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The Oil Insurance Limited (OIL) Companion 2019A complete guide to the biggest Bermuda based energy mutualPUBLISHED FEBRUARY 2019
ENERGY & POWER PRACTICE
Contents • Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
• 2019 News Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
• Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
• Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
• Coverages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
• Automatic Coverages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
• OIL Occurrence Trigger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
• Limits and Deductables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
• Rating and Premium Plan (R&PP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
• Prospect Premium Indications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
• Considerations for Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
• Membership Application Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
• Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
• Contractual Premium Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
• Designated Named Windstorm (DNWS) Occurrence Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
• Designated Named Windstorm (DNWS) Coverage Restrictions and Premium Obligations . . . . . . . 23
• Windstorm Coverage in Other Geographic Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
• General Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
• Non-Owned Property Sublimit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
• Notice of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
• Claim Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
• Offshore Pollution Liability Agreement (OPOL) Endorsement (and OPOL Certification) . . . . . . . . . . 26
• SPLIT Policies and Policies by Geographic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
• Ventilated (SPLIT) Limit Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
• "Wraparound " or "OIL Wrap" Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
• OIL Endorsement No .5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
• Frequently Asked Questions (FAQs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
• UGA Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
• Statutory Capital and Historic Loss Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
i • The Oil Insurance Limited (OIL) Companion 2019
Marsh • 1
Introduction
Marsh’s OIL Companion offers a balanced, objective, and in-depth analysis of OIL membership from a broker’s perspective . It examines both the advantages and possible disadvantages that merit consideration in the evaluation of OIL membership . This document is designed for risk professionals that are interested in, or deal with, OIL and is structured to provide a quick reference to important OIL considerations . The table of contents below facilitates navigating those topics and additional detail is provided within the frequently asked questions “FAQ” and the document’s appendices .
For further in-depth analysis of OIL, its underwriting methods
and full coverage specifications, plus company financials and
literature, including full details on all changes, we recommend
that you visit the official OIL website www.oil.bm .
Marsh strongly encourages any party with an interest in or
engagement with OIL (be that clients, prospects, or insurers) to
register for the OTA (OIL Technical Accreditation) online training
program which can be accessed through the OIL website .
The website contains the most up-to-date information and has
been a valuable source for much of the information used in
compiling this OIL Companion .
Marsh • 1
2 • The Oil Insurance Limited (OIL) Companion 2019
2019 News UpdateSignificant points of interest as we look back at the past year are as follows:
• Reflecting shareholders’ increasingly diverse energy
investments, OIL added a new sector for wind and solar
renewable energy, effective January 1, 2018 . The wind and
solar renewables sector is currently weighted (and therefore
priced) the same as the electrical utilities sector and OIL is
currently reviewing the loss data from two members with
relevant exposures and will adjust the sector weighting
accordingly . As part of the annual sector weighting review,
the electrical utilities sector weighting, which had not been
changed for quite a while, was updated . As a result, there
has been a significant reduction in the electric utilities sector
weighting which OIL hopes will make it more attractive to the
power/utility segment .
• OIL continues to consider (including conducting a shareholder
survey last autumn) increasing the current US$400 million
limit to US$500m; however, for 2019, it has been decided
to keep the current limit offering . Currently, OIL allows
shareholders the option of choosing standard limits between
US$300m and US$400m . Any limits purchased below
US$300m must be accompanied by a warranty that the
shareholder is not purchasing any other insurance excess
of OIL .
• Shareholder membership remains at 54 with one new
shareholder joining in December 2018 and two other
shareholders merging . Also, several companies have
expressed an interest in joining OIL .
• OIL management, as part of its overall marketing strategy, has
made increased shareholder communications a major goal
and is in the midst of a four year campaign to visit and meet
with all shareholders’ senior management .
• OIL paid a US$450 million dividend in June 2018 to
shareholders of record as of January 1, 2018 . OIL emphasized
the Board of Directors dividend determination is based on
OIL’s capital needs (i .e ., “excess” capital, if any, will be utilized
to support increased limits, if the shareholder body requests
such lower rates, or dividends etc .) .
• Standard & Poor (S&P) upgraded OIL’s rating from “A-” to
“A”, a major positive development . The Moody’s A2 rating is
unchanged and AM Best is not used for rating purposes (OIL
has taken the view S&P and Moody’s ratings are sufficient for
its global stakeholders) .
• Effective July 2018, OIL agreed, in response to a Marsh
initiative, to expand acceptable shareholder provided security
instruments to include surety bonds; please contact your
Marsh representative for the surety bond format .
• Also in July 2018, OIL simplified the split policy requirements
(see the split policy section on page 30) to make them less
restrictive for those shareholders hoping to utilize OIL to
address joint ventures’ insurance needs .
• Late 2017, OIL announced that offshore Gulf of Mexico
Designated Named Windstorm (DNWS) coverage would be
eliminated effective January 1, 2018 . In a resolution approved
at the July 2018 board meeting that is expected to be ratified
at the March 2019 shareholder meeting, OIL will allow offshore
Gulf of Mexico assets to be excluded from the 2018 (and
future) asset declarations . Note that OIL will continue to offer
windstorm coverage in “all other onshore and offshore areas
of the Atlantic Basin and the world” .
• OIL had a higher than expected 2018 loss year with losses of
US$917 million as at 30 November 2018 (as advised in OIL’s
shareholder memo dated 13 December 2018) or slightly
less than one standard deviation (US$391 million) above
mean expected losses (US$565 million) . This comprised of
US$619 million from 2018 Occurrences and US$298 million
of adjustments from prior years . As a result, premiums have
increased on average by 29% across Pools A&B, although
this will vary by member . This is because the 2013 loss year
drops out of the calculation and 2013 had lower than average/
expected losses of US$362 million, combined with the effect
of the high 2018 losses . Theoretical withdrawal premium
(TWP) has also been impacted .
• Lastly, OIL has clarified, as a governance improvement, its
board members can only be current shareholder employees
and should a directors’ employment status change during
their annual term of service then the director(s) is required to
submit their resignation for the Board’s Executive Committee
consideration .
Marsh • 3
BackgroundOIL is a mutual insurance company serving the wider “energy” industry (including power, mining and chemical operations) .
Membership of OIL is governed by the OIL Shareholders’ Agreement which is a binding contract between OIL and its members . The
Shareholders’ Agreement contains the standard OIL insurance and reinsurance policies, byelaws, and the Rating & Premium Plan .
The Rating & Premium Plan is the post-loss funding model utilized by OIL . It is designed to collect 100% of incurred losses (excluding
“incurred but not reported” losses) from members over a five year period; per the “repayment schedule” below; therefore, OIL does not
take underwriting risk in the traditional sense .
Repayment Schedule:
Some quick facts and figures:
• Established in 1972 with 16 shareholders .
• Estimated Unmodified Gross Assets (UGA) insured in the
region of US$3 trillion (September 1, 2018) .
• Shareholders’ equity in the region of US$3 .8 billion
(at September 1, 2018) .
• Total assets in the region of US$7 .2 billion
(at September 1, 2018) .
• 54 members (domiciled in USA, Canada, Europe, Australia,
Asia, and Latin America/Caribbean as of December 31, 2018) .
• Rating philosophy designed to fully fund past losses over time
(past losses = future premiums = past losses) .
• Standard & Poor’s (S&P) rating (financial strength) (stable),
Moody’s A2 (stable) as of May 2017 .
• OIL is currently not reliant upon reinsurance (fundamental
principle – to be an alternative to the commercial market) .
• OIL’s expense ratio is 3-5% which is low compared to the
commercial market, another factor why OIL’s rates over the
long term are extremely competitive .
• Over US$13 billion claims paid since inception (in 1972) .
• US$1 .90 billion of dividends paid and premium credits paid
between 2013 - 2018 . However, this is directly related to the
low claims experience during this time period and is not to be
typically expected of the OIL mutual model .
20
2013
20
20
20
20
20
2014
2016
2015
2014
2013
2012
20
20
20
20
20
2015
20
20
20
20
20
2016
20
20
20
20
20
2017 2021202020192018
Premium Payment Year
20
20
20
20
2016
2012
2017 Annual Premium = Loss Year yr x pool % yr x 20%
Cu
mu
lati
ve L
osse
s (%
)
E&P
Integrated Oil
R&M
Chemical
Pipelines
Utilities
Mining
Other
26%
26%
17%
9%
7%
2%
2%
11%MEMBERSHIPBY INDUSTRY
SECTOR
USA
Europe
Canada
Australasia
Asia
Caribbean
52%
26%
13%
5%
2%
2%
MEMBERSHIPBY HEADQUARTER
LOCATION
4 • The Oil Insurance Limited (OIL) Companion 2019
EligibilityEligibility requirements are rigorously enforced and only
companies that are defined as an “Energy Company” are
eligible for membership . In addition to traditional upstream and
downstream oil and gas exploration and production, refining
and marketing operations, the definition of “Energy Operations”
extends to electric utilities/power generation, pipeline, chemical
(including pharmaceutical),and mining operations .
To be eligible for membership, at least 50% of “UGA” must be
devoted to, or 50% of annual gross revenues must derive from,
“Energy Operations” .
Additionally, certain criteria have to be met (and in many cases
maintained) to qualify for OIL membership:
• Minimum US$1 billion of UGA (Property, Plant and Equipment
(PP&E) before depreciation, depletion, or amortization, plus
book value of inventories) .
• Minimum credit rating of either BBB- (S&P) or Baa3 (Moody’s) .
• Companies without external credit ratings can obtain a “shadow
rating” or submit to financial analysis by OIL and may be
required to post acceptable security (for example, a letter of
credit (LOC)) .
• Acceptable 10-year loss history (losses greater than
US$5 million reported on a ground-up basis) .
• Business operations that represent an appropriate spread of risk
and fit within a mutual framework .
• All of the applicant’s energy operations must be covered by OIL
unless specifically agreed by OIL .
• Demonstrated track record of maintaining world-class health,
environment, and safety standards .
Note: Despite the minimum requirement for US$1 billion of UGA,
in order to qualify for the full US$400 million OIL limit UGA will
be deemed at US$4 billion for premium purposes .
Existing members whose credit ratings fall below established
minimum criteria must post acceptable security (usually a LOC
but, per the above, a surety bond can also be utilized) and/or
pay their premium annually (up front) .
All applications must be approved by OIL management . New
members are not permitted to amend their selected coverage
profile for three years other than with the specific agreement of OIL .
Marsh • 5
Coverages
Principal risks insured include: • Physical damage to property . Basis of recovery is Replacement
Cost but if property is not repaired or replaced within two
years from the date of loss the claim will be settled on a
Depreciated Cost basis (Depreciated Cost = Replacement
Cost less a deduction for depreciation and technological,
functional, and economic obsolescence) .
