings allow our clients to
reach more effective investment decisions.”
The range of risks is considered as a whole and
made transparent to the user
Each infrastructure project has its own specific chal-
lenges. Be it the location, technology, implementation
of the construction work, operation, environmental
conditions or natural hazards: depending on the
framework conditions of the individual contract, these
aspects can sometimes have a significant impact on
the risk profile of the various investment options. This
highlights the importance of an all-embracing risk
analysis and calls for an exhaustive rating process.
The transparent presentation and assessment of the
main risks involved also make it easier for MEAG to
form a swift opinion and arrive at a definitive
appraisal of the investment risk.
“The findings obtained from Project Risk Rating help
us to quantify various assertions in documents
acquired from external sources and to transform
these into stress scenarios. This permits more precise
analysis of a project’s sensitivities,” explains Thomas
Bayerl, Head of Infrastructure Debt at MEAG.
INFRASTRUCTURE
MEAG invests in infrastructure
MEAG has invested in renewable energies since 2010,
and in infrastructure since 2012. In both areas these
have been equity investments to meet the long-term
payment obligations in Munich Re’s core business,
and to pursue diversification and optimise returns.
In 2014 MEAG established a dedicated team for infra-
structure third-party capital, which is headed by
Thomas Bayerl.
The capital market segment renewable energies/
third-party capital is handled systematically by the
same team that is responsible for equity investments
in this segment. When assessing the risks involved in
its transactions, MEAG benefits from the know-how
of insurance experts at Munich Re and from Project
Risk Rating, which is presented here. To date, approxi-
mately €2bn of the target volume of €8bn has been
invested in infrastructure/renewable energies.
More information at
www.meag.com

+ -
Dipl.-Ing. Franz Vogt
Construction engineer,
Project manager
Project Risk Rating
fvogt@munichre.com
Leveraging expertise
In the rating process, experts from Munich Re and
TÜV SÜD analyse and assess technical risks, execu-
tion, environmental risks and natural hazards, as well
as macroeconomic and microeconomic aspects.
Since infrastructure projects are, by their nature,
highly individual, suitable experts are selected from
the two companies for each project. Unlike conven-
tional assessments with their compartmentalised
approach, here, communication between all the
parties involved has proven one of the most valuable
features of the rating process.
How are investment projects assessed with
Project Risk Rating?
Overall assessment of the projects in a Project Risk
Rating process allows investors to compare the
respective projects and make decisions in keeping
with their individual risk appetite.
OUR EXPERTS:
Gernot Löschenkohl
Senior Alternative Investment
Manager
gloeschenkohl@munichre.com
Source: Munich Re
Sample report
Granted Denied
Rating
Certification
To assess a project, the six risk containers
are classified according to a risk ranking
system with seven levels (bars). If the
overall ranking is positive, the project is
awarded a certificate with four possible
levels. The certificate’s ranking is repre-
sented by stars.
PPP Courthouse
PPP Roadproject
LNG Export Facility
Hydro Power Plant
Sea Lock
Container Port
Hydro Power Plant
PPP Roadproject
PPP Roadproject
Best in class:
Very low probability of
project failure under excep-
tional circumstances
Very good:
Low probability of project
failure under exceptional
circumstances
Good:
Very low probability of
project failure under nor-
mal circumstances
Acceptable:
Low probability of project
failure under normal
circumstances
INFRASTRUCTURE

All-around view of six risk areas
Macroeconomy
Economists identify the political
and economic risks specific to the
country concerned. Our accumulated
socio-empirical data are also
applied here.
Engineers and insurance experts analyse the risk portfolio
of a construction or industrial project on the basis of
six risk containers and their respective interactions.
Technology
Industrial plants are checked by
engineers and insurance experts
according to the high standards of
western industrialised nations.
Execution
Risks associated with project man-
agement are analysed in detail by
construction experts.
Natural hazards
Geoscientists assess the project’s
exposure to natural hazards on the
basis of available geo risk data.
Environment
Environmental engineers assess the
project’s potential impact on the
environment and the resultant risks
on the basis of western environmen-
tal standards.
Microeconomy
Business plan, market environment
and contract law are scrutinised by
business experts.
PROJECT RISKS

