10 Steps to a Bankable Insurance Programme
This issue of Insight guides the reader through the sometimes hazardous path to achieving a compliant and effective project insurance programme.
Although compliance with the insurance requirements of finance documentation is frequently a critical path item in the financing process, it is often dealt with as an afterthought.  We set out below ten key points to ensure that an efficient and cost-effective bankable insurance programme is arranged which prevents the insurance requirements of lenders from impeding the overall project timeline.
1. Appoint a lenders’ insurance advisor early in the project discussions  The early appointment of an insurance advisor will quickly identify and resolve issues which could cause concern to lenders. It also allows the appropriate project agreements, finance documents and policy documentation to be prepared.  If the Insurance brokers and lenders’ insurance advisors engage at an early stage in the development of the insurance strategy, the requirements of lenders can be included from the outset, and their expectations can be managed.
2. Communicate clear and realistic deadlines for signing and financial close The deadlines for signing the finance documents and for drawing down loan funds are generally driven by dates imposed by contractors or governments.  Providing the insurance advisors with clear and realistic deadlines enables them to ensure that the insurance programme, and associated compliance reports, are finalised and evidenced within those timeframes. 
3. Encourage direct interaction between the insurance and legal advisors  An early direct dialogue between the insurance and legal advisors of all parties will ensure that the legal and regulatory requirements are known at the start of the insurance programme design.  Financiers often have a strong preference to base project documentation on successful precedent transactions and follow similar terms and conditions.  Early understanding of the precedent being used (and its specific context and location) will enable the lenders’ insurance advisor to undertake a due diligence review of the documentation and understand the preferred terms and conditions. 
4. Provide the insurance advisors with direct access to the technical advisors Communication between the insurance advisors, the project engineers and lenders’ technical advisors is key to ensuring that there is a clear understanding of the project risks (including frequency and severity), which will influence the size and shape of the insurances.  If the insurance advisors are aware of the technical issues that influence limits, sub-limits and indemnity periods, the marketing of the programme can be planned appropriately from the start.
5. Ensure insurers and reinsurers are aware of lenders’ additional documentation requirements A major hurdle in the insurance process for financed projects is the negotiation with the legal departments of the insurance and reinsurance carriers in relation to lenders’ clauses and assignment documentation.  This documentation is a key part of the lenders’ security structure and if insurers and reinsurers are aware of the requirements, then this can be part of the placement discussion from the start.  It is therefore important that the forms of documents are agreed and circulated to all parties as soon as possible.
6. Understand the local legislation and practice in relation to insurance. Lenders insist that every project must strictly comply with the prevailing local legal requirements.  However, local practice will inevitably differ from country to country, with legislation controlling the placement of insurance with local insurance carriers.  Accordingly, it is essential that lenders have a realistic understanding of what can be achieved locally when setting their requirements for rated insurance and reinsurance security as this may have an impact on the security profile of the project.
7. Consider contractual risk transfer when designing the insurance programme. Insurance is only one part of a risk mitigation programme.  Risks can also be transferred to counterparties through the various project contracts that are entered into by the project company with contractors and offtakers.  Lenders may also consider indemnities and provisions offering force majeure relief when assessing the levels of insurance they require to be arranged.  It is therefore sensible for the insurance discussions and the negotiations of the project agreements to be run in parallel.
There is often pressure for construction insurance programmes to be arranged by the contractor rather than the borrower, but this can hinder achieving an insurance programme acceptable to lenders and would need to be factored into contract discussions.
8. Address lenders’ requirements for terrorism insurance  Lenders will typically require non-cancellable terrorism insurance cover based on the full replacement value of the project, unless they can be satisfied that a lower limit covers the worst case loss potential or that market capacity has been exhausted.  Borrowers may consider commissioning a Probable Maximum Loss (PML) study, which could result in significant savings if a lower terrorism limit can be justified.  The cost and time involved in undertaking such a study needs to be considered.
9. Highlight governmental incentives which may need to be insured if they are not achieved.  The financial viability of some (notably renewable energy) projects is linked to various governmental financial incentives, which may depend on the delivery of a project in a given timeframe.  The failure to earn such preferential terms can be insured, therefore it is essential for the insurance advisors to understand the incentive structure early in the design of the project insurance programme.
10. Remember that lenders are not the enemy! Throughout the insurance due diligence process, the principal objective of lenders is to ensure that the risks of the project are adequately covered by reputable carriers, in line with prudent industry practice.  In this regard, the views of the lender and the borrower are largely aligned.  In our experience, the main disagreements lie in the interpretation of what constitutes appropriate and reasonable cover. An open dialogue between parties is always the best way to reach a mutually acceptable solution.

ABOUT INDECS
INDECS Consulting Limited is an independent insurance consultant which provides a wide range of insurance and risk management services to clients worldwide. In its role as Lenders’ Insurance Consultants, INDECS currently has 80 active engagements with a total project value of over US$49 billion.
CONTACTS:
Barry Williams                                                                                Felipe Alviar-Baquero
+44 20 7397 4150                                                                         +44 20 7397 4169
b.williams@indecs.co.uk                                                              f.baquero@indecs.co.uk