• Terrorism (including cyber terrorism) .
• Riots, strikes, or civil commotion .
• Well control restoration and redrilling costs .
• Pollution liability (legal, including punitive damages, or
contractual liability for third party property damage or
personal/bodily injury) .
• Note: Coverage is provided on a “sudden and accidental”
basis (40 days discovery/120 days reporting) for Occurrences
commencing on or after January 1, 2006 or date of OIL entry,
whichever is later . It should be noted that “gradual tail” (non-
sudden and accidental) cover for prior Occurrences remains
available for members who elected broad form pollution
coverage prior to January 1, 2006 . All members of OIL including those insured on a “sudden and accidental” basis (i.e. all post 2006 members) are still pooling losses with the “gradual tail” members.
• Debris removal costs and clean-up expenses (including
reasonable and necessary expenses incurred to mitigate
further injury or damage that would otherwise arise) .
• Offshore Pollution Liability Agreement (OPOL) certification
(where applicable) .
• Sue and labor expenses (including general average and
salvage expenses) .
• Cargo .
• Construction (contractors or project lenders cannot be named
as additional insured parties) .
• Note: OIL eliminated Offshore Gulf of Mexico DNWS coverage
from January 1, 2018 .
• It should be noted that apart from Designated Named
Windstorm (DNWS) and non-owned property not included in
a member’s UGA declaration and not used in the operations of
the member, none of the coverages provided by OIL are sub-
limited and therefore the full limit of the OIL policy is available
for all perils/coverages (including earthquake) .
*
RISK INSURED MAJOR EXCLUSIONS
ALL-RISK PHYSICAL DAMAGE
CONTROL OF WELL(INC. RESTORATION & RE-DRILLING)
3RD PARTY POLLUTION LIABILITY• NON GRADUAL (40/120 DAYS)
WAR, NUCLEAR
BUSINESS INTERRUPTION
COMMERCIAL WASTE DISPOSAL
PRODUCT & COMPLETEDOPERATIONS LIABILITY
TANKER POLLUTION LIABILITY(EXCEPT CHARTERER’S LIABILITY)
TRANSMISSION &DISTRIBUTION LINES
INHERENT DEFECT, WEAR & TEAR
ECONOMIC & TRADE SANCTIONS
TERRORISM(INC. CYBER TERRORISM)
CONSTRUCTION
CARGO
WINDSTORM
EARTHQUAKE
6 • The Oil Insurance Limited (OIL) Companion 2019
Principal exclusions are: • War (excepting terrorism) and political risk (confiscation or
expropriation) .
• Nuclear (applies to (i) the “Hot Zone” of any nuclear facility
or portion thereof or (ii) any loss, damage or expense arising
out of or resulting from…nuclear reaction or nuclear radiation
or radioactive contamination…etc . Refer to OIL policy for full
exclusion but OIL does provide cover in the “Cold Zone”) .
• Oil in the ground, (prior to recovery) .
• Land, land values (other than land alterations or processed
water) .
• Loss of hire .
• Business interruption .
• Waste site pollution liability (commercial) .
• Products and completed operations liability .
• Tanker pollution liability (except charterers’ liability) .
• Third party liability (other than pollution liability) .
• Fidelity (dishonest or fraudulent acts but exclusion does not
apply to physical damage caused by employee sabotage,
vandalism or other willful and malicious destruction of
tangible property) .
• Defective part (relevant with respect to the
construction coverage) .
• Wear and tear (does not apply to collapse of the property, or
a material part thereof, or resultant loss or damage to other
property) .
• Loss of hole (direct physical loss or physical damage to insured
equipment in hole is covered) .
• Transmission and distribution (T&D) lines above ground
(1,000 meter exemption) .
• Economic and trade sanctions .
Note: OIL is unable to provide cover for any operations which
may breach sanctions (and sanctionable assets are to be
identified on the annual Unmodified Gross Asset declaration) .
• The applicability of this exclusion will be determined “at the
time of loss” once all the facts and circumstances surrounding
a claim are known .
• Watercraft .
Note: Floating production storage and offloading systems
(FPSOs) are not excluded (not considered as “Watercraft”)
but pollution liability for FPSOs is only provided if the FPSO is
“secured at site” for the production, storage, or processing of
hydrocarbons at time of the Occurrence . No cover for off-station
pollution liability (routine maintenance or repair transits or for
transportation of cargo) other than for emergency breakaways/
reasonable responses to emergencies (causing disconnect)
which are the only circumstances in which off-station pollution
liability cover will be afforded for FPSOs .
Automatic CoverageOIL’s coverage is either automatic or subject to additional
criteria, depending upon the circumstances .
Automatic coverageWorldwide coverage for an energy company and its consolidated
subsidiaries/affiliates (except where sanctions apply) .
A member’s interest in a joint venture or other non-consolidated
(or partially consolidated) affiliate (if interest is less than 1% of
UGA) .
Coverage for non-owned assets where a member has a
contractual obligation to repair/replace (or which are in the care,
custody, or control of the member) .
Newly acquired properties are automatically included from date
of acquisition .
Coverage subject to additional criteria:A member’s interest in a joint venture or other non-consolidated
(or partially consolidated) affiliate (if interest equates to greater
than 1% of UGA), subject to a declaration of the assets to OIL for
premium purposes and written approval by OIL .
Coverage may be extended to non-OIL member third party
interests (for example, joint venture partners) subject to OIL
guidelines (which includes a requirement to enter into an
indemnification agreement with OIL in respect of claims that may
be brought by such third party interests) and written approval by
OIL . For the current guidelines please refer to the OIL website .
Note: Coverage for a joint venture or other non-consolidated (or
partially consolidated) affiliate is only permitted if the interest to
be insured is not otherwise insured under another OIL policy .
Marsh • 7
Limits and DeductiblesFor all coverage provided by OIL, including (currently) all non-
DNWS windstorm coverage, the limits and deductibles are as
set out below . However, specific limit and deductible conditions
(restrictions) apply to DNWS coverage and these are highlighted
separately .
Note: Designated Named Windstorm (DNWS) currently equates
to a Named Windstorm originating in or migrating into the
Atlantic Basin DNWS region only (Gulf of Mexico/Caribbean/ US
Gulf Coast and US East Coast onshore, etc .), formerly known as
an “Atlantic Named Windstorm” or “ANWS”, but other regions
could potentially be included as DNWS regions (subject to
coverage and limit restrictions) if triggered by future windstorm
loss activity .
Note: OIL eliminated Offshore Gulf of Mexico DNWS coverage
from January 1, 2018 .
In this companion we focus on the onshore and rest of world
(ROW) offshore windstorm coverage and limit restrictions .
Oil Occurrence TriggerOIL coverage is triggered by an Occurrence .
An Occurrence is essentially defined as an event or continued or
repeated exposure to conditions commencing during the policy
period that is neither intended nor expected by the member and
that causes loss (or losses irrespective of the period or area over
which such losses occur) .
For earthquake an event means one or more earthquake shocks
occurring within any period of 72 hours .
For “perils of nature” including but not limited to windstorm, an
event equates to a single atmospheric disturbance designated by
the Responsible Meteorological Service .
The definition of Occurrence in a commercial market policy may
be different from OIL . This can include different application of
72-hour clauses and definitions of windstorm or other natural
phenomena . Such differences give rise to a potential disconnect
with respect to the treatment of limit and attachment point for
any excess OIL or OIL difference in conditions/wraparound (“OIL
Wrap”) policies that may be put in place to compliment OIL . This
issue needs to be carefully managed .
A separate definition applies for Designated Named Windstorm
(DNWS) Occurrences . Currently a DNWS Occurrence equates to
a Named Windstorm originating in or migrating into the Atlantic
Basin DNWS region only (formerly known as an “Atlantic Named
Windstorm” or “ANWS”), and this is further discussed below .
8 • The Oil Insurance Limited (OIL) Companion 2019
Limits (current 2019)
Occurrence limit
US$400 million (for interest) .
However
DNWS Occurrence limit is restricted to US$150 million (60%
quota share part of US$250 million) .
Limits are also restricted to the lesser of 10% of a member’s UGA
or US$400 million, although a member can purchase “excess
limits” up to the maximum US$400 million Occurrence limit or
US$150 million (part of US$250 million) DNWS Occurrence limit
specified above by declaring UGA deemed at US$4 billion .
Note: OIL imposes a sublimit of US$50 million (for interest) for
non-owned property which is (i) not included in a member’s UGA
declared to OIL and (ii) which is not used or intended for use in
the operations of the member .
Individual members’ Annual aggregate limit
OIL does not impose an annual aggregate limit .
However
A DNWS annual aggregate limit of up to US$300 million (twice
the DNWS Occurrence limit selected) applies for each member .
Joint venture limit
Limits are not scaled to interest and recoveries are only
restricted by:
1 . Members’ individual Occurrence limit .
2 . Members’ DNWS annual aggregate limit .
3 . Aggregation Limit, as applicable (see following page) .
Note: This can be a major differentiator from a commercial
market control of well or pollution coverage perspective .
OIL $400M OIL $400M OIL $400M
OIL $150MPart of$250M
60 %
RET
AIN
ED /
MA
RK
ET /
R
ETR
O L
IMIT
%
Marsh • 9
Per occurrence aggregation limit US$1,200 million (all insureds combined)
However
DNWS Aggregation Limit is restricted to US$750 million .
Aggregation Limit is shared between all members per
Occurrence (for example, major earthquake or major
windstorm) . However, each member is still limited to their
individual Occurrence limit or DNWS annual aggregate limit
as applicable . The effect of this condition is potentially to reduce an individual member’s OIL recovery in any given Occurrence, if that Occurrence affects more than three members (or more than five members for DNWS).
Flexible limit
Limits can apply as primary, excess, or quota share and may be
ventilated (split) .
Different limits are allowed on a sector-by-sector basis .
Members can select a reduced limit (minimum US$100 million or
US$60 million quota share part of US$100 million for DNWS) .
If less than full limits are purchased, OIL may, at its discretion,
impose a warranty relating to the absence of any other insurance
(i .e . prohibiting insurance purchases from other insurers in
excess of the reduced OIL limit) . Currently OIL does not apply the
warranty to windstorm limit selection .
Note: If the full US$400 million is not purchased, the warranty
relating to the absence of relevant excess insurance will be
waived for limits between US$300 million and US$400 million, as
noted in the news update section . However, a warranty will still
apply to the first US$300 million if a member does not buy that
entire limit .