COLUMN
Prof. Peter Höppe, Head of Munich Re’s Geo Risks Research/Corporate Climate Centre
phoeppe@munichre.com
Climate change
COP21 – Let’s make the most of
the new opportunities
of just under one degree Celsius, will
intensify, so more vigorous adapta-
tion efforts are required.
From our perspective, a further
aspect that must be seen in a very
positive light is the fact that Article 8
of the Paris Agreement now officially
recognises insurance solutions as an
important part of the adaptation pro-
cess. For example, the already opera-
tional pool solutions to cover losses
from extreme weather events in
poorer countries – such as the African
Risk Capacity (ARC), the Caribbean
Catastrophe Risk Insurance Facility
(CCRIF), and the Pacific Catastrophe
Risk Assessment and Financing Initi-
ative (PCRAFI) – are seen as useful
and extendible approaches.
It is now up to us insurers to breathe
life into the new opportunities that
have emerged. As a globally operat-
ing reinsurer, we understand better
than anyone the very different
regional hazard situations, how they
are changing, and the vulnerabilities
involved. Managing risks – including
those posed by climate change – is
part of our core business. After Paris,
the door is now open for us to con-
tribute our expertise and help to
achieve a meaningful increase in
people’s resilience to the unavoidable
consequences of climate change.
Let us make the most of this oppor-
tunity!
In many respects, 2015 was very
much a climate year. It gave us a
new global temperature record
fuelled by a strong El Niño, signifi-
cantly exceeding the previous
record of 2014. It was almost as if a
further compelling argument was
being presented for the climate
negotiations. Throughout the year,
suspense built up, accompanied by
some extremely ambitious expecta-
tions, as we moved towards the
climate summit in Paris. It was clear
to everyone that a failure like that of
2009 in Copenhagen would signal
the end of the UN-led negotiation
process – and this had to be avoided
at all costs.
Back in June in Elmau, the G7 coun-
tries had laid solid foundations by
reaffirming their commitment to
restrict global warming and make
support payments to developing
countries. However, a new feature
was agreement on a five-year project
that will enable an additional 400 mil-
lion people in developing countries to
protect themselves against increasing
losses from extreme weather events
in the form of insurance solutions.
This initiative sent out a clear signal:
that we take the problems faced by
people in developing countries very
seriously and are prepared to take
responsibility for emissions. In my
opinion, this gesture had a positive
effect on the atmosphere at the
negotiations, which have frequently
been affected by the conflicting
interests of the countries responsible
for climate change and those that
suffer most from it.
Further enabling factors included the
superb organisation of the confer-
ence by the French hosts, and the
excellent management of the negoti-
ations by the French Foreign Minis-
ter, Laurent Fabius. A breakthrough
was finally reached, not least thanks
to the positive mood that prevailed,
which inspired goodwill in many
countries that would otherwise have
tended to block proposals. I believe
that the result of the climate summit
is the best possible outcome that
could be achieved at the present
time. What’s more, with the target of
holding global warming to “well
below two degrees Celsius”, an even
stricter limit was set than originally
planned. Yet certain risks remain
from the Paris Agreement: the indi-
vidual countries still have to ratify the
agreement; there are no sanctions if
the voluntary reduction targets are
not met; countries can opt out of the
agreement.
400 million people can now
protect themselves against
losses from extreme
weather events.
And we also need to be very clear
about one thing: even if all the prom-
ises are kept, and the reduction tar-
gets are tightened after five-year
review periods, climate change can-
not be stopped. Yet Paris represents
a breakthrough. It has considerably
improved the opportunities to limit
climate change within a framework
that is still manageable for most
countries. The effects, however,
which have become already detecta-
ble with the current global warming
Munich Re Topics Risk Solutions 1/201618

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Topics Risk Solutions: Issue 1/2016

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