Members can purchase ventilated (or split) limits subject to
approval by OIL . Splitting the limit into layers (using part of
the limit on a high excess basis) allows members to avoid the
warranty regarding the absence of other insurance (for selecting
less than US$300 million OIL limit) . OIL will also allow the layers
of a ventilated limit to be arranged with different coverage
profiles (100% limit versus external quota share limit, for
example) .
Note: Endorsement No . 5 (Schedule of Excess Insurance) will
need to be adjusted to reflect split limits .
OIL USD400M
Commercial MarketUSD 400M
OIL Deductible
elpmaxE ’yramirP‘
‘External’ Quota Share Example(USD 800M)
Commercial Market Excess (if required)
OIL USD 400M
OIL Deductible
elpmaxE ’ssecxE‘
‘Internal’ Quota Share Example
OIL allows either 10%, 20%, 30% or 40% Internal Quota Share.
OIL USD 400M
Commercial Market Placement
Retention
60% ofUSD 400M OIL
40% Commercial Market
OIL Deductible
10 • The Oil Insurance Limited (OIL) Companion 2019
Deductibles (current 2019)
Minimum deductibleUS$10 million (100%) per Occurrence .
Deductibles scale to interest subject to a minimum of US$1
million (for interest) per Occurrence . Different deductibles can
be selected for different Sectors .
However
DNWS minimum deductibles are subject to OIL agreement and
does NOT scale to interest .
New members may potentially be subject to a higher minimum
deductible than US$10 million depending upon their 10-year loss
history and their current exposures .
Higher deductiblesHigher deductibles are allowed on a Sector-by-Sector basis in
increments of US$5 million . Deductible credits are given up to a
maximum attachment point of US$750 million or US$2 .5 billion
for DNWS .
If higher deductibles are selected, OIL may, at its discretion,
impose a warranty relating to the absence of underlying
insurance (i .e . prohibiting the purchase of underlying insurance) .
To date, OIL has never exercised that right .
Deductible applicationA single Occurrence involving multiple Sectors attracts only
the highest deductible (losses eroding the highest deductible
applicable to any one Sector are also applied to erode or exhaust
the deductible amount applicable to any other Sectors involved
in the same Occurrence) .
However
The highest single deductible methodology only applies to the
nine Sectors (not DNWS) .
For DNWS Occurrences, onshore losses will only erode onshore
deductibles and offshore losses will only erode offshore
deductibles on a separate and distinct basis .
Members are allowed to make coverage (limit/deductible profile)
changes during the policy year subject to 30 days notice and
consent by OIL, but only in certain circumstances such as an
asset sale or merger or similar non-recurring event .
Rating and Premium Plan (R&PP)It is important to understand that the OIL premium calculation
(premium model) is different from the wider commercial
market approach . Premium is derived from OIL’s R&PP . This is
a formula driven rating plan based on members’ unmodified
gross assets (UGA) (as derived from the shareholder’s audited
balance sheet – not insured values, adjusted with credits/
debits for operational risk and coverage (limit and deductible)
profile (to produce Weighted Gross Assets – see detail below),
and the five-year mutualized loss history of OIL . There is no
individual underwriting as such but individual premiums may
be subject to Experience Modification (EM) as explained later in
this Companion . The intention is to provide a five-year post loss
funding facility (fund past pooled losses) on a mutual basis .
The R&PP sets out the method of premium calculation, known as
the Lock-In Plan, and details of the plan are discussed below .
Unmodified gross assets and sector weightingAs stated above, a member’s premium is dictated by their
UGA weighted according to their risk and coverage profile . OIL
Weighted Gross Assets are generated as follows:
• UGA are taken from an audited balance sheet (not schedules
of insured values) .
• UGA equates to the gross value (historical cost) of Property,
Plant and Equipment (PP&E) before depreciation, depletion,
and amortization, plus book value of inventories, materials,
and supplies .
• UGA are adjusted for operational risk (Sector weighting) and
coverage (limit/deductible) profile to generate Weighted
Gross Assets used to calculate the Pool Percentage and
individual premiums .
The R&PP recognizes differences between low or high risk
operations by way of a weighting of UGA depending upon Sector
(as defined by OIL – see definitions below) and variations in limit/
deductible credits (depending on Sector) .
Marsh • 11
OIL Sector Definitions
The UGA are allocated across the nine Sectors as follows:
“Offshore Exploration & Production” means the Sector for reporting Unmodified Gross Assets that are physically located
Offshore (including Pipelines) in respect of companies or
business operations engaged in the exploration, development,
production, processing, and on-site storage of hydrocarbons .
“Onshore Exploration & Production” means the Sector for
reporting Unmodified Gross Assets that are physically located
Onshore in respect of:
(1) Companies or business operations engaged in the
exploration, development, production, processing, and on-site
storage of hydrocarbons, and/or
(2) Extraction of bitumen from oil sands by the Steam Assisted
Gravity Drainage Process (SAGD) (the drilling of injection and
production wells, steam injection in order to separate the
bitumen from the sand, and collection of the bitumen and
pumping it to the surface) .
“Refining & Marketing/Chemicals” means the Sector for
reporting Unmodified Gross Assets in respect of:
(1) Companies or business operations engaged in the
manufacturing, transportation (excluding Pipeline Operations),
distribution, and/or sale of:
(a) Motor gasoline,
(b) Distillate fuels,
(c) Lubricants,
(d) Synthetic crude oil refined (upgraded) from bitumen
extracted from oil sands,
(e) Other refined products derived from hydrocarbons (including
synthetic crude oil), and
(f) Chemicals of all types other than Pharmaceuticals, and/or
(2) Co-generation electricity plants located within or adjacent to
refinery complexes .
“Pipeline Operations” means the Sector for reporting
Unmodified Gross Assets that are physically located Onshore
(other than those accounted for under another business Sector)
in respect of:
(1) Companies or business operations engaged in the
transportation via pipelines, and/or processing, and/or
terminaling, and/or storage of fluids, and/or
(2) Underground cables .
“Pharmaceuticals” means the Sector for reporting Unmodified
Gross Assets of companies or business operations engaged in
the discovery, development, manufacturing and marketing of
vaccines, prescriptions and over the counter medicines, and
health-related products for humans and animals .
“Electric Utilities” means the Sector for reporting Unmodified
Gross Assets of companies or business operations engaged
in the generation (excluding co-generation electricity plants
located within or adjacent to refinery complexes), storage,
transmission, and/or distribution or electrical energy .
“ Mining” means the Sector for reporting Unmodified Gross
Assets of companies or business operations engaged in the
exploration for and/or mining or and/or extraction of:
(1) Mineral deposits or ores, and/or
(2) Coal, and/or
(3) Oil sands for transportation to extraction plants, and/or
(4) Bitumen by a hot-water wash (often referred to as the steam
process) .
“Wind & Solar Renewables” means the Sector for reporting
Unmodified Gross Assets of companies or business operations
engaged in the generation, storage, and transmission of energy
from wind and/or solar renewable energy resources .
“Other” means the Sectors for reporting Unmodified Gross
Assets that do not qualify under any of the other Sector
definitions .
Notes:
Inventories should be classified under the business sector in
which they are accounted for .
A . Members are required to identify sanctionable assets on the
annual UGA declaration . These assets, identified by country
and business sector and signed off by an officer of the
member (or prospect) will be deducted from the total asset
declaration and will not be included for premium purposes .
B . For oil sands operations, assets declared are to be split
between the Onshore E&P, Refining & Marketing/Chemicals
and Mining Sectors depending upon the stage of the oil
sands extraction process to which the assets relate .
Sector weighting factors apply to the UGA within each Sector,
which are then further adjusted for coverage profile (limit/
deductible weighting factors) to produce Weighted Gross
Assets . The weighting factors are adjusted annually .
12 • The Oil Insurance Limited (OIL) Companion 2019
Sector weighting does not apply to the two excess windstorm
pools . These pools use deductible and operational area risk
weighting factors applied to the UGA to produce Weighted Gross
Assets used for Named Windstorm Excess Premium calculation .
Therefore, as part of the UGA declaration process (due June 30
each year), the balance sheet UGA (as defined) must be allocated
by Sector and certified by an auditor . This includes specific
declaration requirements for UGA that are within the Atlantic
Basin DNWS Geographic Region .
The DNWS declaration requires sign off by an officer of the
shareholder or prospect (it does not need to be audited) .
Standard Premium (POOL A)The Standard Premium (Pool A) is the premium obligation
associated with purchasing 60% of the selected limit . It is
mandatory, paid by all members, and is governed by members’
discrete (historical) percentage shares of the unfunded loss pool
(Pool Percentage) for each of the past five years (during which
time the loss pool was generated) .
In other words, a member’s premium obligation is determined by
calculating their individual Pool Percentage (member’s Weighted
Gross Assets relative to total Weighted Gross Assets) for each
of the past five years . A member’s final Pool Percentage in any
given year is calculated using the UGA reported as of December
31 from the prior year . The Pool Percentage once calculated for
any given year is locked-in . A member’s premium is a function of
their Pool Percentage and the unfunded loss pool for each of the
past five years (contributing to annual premium at 20% per year)
and is locked-in irrespective of a member’s current (or future)
Weighted Gross Asset profile – see the graph on page 9 .
For example:
Weighted Gross Assets will be higher for a US$10 million
retention than a US$100 million retention as weighting credit
is given for higher retention . Despite reduced Weighted Gross
Assets in future years, a member’s obligation for past losses is
‘locked in’ for the US$10 million retention years
Note: If a member exceeds 30% of any pool, OIL will require pre-
loss collateral against the member’s contingent liabilities (future
premium obligations) for that pool . This will most likely be in the
form of a LOC and now alternatively, a surety bond .
Current or future Weighted Gross Asset profiles have no bearing
on current annual premium . If a member makes risk profile
(Weighted Gross Asset) changes, such changes do not alter
their retrospective Pool Percentage (of the loss pool/premium
obligation) only their future Pool Percentage (and therefore their
future premium obligations) . Annual premium, therefore, takes
five years to fully reflect coverage profile (Weighted Gross Asset)
changes .
The Standard Premium is intended to fund 60% of the past
losses of the mutual or, looked at another way, fund 60% of the
selected limit .
Named windstorm excess premiumNamed Windstorm Excess Premium is paid by members of the
excess windstorm pools with exposed windstorm assets and is
determined separately based on losses (in excess of the US$300
million annual aggregate Pool A retention) that are allocated to
the excess pools .
Premium is calculated using the Lock-In method, with individual
Pool Percentage shares based on Weighted Gross Assets
exposed in the relevant geographic region . Currently, this
premium only applies to members with assets located in the
Atlantic Basin DNWS Geographic Region (OIL eliminated
Offshore Gulf of Mexico DNWS coverage from January 1, 2018) .
This region currently includes the Gulf of Mexico (GoM),
Caribbean, eastern seaboard states (ESB) of the USA, and
Trinidad and Tobago . However, with the exception of the GoM
and ESB states, the other areas have historically not produced
losses to OIL and therefore are currently not subject to Named
Windstorm Excess Premium . This exemption is achieved by
way of a zero DNWS operational area risk (weighting) factor
which discounts assets in those areas . However, it is important
to note that such assets are still subject to the DNWS limit and
deductible restrictions .
Members without exposed windstorm assets will have 0% share
of the excess windstorm pools and no Named Windstorm Excess
Premium .
Note: OIL eliminated Offshore Gulf of Mexico DNWS coverage
and excess premium pool from January 1, 2018 .
Marsh • 13
Additional Premium Options for the Remaining 40% of the LimitAll members must participate in the mandatory Standard
Premium (Pool A), but given that it only funds 60% of past losses,
members then have a choice of options to fund the remaining
40% of such losses .
The choices for the remaining 40% of the limit are:
• Do nothing: Pay the Standard Premium and only recover
60% of losses from OIL, that is, retain 40% of own losses
(retain US$160 million part of US$400 million limit) for all
Occurrences (or place quota share in the commercial market
to protect the retained amount) .
• Flat Premium option (Pool B): Premium (calculated on same
basis as Pool A above) is intended to fund 10%-40% of past
losses (fund US$40 million-US$160 million part of US$400
million limit) . Note: This option is not applicable for DNWS
losses; as such losses do not flow through Pool B . A significant
majority of shareholders elect Pool B .
• Retro Premium option: An additional premium to be paid
by members, but only if they actually sustain losses, that
is, Retro Premium adjustment on their own losses (i .e . no
mutualisation) . Premium is intended to repay 10%-40% of
their own losses over five years (Retro Premium repayment on
a straight line basis in equal installments) . The Retro Premium
option is a substitute or replacement for the Flat Premium
option described above . This option is available for DNWS
losses .
Under the Lock-In Plan, members have the ability of selecting
different premium options for each Sector in any combination .
Premiums are payable quarterly (except where a member falls
below the minimum credit rating or a LOC is provided to support
eligibility; then premiums are payable annually in advance) .
Marsh has observed there has been a trend towards more
participation in Pool B .
Quota Share (QS) Options
Internal QS to Pool BThe Pool B QS (Internal QS) option allows members to take a QS
retention of their OIL limit (in increments of 10%) . Alternatively, a
member can opt for the Standard Premium Only option, whereby
the member fully retains 40% of their own losses outside of Pool
B . Either of these options can be fully or partially protected in the
commercial market by way of a QS placement .
One downside to this option is using only a part of, rather than the
full, available OIL limit in any one loss, thus potentially sacrificing
capacity .
External QSThe External QS option allows a member to use the full OIL limit as
QS part of a larger program limit without sacrificing OIL capacity .
This reduces the horizontal exposure to OIL (and therefore, in
theory, to loss payback) and will result in a reduction in the OIL
premium over time as profile (Weighted Gross Asset) changes are
gradually reflected under the Lock-In premium calculation . Again
this option can be blended with a QS commercial market placement .
One benefit of selecting a QS option (either Pool B Internal QS or
External QS) is that it avoids total reliance on OIL . If a suitable QS
program can be developed it could support the buying of business
interruption and other coverages in the commercial markets .
Of the remaining 40% of losses,members can elect to participate
in the Flat Premium Plan tocover 10% to 40% of the
remaining losses; losses allocatedto the Flat Premium Plan are
only shared among thosemembers participating in the
Flat Premium Plan
Of the remaining 40% oflosses, members can elect to
participate in the RetrospectivePremium plan; OIL will advance
payment on these 40% oflosses to such member and only that
member is responsible forrepaying such loss.
Mandatory
FLATPREMIUM
PLAN
RETROSPECTIVEPLAN
PARTICIPATION
MUTUALISATIONOF 60% OF ALLPOLICY LOSSES
STANDARD PREMIUM
ONLY PLAN
NOADDITIONALCOVERAGE
40% OFREMAINING
POLICYLOSSES
60% of all lossesare shared among
the entiremembership;
it is mandatorythat all membersparticipate in the
Standard Pool
56(as of December 31st, 2016)
DESCRIPTION
14 • The Oil Insurance Limited (OIL) Companion 2019
Retrospective premium optionIf the Retro Premium option is selected in place of the Flat Premium
(Pool B) or Standard Premium Only (Pool A) options, then the
member becomes liable for Retro Premium for the losses it incurs .
The main features of the Retro Premium plan are:
Retro Premium is only paid by members actually sustaining the loss
(paid on their own losses sustained) .
OIL pays 100% of such losses – full limit (coverage) available
(including full US$250 million limit for DNWS) .
Retro Premium plan member then repays all of their own losses
(up to 40% of whole) through payment of Retro Premium .
Losses are repaid on a straight line basis in equal installments (20%
per year) over five years .
Retro Premium is first collected in the OIL policy period immediately
following the date the loss is incurred (date reserve booked –
irrespective of the actual date of loss settlement) .
Members also have the option to select a partial Retro Premium
option (in increments of 10%, up to 40%) . This option can then be
combined with Internal QS to Pool B .
Under the Retro Premium plan, 60% of a member’s losses are repaid
by all members paying the Standard Premium (Pool A)
OIL USD400M
Commercial MarketUSD 400M
OIL Deductible
elpmaxE ’yramirP‘
‘External’ Quota Share Example(USD 800M)
Commercial Market Excess (if required)
OIL USD 400M
OIL Deductible
Marsh • 15
Premium discountsA member’s premium is formulated off a base calculation at a
deductible of US$10 million and a limit of US$400 million . Discounts
off the base calculation are available for deductibles that are higher
than US$10 million and for limit profiles that are less than US$400
million . It should be remembered, however, that for existing
members, the premium impact is phased in over five years (as the
risk profile changes as a result of the phasing effect of the lock-in
plan) .
New entrant premium (NEP)Upon joining OIL a new member is required to pay a New Entrant
Premium (NEP) .
NEP will be determined by OIL based on the expected losses for the
year of joining, for each of the premium pools that such new entrant
is participating in, multiplied by their Pool Percentage . The Pool
Percentage will be determined by comparing their Weighted Gross
Assets relative to OIL’s total Weighted Gross Assets for the first year
of membership . The NEP is then fixed . In each subsequent year, the
premium will be adjusted as the member accrues liability under the
Lock-in Plan . The NEP is eliminated after five years .
Note: NEP is not included in a member’s Theoretical Withdrawal
Premium (TWP) calculation (it is in addition to future loss driven
premium or TWP obligations which are based on actual incurred
losses during the period of membership rather than expected or
forecast losses at the time of joining) . If a high NEP is of concern,
a possible mitigation strategy would be to join OIL at a high
deductible level (to manage NEP) and then subsequently reduce the
deductible after three years . This would, however, require the prior
(explicit) agreement of OIL at the time of joining .
Experience modification (EM)Once premium has been calculated in accordance with the Lock-In
Plan, as described above, it may be further adjusted by application
of EM as detailed below:
• EM was first introduced into premium calculations in 2014 .
• EM redistributes calculated premiums so that members with
relatively poor loss records pay more and those with better
records pay less . Premium impact to OIL of redistribution is
neutral .
• Calculated premium (under the Lock-In Plan) is adjusted by
applying an EM Factor (debit) based on a member’s Reserve
Ratio (RR) or an EM premium credit (redistributed share of
total debits) .
• RR for any given year generates an EM Factor to be applied to
the calculated annual premium for the subsequent year (RR
calculated for 2017 drives EM for 2018 premium) .
• One-off debit/credit – process repeated for each annual
premium .
• RR = a member’s own Loss Reserve Movements (“LRM”) +
Loss Adjustment Expenses (“LAE”) divided by that member’s
share [pool %] of OIL total LRM + LAE (for any given year) .
• RR is calculated on a three-year rolling basis (three prior
financial loss years) .
• LRM = incurred losses and reserve changes (all reserve
movements from current/past accident years) in any given
financial year .
• EM Factor is based on a member’s RR within a range to be
determined by the OIL board .
• EM Factors range from 1 .0 to 1 .25 based on RR ranging from
150% to 350% (range of factors may change) .
• The maximum EM Factor the OIL board can set is 1 .50 before
having to go out to the membership for authority .
• Examples of RR impact on EM:
– RR ≤150% = EM Factor of 1 .0 (no EM) .
– RR 250% = EM Factor of 1 .125 (applied to calculated
premium) .
– RR ≥ 350% = Maximum EM Factor of 1 .25 (applied to
calculated premium) .
• TWP Spot estimates are adjusted annually (debited or
credited) to reflect impact of EM on premium .
Phase in of rolling RR calculation took three years (started with
2014 losses) . Phase in of Premium impact will take five years (only
20% of 2015 annual premium was impacted by EM then for 2016
40% was impacted and so on for five years) . OIL is effectively
operating a split rating system for five years (so there is medium
term added complexity to the R&PP) .
16 • The Oil Insurance Limited (OIL) Companion 2019
Potential New Member Premium IndicationsPotential new members can obtain premium indications from
OIL in one of two ways:
• For a non-binding premium estimate, a Premium Indication
Request Sheet (PIRS) must be completed . Indications can
be offered on a “no-name” basis but are provided subject
to confirmation that the prospect meets the eligibility
requirements . Your Marsh client executive will be able to do
this for you .
• If a prospect wishes to actively pursue OIL membership,
additional information is required and a Premium Indication
Request Form (PIRF) must be completed as part of the
membership application process .
The PIRS also can be downloaded from the OIL website and
submitted directly to indications@oil .bm, and turnaround time
for premium indications is usually 48 to 72 hours .
OIL will provide an estimate of the New Entrant Premium (NEP)
for the first year of entry but thereafter annual premium depends
on the mutual loss record .
It should be noted that despite the minimum eligibility
requirement of US$1 billion of UGA, for some prospects OIL
may not be a cost-effective option unless their UGA are at least
US$4 billion . This is because, as noted above, to qualify for
the full US$400 million OIL limit, UGA will be deemed at US$4
billion for premium purposes . This may significantly impact the
quoted premium . For example, a company may qualify with the
minimum US$1 billion of UGA, but if those assets are devoted
entirely to the Offshore Exploration and Production Sector they
will firstly be deemed at US$4 billion and then further adjusted
(weighted) to approximately US$6 billion (according to the
weighting factors that currently apply under the R&PP) . Such
prospects may indeed qualify for OIL with UGA of only US$1
billion but for a US$400 million limit their assets (and premium)
will potentially be loaded by as much as a factor of six, thus
OIL may not be a competitive option . However, they do have
the option to select a lower limit (equivalent to 10% of UGA) of
anywhere between US$100 million and US$400 million until
such time as the company grows in size .
Considerations for MembershipIn order to fully evaluate the suitability of OIL membership many
factors have to be carefully assessed, not just the premium cost .
When contemplating membership, various advantages and
disadvantages of membership need to be considered .
If oil membership dovetails with an energy company’s overall risk management strategy, then it can offer many benefits:
Ownership • Owned by, and therefore responds to, its membership as
opposed to financial markets or reinsurers .
• Focus is on the needs of its members in relation to the
coverages afforded; again OIL is not reliant on reinsurers’
coverage issues .
Continuity • Long-term capacity available to members .
• OIL enjoys strong ratings from S&P and Moody’s .
• Affords an alternative to or hedge to the commercial market
cycles .
Industry focused • Established in direct response to the needs of the petroleum
industry when commercial markets ceased to provide
adequate coverage or limits for certain catastrophe events .
Subsequently expanded to encompass “Energy” definition
in response to the changing profile of the industry and its
members .
• Coverage tailored to the specific needs of the energy industry .
• Mutual for the benefit of and run by companies with shared
goals and interests, provides a forum for sharing industry
intelligence with peer group .
Cost • Premium simply designed to post fund historical losses plus
expenses incurred by existing members .
• Greater operating efficiencies than traditional markets .
• Expense ratios amongst the lowest in the insurance industry .
Effectively every premium dollar collected has a direct
correlation to claims incurred by the membership .
• Delivers maximum value of premium dollar spend to members
rather than outside shareholders .
Marsh • 17
CoverageAutomatic cover for new assets (under construction,
constructed, or purchased) .
In many instances coverage is broader than the equivalent
commercial market product .
With the exception of DNWS and non-owned property which
is not included in UGA declaration, no coverage (risk or peril)
sublimits .
Worldwide coverage (no territorial exclusions/restrictions but a
sanctioned activity exclusion applies) .
Note: OIL eliminated Offshore Gulf of Mexico windstorm
coverage in 2018 .
Limits and deductiblesAvailability of significant and reasonably easily accessed limits
(note OIL’s US$400 million is probably the largest single block of
capacity that is not dependent on reinsurance) .
Limit flexibility available by way of individual Sector limits (no
need to purchase full limits for all Sectors – subject to a warranty
where applicable) or ventilated (split) limits .
Full limits available for terrorism (including cyber terrorism) and,
with the exception of DNWS, natural catastrophe (Nat Cat) perils .
No joint venture restriction on individual assets and, with the
exception of DNWS, no annual aggregates for Nat Cat perils (only
the overall “single event” aggregate) .
Deductible options with flexibility to structure to individual
needs .
Ease of administrationNo capital contribution – purchase of voting stock only
(US$10,000 for one “A” share of capital stock) .
Ability to Exit - A member can exit each year on December 31
(after giving 90 days notice) in return for payback of members’
share of unfunded pooled losses and (if applicable) outstanding
Retro Premium . The creation of the “exit premium” (Theoretical
Withdrawal Premium (TWP)) balance sheet contingent liability,
potentially eases the exit process as the liability has already been
incurred .
Premium calculation based on Unmodified Gross Assets derived
from published balance sheet significantly reduces reporting
burden on risk management department (as long as balance
sheet complies with US GAAP (Generally Accepted Accounting
Principles)/IFRS/Canadian GAAP/Japanese GAAP) .
No requirement for engineering inspections or visits .
Entry can be direct or by captive in order to facilitate reinsurance
of local insurance programs by OIL .
Claims handlingOIL has a dedicated claims team and regularly conducts
shareholder surveys which indicate 80%+ shareholder
satisfaction with their claims handling including
communications . OIL does have a list of preferred loss adjusters
but will consider shareholder nominated adjusters . OIL does
have a claims handling protocol for adjusters which is available
to shareholders which promotes a high level of consistency
in the claims adjustment and management process . Special
consideration needs to be given to adjuster selection if a claim
also involves commercial market insurers, especially for business
interruption losses, as some commercial market insurers prefer
using separate adjusters from OIL (so as not to “muddy the
waters” adjusting different types of claims) . OIL is available to
conduct claims workshops for its shareholders .
18 • The Oil Insurance Limited (OIL) Companion 2019
Potential disadvantages to consider, depending upon individual perspective, include:
• The concept of mutualization and the member’s philosophy to
this and risk retention in general .
• The fact that the member will be participating in a mutual with
companies involved in high-risk exploration and production or
heavy petrochemical operations . This risk is somewhat mitigated
by OIL’s unique risk weighting system .
• Exposure to potentially volatile risk areas, for example, DNWS
irrespective of own risk profile, although this exposure has been
somewhat mitigated for members without DNWS exposure by
the introduction of the Pool A annual aggregate retention and the
specific excess windstorm pools . This has been further mitigated
by the elimination of the Offshore Gulf of Mexico DNWS coverage
and premium pool in 2018 .
• The potential for collateral requirement if pool participation
exceeds 30% of any pool .
• The potential of premium calls for adverse loss experience .
Note: this risk has been significantly mitigated as the Bermuda
Monetary Authority and Standard & Poor’s have given OIL
specific capital credit for the outstanding TWP amounts owed by
the membership .
• The potential for premium loading as a result of Experience
Modification Experience Modification is subject to transparent
requirements and appears less onerous than the commercial
market .
• The single event Aggregation Limit, currently US$1,200 million
(or US$750 million for DNWS), which creates uncertainty if a
loss exceeds this limit . Recovery by each member could be
significantly less than their full policy limit (to date this limit has
only been applied as a result of DNWS losses in 2005 and 2008) .
• The DNWS (per Occurrence and annual aggregate) limit and
deductible restrictions .
• Absence of Offshore Gulf of Mexico windstorm coverage .
• Potential for OIL to prospectively restrict or withdraw coverage
(e .g ., windstorm in other parts of the world) if it experiences
significant losses in a particular risk category or sector . This
outcome is less however, likely than in the commercial market .
• Inability to individually influence premium . Premiums are fixed
according to the Rating & Premium Plan (R&PP) – no negotiating
position for individual members . Risk differentiation comes
through the weighting of assets by Sector (or geographic area for
DNWS) for premium generation . There is currently no individual
differentiation between members in a given Sector (although
individual premiums may be subject to Experience Modification) .
• Members have to ensure their balance sheet conforms to US
GAAP/IFRS /Canadian GAAP/Japanese GAAP (certified by an
auditor) .
• Requirement to repay on withdrawal the member’s share of
unfunded pooled losses (TWP) and (if applicable) outstanding
retrospective premium at the time of such withdrawal . Members
need to account for the TWP based on their theoretical (at any
time potential) withdrawal from OIL . This has created a balance
sheet liability for OIL members accounting under US GAAP/IFRS
/Canadian GAAP/Japanese GAAP regardless of their intention
or otherwise to withdraw from OIL . However, upon withdrawal,
the liability is translated into a short term cash flow demand with
a corresponding positive impact on the balance sheet once it is
paid .
• Elective coverage changes do not result in an immediate and
corresponding change in premium . The impact of coverage
profile (Weighted Gross Asset) changes on premium takes five
years to be fully embedded .
• Decisions affecting coverage are at the discretion of the board of
directors; majority decisions will apply . Any decisions affecting
the R&PP require a 75% majority vote of the shareholders (not the
board of directors) .
• The OIL form is set and non-negotiable from an individual
standpoint . Wraparound coverage may still be needed
depending on an energy company’s insurance requirements .
• Potential OIL claims adjustment complexity if OPOL claim is
subsequently withdrawn (or time barred) .
• Construction all risk (CAR) coverage has certain limitations, for
example contractors cannot be named assureds and (no benefit
to lenders, etc .) although the member can designate third parties
as loss payees .
• OIL is non-admitted in certain territories (but fronting through a
captive can be arranged) .
• The “non-gradual pollution” cover provided by OIL is, in some
cases, potentially more restrictive in terms of discovery and
reporting provisions than coverage available from the commercial
market for offshore (upstream) E&P operations . However, it is
still very much broader than what is available under a traditional
property form .
While any one of the above considerations taken individually may
not be sufficient to determine the final decision on OIL membership,
taken collectively they may influence that decision and lend
subjective support to the more objective pricing and structure
considerations that will apply .
As can be seen, the issues surrounding OIL can be complex and it
is recommended that companies refer to their insurance advisers
for guidance before taking decisions on OIL membership . This is an
area where Marsh’s Global Energy Practice can certainly add value
and deliver expertise .
Marsh • 19
20 • The Oil Insurance Limited (OIL) Companion 2019
Membership Application ProcessThere are four primary bases on which to apply for OIL membership:
Direct (Energy Company as Shareholder) – OIL will insure the energy company on a direct basis . The energy company will be the named insured .
Direct and reinsurance (Energy Company as Shareholder) – OIL will insure the energy company on a direct basis for some risks (territories) and act as a reinsurer (of the energy company’s wholly owned captive) for other applicable risks . The energy company will be the named insured and the captive will be scheduled as a joint policyholder (for specified territories) . The advantage of this basis of entry is that it allows maximum flexibility depending upon the requirements of a particular territory .
Reinsurance (Energy Company as Shareholder) – OIL will reinsure the energy company’s wholly owned captive for all applicable risks . The captive will be the named insured for all operations/territories and the energy company will be scheduled as such on the Policy Declaration . A parental guarantee is not required (because the energy company is the shareholder and therefore “owns” all of the contractual obligations under the Shareholders’ Agreement) .
Reinsurance (Captive as Shareholder) – OIL will reinsure the energy company’s wholly owned captive for all applicable risks . The captive will be the named insured and the energy company will be scheduled as above (no difference in coverage) . A parental guarantee for the captive (as shareholder) may be required depending on the captive’s financial wherewithal and rating . This is the only potential disadvantage of this particular basis of entry . However, if the captive has an investment grade rating acceptable to OIL (i .e . from Standard & Poor’s or Moody’s) then a parental guarantee will not be required by OIL .
Note: Where insurance has to be placed with a local (or state-owned) insurance company, OIL will not reinsure such local insurance companies . However, the above membership options provide a flexible solution:
In countries where OIL is a non-admitted insurer and local insurance is required, OIL can provide reinsurance of a member’s wholly owned captive (as outlined above) .
The full US$400 million limit remains available to members regardless of whether OIL is a non-admitted insurer and regardless of the limit of the captive issued policy .
• If a fronting policy is issued, OIL will only reinsure the captive,
however, OIL can also insure the OIL member directly, subject
to local insurance regulations (so any surplus OIL limit beyond
the locally issued fronting policy is available to the member as
long as this does not breach local regulations) .
Full cover remains available to the member but the OIL “Other
Insurance” provisions will apply (OIL has benefit of more specific
valid and collectible local insurance to avoid double insurance)
and tax and local regulatory considerations may apply . The
member would therefore have to seek tax and legal advice
independently (and would be responsible for such matters) .
Application for OIL membership is a fairly straightforward
process, but a certain amount of forward planning is required:
• Once a company has expressed an interest in joining OIL,
it will need to complete the PIRF and the membership
application forms . These forms allow the company to select its
coverage profile and provide OIL with information regarding
the business operations of the company as well as the required
legal information (parental guarantees/auditors statements
and the like) . In addition, OIL requires a detailed summary of
the company’s 10-year loss history, for all losses in excess of
US$5 million (reported from the ground-up) .
• OIL membership application forms can be found under the
Agreements, Policies & Forms section of the OIL website .
• Once the completed application forms have been received
by OIL, all information will be submitted to OIL management
for approval . OIL management may impose restrictions (e .g .,
deductible) on the coverage profile offered to a prospective
member . Once the prospect receives approval, the OIL
insurance/reinsurance policy is issued to the new member .
• A new member will be billed for its initial premium plus
US$10,000 for the purchase of one class “A” share as outlined
in the OIL Shareholders’ Agreement . Ownership and voting
rights are accrued over time as a function of certain premiums
paid and length of membership .
• The OIL Shareholders’ Agreement must be signed in Bermuda
prior to joining . If the new member is unable to travel to
Bermuda, the Shareholders’ Agreement can be signed by a
designated local contact (lawyer, or other representative) via a
Power of Attorney
Marsh • 21
Timing
• A company can join OIL at any time .
• However, all applications must be approved by OIL
management and a certain process has to be adhered to .
While an entry can in certain circumstances be “fast tracked”
we would recommend that a minimum of two months is
allowed from submission of the final (formal) application to
completion of the process and inception of the policy to allow
for any last minute changes or clarifications on either side .
Final approval will take place after a face-to-face meeting with
the prospect company .
• The initial policy period will run from the date of joining to
December 31 of that year . Thereafter, policies are issued for
a calendar year and automatically renew at the anniversary
(December 31) unless notice of cancellation is received by OIL
by September 30 (for withdrawal from OIL at December 31 of
that year) .
• We do not recommend OIL as a short-term (opportunistic)
solution . While there is no hard and fast rule concerning
length of membership, any energy company considering
membership is encouraged to view OIL as a minimum five-
year commitment .
Note: New entrants accrue liability on all loss movements for the
year they join . The date of entry determines their percentage of
losses . For example, if a member joined on July 1 the member
accrues liability for 50% of all loss movements for the year – not
only on the losses between July and December .
Note: OIL may, at its discretion, terminate coverage if a member
fails to:
A . Pay its premiums when due .
B . Maintain the appropriate level of financial responsibility
(for example, credit rating, posted security, etc .) .
C . Meet the eligibility requirements set out in the OIL
Shareholders’ Agreement .
Contractual Premium ObligationsOIL membership entails an undertaking to commit to certain
express premium obligations . These can be summarized as
follows:
• Members are contractually obligated to pay their share of
pooled losses .
• Any member leaving OIL must pay, immediately upon exit, its
share of unfunded pooled losses and, if applicable, any unpaid
Retro Premium; this is referred to as the Withdrawal Premium .
It is not an exit penalty . In simple terms the Withdrawal
Premium is the premium the member would have paid over
the next five years had it not withdrawn from OIL and OIL
sustained no further losses .
• Members are required by their auditors (to comply with
various international accounting standards) to book the
Theoretical Withdrawal Premium (TWP) amount, i .e . potential
Withdrawal Premium (regardless of intent to exit or otherwise)
which has to be carried on balance sheet as a liability .
• Accrual of the TWP liability is not an OIL requirement,
although OIL does calculate the TWP amount for each
member .
Furthermore, any member that does not satisfy, or falls below, the
minimum financial eligibility criteria may have to post additional
security (usually a LOC but, now can be a surety bond) to cover its
TWP obligations as outlined above .
Designated Named Windstorm (DNWS) Occurrence DefinitionThe definitia designated named windstorm (DNWS) Occurrence
requires careful consideration .
In simplistic terms:
• DNWS Occurrence comprises losses attributable directly or
indirectly to a DNWS (as defined) and includes all onshore
and offshore losses arising from such windstorm (DNWS),
irrespective of the period or area over which such losses occur .
• DNWS Occurrence definition includes losses arising out of
pre-storm preparatory measures (including ensuing fire,
explosion, or collapse resulting from pre-storm shutdown and
re-start activities) .
For the purposes of the DNWS Occurrence definition, a DNWS
is currently defined (simplistically) as a “hurricane, typhoon,
tropical cyclone, cyclonic storm, or any other windstorm”
which “originates in or migrates into” the Atlantic Basin
(which essentially comprises the North Atlantic Ocean west
of the Cape Verde Islands, the Caribbean Sea, and the Gulf of
Mexico as defined by OIL) AND is named by the Responsible
Meteorological Service . This was formerly known as an "Atlantic
Named Windstorm (ANWS)” .
22 • The Oil Insurance Limited (OIL) Companion 2019
Conceivably, in the event of a DNWS Occurrence triggering
the OIL Aggregation Limit (for all losses arising out of a single
Occurrence), a member suffering damage which is solely
attributable to precautionary “shutdown/re-start” activities
may be unable to recover their full OIL loss due to the DNWS
coverage restrictions outlined below even though the member
did not suffer any actual storm (wind or flood) impact damage,
but this will depend upon the facts and circumstances of each
loss (which will govern policy interpretation) .
Note: If a named storm (a DNWS) tracking up the east coast of
the USA causes damage to a property in New Jersey it is still a
DNWS Occurrence and subject to DNWS coverage (limit and
deductible) restrictions .
Also from January 1, 2018 OIL excludes Offshore Gulf of Mexico
DNWS coverage . This exclusion may give rise to a possible
disconnect with respect to limit application when compared to
the commercial market alternative
Designated Named Windstorm (DNWS) Coverage Restrictions and Premium ObligationsWindstorm coverage restrictions and premium obligations
currently only apply to the Atlantic Basin DNWS region
(windstorm exposures in the Gulf of Mexico/Caribbean/US Gulf
Coast and US East Coast onshore region) . This was formerly
known as an “Atlantic Named Windstorm” or “ANWS” .
Note: OIL has eliminated Offshore Gulf of Mexico DNWS
coverage from January 1, 2018 .
For OIL members with DNWS exposed assets, the restrictions
and premium obligations (applicable to DNWS Occurrences
only) can be summarized as follows:
Coverage restrictions • Lower limit and quota share (QS) retention: The limit is
lower than the full OIL limit . It is restricted to US$150 million
(60% QS) part of US$250 million per Occurrence . This imposes
a 40% QS retention of up to US$100 million per Occurrence for
DNWS losses .
• Lower Aggregation Limit: A lower limit of US$750 million
applies to DNWS Occurrences . This creates a potential
shortfall in cover . However, scaling of limit is less likely for
DNWS losses (as only 60% of DNWS losses are paid by OIL and
thus exposed to the Aggregation Limit) .
• Annual aggregate limit: The annual aggregate limit is 200%
of the DNWS Occurrence limit selected by each member . This
imposes a recovery cap of US$300 million per annum for each
member .
• Deductible: The DNWS deductible stands for interest (not
scaling) which means that members have a fixed attachment
point for DNWS losses . For members with a US$10 million
per Occurrence deductible, this potentially creates a larger
deductible by up to US$9 million per Occurrence for interests
of 10% or less . For higher deductibles the effect is more
pronounced . DNWS specific deductibles must be selected
and declared to OIL each year .
Note: The above restrictions currently only affect DNWS
Occurrences (named windstorm losses in respect of the US Gulf
of Mexico/Caribbean/Gulf Coast and US East Coast onshore
region) and do not apply to other perils (fire, explosion, and
earthquake, for example) unrelated to a DNWS Occurrence for
which limits/deductibles remain unaltered, including the full
US$400 million per Occurrence limit .
Premium obligations • Members of the nine defined OIL Sectors (e .g .: Refining &
Marketing/Chemical, Offshore Exploration & Production) fund
all non-windstorm losses .
• DNWS losses up to an annual aggregate of US$300 million are
funded (mutualized) by all members of the nine Sectors in the
Standard Premium (Pool A annual aggregate retention) .
• DNWS losses in excess of the US$300 million Pool A annual
aggregate retention are funded (mutualized) only by those
members with DNWS exposed assets in two excess windstorm
pools (onshore and offshore) . Zero DNWS assets = zero DNWS
pool exposure .
• DNWS losses flow through the Pool A annual aggregate
retention and into the two excess windstorm pools from the
bottom up (with pool exposure adjustment at year end) .
• For premium purposes the two excess windstorm pools
are ring-fenced – the onshore pool is not exposed to losses
(premium payback) from the offshore pool and vice versa .
• OIL may require the excess windstorm pool to QS the
• US$300 million Pool A annual aggregate retention with the
nine Sectors . The QS factor will be determined annually and
is subject to a maximum of 25% . Currently the QS percentage
factor is 0% .
Marsh • 23
• The two specific (and distinct) excess windstorm premium
pools are potentially more volatile in the event of DNWS
losses .
• DNWS losses do not flow through Pool B (because of the
above 40% QS retention) .
• Retro plan option can be selected for the 40% DNWS QS
retention (in increments of 10% up to 40%) .
Windstorm coverage in other geographic regions
Coverage restrictionsWindstorm coverage restrictions are only applied to Atlantic
Basin DNWS losses at this time . However, “Trigger Events” have
been defined by OIL to implement coverage restrictions for other
geographic regions if impacted by future windstorm losses .
Incurred loss Trigger Events by geographic region are defined as:
• A single loss event of US$750 million .
• Cumulative losses of US$1 billion over a five-year rolling
period .
Once a Trigger Event is incurred, windstorm coverage and
pricing for that geographic region will automatically change in
the next policy year (unless OIL determines otherwise) . Changes
will mirror the restrictions that currently apply to the Atlantic
Basin DNWS region . A new DNWS region will be created .
Any new DNWS region will be defined by OIL, but we understand
this will essentially relate to any area (concentration of assets)
which can be impacted by a single named windstorm .
Premium obligationsAs stated above, members of the nine defined Sectors fund all
non-windstorm losses . However, members with DNWS exposed
assets will absorb the majority of the premium severity and
volatility relating to DNWS losses, as the nine defined Sectors
only fund up to US$300 million annually of DNWS losses (and
this may be further reduced by application of a QS factor with the
excess pools, although as stated above, the QS factor is currently
set at 0%) . Therefore, there is less exposure from DNWS losses
to the greater mutual body (due to the per member annual
aggregate limit and annual aggregate retention capping, and
the creation of DNWS specific premium pools) . Consequently,
there is less exposure to potential premium increases from losses
caused by DNWS events . The potential for premium increases
will be further mitigated by the elimination of Offshore Gulf of
Mexico DNWS coverage and premium pool in 2018 . Retro plan
option can be selected for the 40% DNWS QS retention (in
increments of 10% up to 40%) .
General ConditionsTerritory
• Worldwide (no restrictions, including terrorism) BUT a
sanctioned activity exclusion applies .
Currency
• US dollars .
Policy governing law
• New York State .
Shareholder agreement governing law
• Bermuda .
Jurisdiction
• Arbitration: Law of England and Wales .
Other insurance
• Excess of other insurance (unless schedule OIL as primary per
OIL Endorsement No .5) . Note: Endorsement No .5 does not
renew automatically and members are required to resubmit
annually .
Fixed conditions
• No bespoke wording changes .
Policy term
• Annual (automatically renewed unless notice to cancel by
September 30) .
24 • The Oil Insurance Limited (OIL) Companion 2019
Marsh • 25
Non-owned Property SublimitA sublimit of US$50 million per Occurrence applies for non-
owned property:
i . Which is not included in a member’s UGA declared to
OIL .
and
ii . Which is not used or intended for use in the operations of
the member .
However note the importance of the word “and” as in a link
(double trigger) between (i) not included in UGA and (ii) not
used…etc . as this mitigates application of the sublimit .
Notice of LossThe Assured is required to provide written notice of any loss
which is likely to involve OIL as soon as practical in accordance
with Condition E of the OIL policy .
Written notice can be provided by email to: OILClaimsNotification@omsl .bm .
Claim Reporting RequirementsClaim reporting requirements are a “condition precedent to
coverage” under Condition I of the OIL policy . In summary:
• OIL can look to avoid liability for non-compliance .
• A pollution Occurrence has to be discovered within 40 days
and reported within 120 days of the date of Occurrence (for all
Occurrences after January 1, 2006) Note, this may differ from
commercial market time triggered pollution liability reporting
requirements .
• Pollution claims have to be submitted within a year of the
member making settlement/incurring ultimate net loss (UNL)
for such claim . Liability will not attach until the member’s
liability is fixed by final judgment against the member or by
settlement with the prior written consent of OIL .
Furthermore, any member leaving OIL may report claims
resulting from Occurrences during their membership up to five
years from the date of departure .
However, for all claims for which payment is sought after the date
of departure, a member’s recovery is limited to their notional
dissolution rights at the time of departure . The limitation
does not apply to claims submitted prior to termination of
membership .
Note: Claims are booked in the year in which OIL has sufficient
information to establish an initial reserve . This may be the same
year as the occurrence date, the year in which it is reported
to OIL, or some other date . For example, a loss that occurs in
2017 may be booked in the 2017 loss year or in later years . Case
reserve movements are only booked in the year in which OIL has
sufficient information to book the reserve movement . This is a
different treatment than that which applies to most commercial
market policies where the loss settlement will go back to the
policy year in which the loss occurred .
Losses in a currency other than U .S . dollars will be converted on
the date when the proof of loss is finalized per condition K of the
OIL policy .
Offshore Pollution Liability Agreement (OPOL) Endorsement (and OPOL Certification)Where OPOL coverage is required, the OPOL endorsement (OIL
endorsement No . 4) allows members to use the OIL policy to
certify evidence of financial responsibility for a limit of liability of
US$250 million per incident .
The OPOL endorsement specifically dedicates US$250 million of
limit per operator for OPOL incidents and will reserve that limit
until liability is determined as defined by OPOL . OIL requires an
indemnity from the member before the OPOL endorsement is
issued . An indemnity also applies if:
26 • The Oil Insurance Limited (OIL) Companion 2019
• A member has an OIL policy deductible that is greater than
the OPOL maximum of US$10 million (the member has
to indemnify OIL for any OPOL claims between the OPOL
maximum deductible and the OIL policy deductible) .
• There are differences in conditions between the OIL and OPOL
wording (differences in conditions arising from changes after
January 1, 2016 will be covered by OIL on an indemnity basis
and is cancellable mid year by OIL if the credit exposure for
DIC is unacceptable to OIL) .
Note: OIL confirmed in writing that the changes to OPOL
implemented on April 1, 2016 that were agreed in December
2015 are included in coverage even though their inception
date is after January 1, 2016 .
• Claims paid from a single Occurrence exceed the Aggregation
Limit .
The fact that OIL will reserve US$250 million (part of the US$400
million) limit for OPOL claims (give priority of settlement to OPOL
claims) could give rise to a potential recovery gap and additional
adjustment complexity for policies written excess of OIL (or “OIL
Wraps”) where the OIL limit is deemed in place .
The OIL settlement may be readjusted upon final resolution of
OPOL claim (or withdrawal of OPOL claim or if the OPOL claim is
time barred – one year from date of incident as defined by OPOL)
and this will require careful coordination with excess markets,
otherwise there may be a recovery gap or at best a recovery
delay . It’s not so much the Combined Single Limit (CSL) and
priority of settlement that is the problem, but more the potential
for readjustment and delay in OIL loss settlement .
OIL members with OPOL entries should be aware of this added
complexity and it is recommended that companies refer to their
insurance advisers for guidance .
Split Policies and Policies by Geographic RegionAs mentioned, OIL can be flexible in some regards . Members
have the additional option of arranging their OIL entry such
that it more appropriately meets the needs of the business or
operations of subsidiary or joint venture companies .
There are two options available:
Split policy A member can request a separate policy, known as a “split
policy,” for a joint venture or subsidiary company . This option has
certain advantages (as outlined below) but to qualify for a split
policy, the joint venture or subsidiary must:
D . Be a separate legal entity with separate financial
statements .
E . Have a separate insurance program .
F . Operate as an independent profit center .
G . Have autonomous risk management and insurance
functions .
Requests for split policies are at OIL’s discretion and subject to
OIL senior management approval . Split policies do not increase
the overall member’s policy limit as the limit under a split policy
is shared with the limit of the member’s main OIL policy .
The assets of the split member are reported separately on the
gross asset declaration of the member, and only those assets are
taken into account when calculating the premium for the split
policy .
The main OIL shareholder assumes financial responsibility for
split members .
Benefits of a split policy include:
A . The ability to select different limits or deductibles from the
member’s main OIL entry for a particular subsidiary or joint
venture company .
B . A separate premium invoice for the subsidiary or joint
venture company .
C . The full US$400 million limit being available for the
subsidiary or joint venture company without the
requirement to “deem” assets at US$4 billion for such
company (although the main member must still have US$4
billion of assets) .
This may allow a joint venture company to be covered that might
not otherwise qualify for a standalone OIL entry .
Policies by geographic regionA member can have its policy – and premiums – split by
geographic region, for example, US and non-US risks . The
Policy Declaration issued by OIL will be split by the requested
geographic regions . The premiums will also be split based on the
percentage allocations provided by the member . A policy split
by geographic region does not alter the coverage, deductibles,
limits, or premiums that would otherwise apply had a single
policy been issued to the member .
Marsh • 27
Ventilated (split) Limit OptionMembers can purchase ventilated (or split) limits subject to
approval by OIL so that limit deployment more appropriately
meets the needs of the business .
The limits offered by OIL are intended to be used in a single
contiguous layer but limits can be split or ventilated (for example)
(US$200 million as a primary layer and US$200 million as a high
excess layer) but only with the consent of OIL . OIL will determine
what premium effect this will have depending upon the overall
risk profile and Weighted Gross Assets but this may be a way to
more appropriately deploy limit/achieve premium saving and at
the same time avoid the warranty regarding the absence of other
insurance (which would otherwise apply if the member elected
for less than US$300 million limit from OIL) .
OIL will also allow different layers of a ventilated limit to be
arranged with different coverage profiles (for example, one layer
can be on an external quota share basis and another layer can be
on a 100% order basis) so it is very flexible .
Note: Endorsement No .5 (Schedule of Excess Insurance) will
need to be adjusted to reflect split limits .
“Wraparound” or "OIL Wrap" OptionCommon reasons for use:
• Purchase Business Interruption (and other coverages) from
the commercial market
• Flexibility to use OIL limit or Commercial Market limit in
the event of a claim . However, this will restrict commercial
market ability to credit the PD rate as we see in the other OIL
structures . Instead customer will receive “Benefit of OIL”
credit which is highly up to individualunderwriter’s approach .
• Technically broader coverage may be available if commercial
market policy form broadens OIL PD coverage terms .
PP&E – Capital Expenditures + Accumulated Depreciation .
Member Retention
OIL US$100m Excess P/O US$400m (Layer 2)
OIL US$300m Primary P/O US$400m (Layer 1)
Commercial MarketLayer(s) as required
COMMERCIAL MARKET EXCESS
DEDUCTIBLE BUY-DOWN
DEDUCTIBLE BI WAITING PERIOD
DICOIL USD 400M
28 • The Oil Insurance Limited (OIL) Companion 2019
Oil Endorsement No.5OIL (per its terms and conditions – Condition G Other Insurance)
responds excess of any other valid and collectible policy that is
to say as the top layer of insurance . This is the default position .
However, Endorsement No .5 (Schedule of Excess Insurance) to
the OIL policy allows the member to schedule OIL as primary
insurance .
Where OIL “wraparound” or excess layer limits are intended
to (or more importantly could) apply to coverage that is
also provided by OIL (property damage/control of well, etc)
Endorsement No .5 must be submitted to OIL by the member in
order for OIL to be primary to such limits .
Endorsement No .5 will contain a schedule of the policies (or
sections of policies) that are to apply excess of OIL (to which
OIL is to be considered primary in any given loss recovery) .
Members are also required to attach a diagram/pictorial of its
insurance program .
Members need to give special attention to how pollution
coverage is scheduled in their programs .
Note: Endorsement No . 5 does not renew automatically .
Members are required to update the schedule each year and the
endorsement is not effective until all applicable documents are
received and approved by the underwriter . (OIL will always be
excess of a Protection and Indemnity Club) .
UGA Additional CommentaryAs previously mentioned, OIL’s Rating & Premium Plan (R&PP)
is rated on Unmodified Gross Assets (UGA) . Gross Assets are
defined as property, plant, and equipment (PP&E) without
deduction for depreciation, amortization, or depletion plus
inventories, materials, and supplies as reflected in the most
recent annual report) .
What is PP&E?
Property, plant, and equipment (PP&E) basically includes any of
a company’s long-term, fixed assets . PP&E assets are tangible,
identifiable, and expected to generate an economic return for
the company for more than one year or one operating cycle
(whichever is longer) . The account can include machinery,
equipment, vehicles, buildings, land, office space, office
equipment, and furnishings, among other things .
PP&E Formula
Not all companies’ balance sheets are represented exactly
the same . Therefore, please see the formula below which may
help back into the gross PP&E which is needed for OIL pricing
purposes:
Formula:
Gross PP&E = Net PP&E – Capital Expenditures + Accumulated
Depreciation
Marsh • 29
Statutory Capital and Historic Loss AnalysisPlease refer to question 22 of the FAQ for additional commentary on mitigation .
Marsh Broker Workshop 2018
OIL’s Statutory Capital Structure
Since 2008, OIL receives statutory capital credit from Standard & Poor’s & Bermuda Monetary Authority for the Theoretical Withdrawal Premiums (TWP) of the membership.
Shareholders’ Equity (excluding preference shares) Preference shares TWP Capital Credit
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Billi
ons
Marsh Broker Workshop 2018
Net Incurred Losses by Geographic Region
Losses from 1972-2017
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
USA Europe Canada W/stormGOM
NorthSea
Billi
ons
Other Areas
28%
13%
9%10%
13%
On a recast basis, OIL’s total windstorm losses have reduced to roughly $152 million (or 1% of total losses) compared to $3.7Bn actual.
27%
Aggregate Value = $13.9 Bn
2018Marsh Broker Workshop
OIL’s Incurred Loss History (per Annual Reports)
OIL Incurred Losses
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Billi
ons
Historical windstorm losses thathave been mitigated
Historical losses
OIL’s Statutory Capital
OIL’s Incurred Loss History
Net Incurred Losses by Geographic Region
OIL Incurred Losses vs. “Mitigated” basis
30 • The Oil Insurance Limited (OIL) Companion 2019
Frequently Asked Questions (FAQs)The OIL website www.oil.bm has an extensive list of answers
to FAQs . However, in this Companion we offer our own answers
to questions which are not specifically addressed by the OIL
website FAQs .
Q1. Can a member name additional insured parties under their
OIL policy?
A: OIL insures the Policy Holder (Named Insured and its
Consolidated Subsidiaries and Affiliates) but does not permit
the naming of additional insured parties such as joint venture
partners or contractors on the policy . To use OIL to cover
property under construction it may be necessary to adapt
contract wording (to indemnify contractors for loss or damage to
contract works in their care) .
Q2. Does OIL agree to specific lenders’ clauses?
A: The OIL policy form is set and non-negotiable . OIL will issue
a Certificate of Insurance under which they will acknowledge a
lender’s interest by way of a loss payee provision but claims will
only be negotiated and adjusted with the Named Insured .
Q3. Does OIL impose a testing and commissioning requirement
on property coming off construction?
A: All property owned by the assured or for which the assured
is responsible under contract for repair or replacement is
automatically covered, subject only to annual Unmodified Gross
Asset declarations .
Q4. Can I select different deductibles for property and terrorism
or operating and construction?
A: OIL deductibles can be selected on a Sector by Sector basis
(not coverage or location specific) . All property or risk within a
given Sector (for example, Refining and Marketing/Chemicals)
takes the same deductible . However, OIL can be utilized at
varying levels within an overall risk transfer strategy for different
operational risks .
NOTE: If a different deductible (or limit) is required for a
subsidiary or joint venture, a split policy could be arranged (with
different risk profile), but only if they meet the criteria set forth in
the Split Policy section of this Companion .
Q5. Does OIL cover wells in the course of drilling at inception?
A: OIL does not require specific declaration of wells in order
to establish premium or cover . As such all wells are covered by
whichever OIL policy is in force at the date of the Occurrence
(loss) irrespective of when drilling may have commenced .
Q6. Can I change deductibles mid-term?
A: Assuming an OIL entry has been in place for three or more
years, or with the specific agreement of OIL, changes can usually
be made by giving 30 days notice . However, all change requests
are at the discretion of OIL . Windstorm profile changes are
subject to a review of updated windstorm data and are subject
to OIL approval . Premium changes will take five years to be fully
realized under the terms of the Lock-In Plan .
NOTE: OIL may, at its discretion, apply a warranty prohibiting
the purchase of underlying insurance if higher deductibles are
selected .
Q7. Does OIL cover clean-up expenses?
A: OIL Insuring Agreement 3 (Seepage and Pollution Liability)
extends to cover reasonable expenses incurred (including
liability to any governmental authority/agency) for clean-up and
removal costs and expenses, but only to the extent reasonable
and necessary to minimize or remediate, or prevent further,
injuries to persons or loss or damage to property of others .
Q8. Does OIL accept single location entries?
A: Typically no, but if all other eligibility criteria are met, OIL
could in theory make an exception, although such entries are
discouraged .
Q9. Can I include joint venture ( JV) partners under my OIL entry?
A: Assuming the OIL member is the operator or has a controlling
interest in a given project (or has other dispensation from OIL),
and if certain other conditions imposed by OIL are met, the
member can seek approval to cover 100% (or an amount up to
100%) of the project ( JV) under their OIL entry . Cover will only
take effect upon declaration to OIL of the additional JV assets
of the project to be insured (if subsequently the OIL member
relinquishes its interest in the JV, cover for the JV partner
automatically ceases at that time without further notice from
OIL) . Approval in writing from OIL is required prior to declaration
of additional JV partner assets and the member is required to
provide an indemnification agreement to OIL in respect of any
claims brought by the JV partner . Additional premium will be
charged on the increased ( JV partner) assets declared . However,
OIL does not permit the naming of JV partners as additional
insured parties and contract wording may need to be adapted .
Q10. Can I select a different premium basis for my refineries and
my onshore pipelines?
Marsh • 31
A: Under the Lock-In Plan, Premium options can apply on a
Sector-by-Sector basis so, for example, a member might select
Flat Premium (Pool A and B) for Pipeline Operations but Standard
Premium Only (Pool A) for Refining & Marketing/Chemicals .
Although this is not specifically stated on the Coverage Profile
Selection Worksheet issued by OIL, it is permitted . Please note
that in the case of an OIL prospect, OIL will need to understand
their actual profile to determine if varying premium options per
Sector is feasible based on the circumstances presented prior
to entry . Additionally, any coverage or premium profile changes
(elections) remain at OIL’s discretion .
Q11. What is the Offshore/Onshore Excess Pools default profile
for a member not declaring DNWS assets?
A: The default profile is US$60 million part of US$100 million
(the minimum limit) excess of US$2,500 million (the maximum
deductible) . Members without DNWS assets will have 0% share
of the excess windstorm pools .
Q12. What is the difference between Unmodified Gross Assets
insured and Weighted Gross Assets?
A: Unmodified Gross Assets insured represents the total of
Unmodified Gross Assets (taken from members’ audited balance
sheets) before adjustment for operational risk and coverage
profile to produce Weighted Gross Assets used for individual
Pool Percentage and premium calculation .
Q13. Can my OIL entry be direct for some risks and
reinsurance for other risks?
A: Members can have their entry on both a direct and
reinsurance basis by using the Joint Policyholder Endorsement
(No . 3) . For example OIL could be a direct insurer for the Energy
Company for US risks (Energy Company listed as the named
insured for US risks) and a reinsurer of the captive for non-US
risks (captive listed as the Joint Policyholder for non-US risks) or
vice versa . Furthermore, a member could have a split policy (see
above) with OIL as a reinsurer for the split policy only and a direct
insurer for all other risks .
Q14. Does OIL cover cargo?
A: Yes, but cover is available under commercial market forms
with a broader range of benefits such as war, loss of hire/
ALOP (advanced loss of profits), inherent defect or gradual
deterioration, confiscation or expropriation, claims handling
and certificates for claims payable abroad scheme (delegated
authority), additional named insured benefit, guaranteed
outturn, mysterious disappearance/shortage, commingling/
contamination (which may be covered by OIL if construed as
property damage), and special loading clauses . It is difficult,
therefore, to evaluate the true benefit of OIL for cargo beyond
providing additional catastrophe limit .
Q15. If OIL becomes insolvent, what are the obligations/rights of
the member?
A: Upon dissolution of OIL, members are entitled to their
dissolution rights (in addition to their single share worth
US$10,000) . Also, a member’s financial liability to OIL is limited
to the premiums due to OIL (TWP) .
Q16. If a member enters via a captive, is the TWP booked on
balance sheet at the captive level or at the parent level?
A: It appears that some members do either, i .e . captive or parent,
although perhaps it should probably be the captive as technically
they are the member . However, this question should more
appropriately be addressed to a member’s auditors .
Q17. With respect to ventilated (split) limits, can one layer be on
an external quota share basis and another layer on a 100% limits
basis?
A: Yes (with agreement of OIL) .
Q18. As OIL excludes sanctionable activities do I still need to declare assets connected with such activities?
A: Yes . However, members are required to identify sanctionable assets as part of the annual Unmodified Gross Asset declaration and OIL deducts these assets before calculating Weighted Gross Assets .
Q19. Once Endorsement No .5 has been submitted to OIL does this roll over each year?
A: No . Endorsement No .5 does not renew automatically and must be resubmitted (and updated) each year . It is very important to remember to do this .
Q20. How does OIL loss recovery vary under the different premium options available (internal quota share versus external quota share, for example)?
A: The attached exhibits clearly illustrate the impact on claims at various levels for the different premium options that can be selected – see ‘Rating & Premium Plan’ section .
Q21. When OIL eliminates Offshore Gulf of Mexico DNWS coverage at January 1, 2018 will it still provide cover for Trinidad and Tobago?
A: Yes . OIL will continue to provide a maximum limit of US$150 million part of US$250 million for Trinidad and Tobago DNWS coverage .
Q22: What steps did OIL take to minimize the possibility of supplementary premium “calls”?
32 • The Oil Insurance Limited (OIL) Companion 2019
A: In 2005 OIL billed members US$1 .7 billion in premium via two member assessments (US$900m and US$800m respectively) which were the direct result of OIL incurring US$2 .8 billion of losses from hurricanes Katrina and Rita and US800 million from normal operational losses (one involving a large plant explosion in Europe) .
These 2005 events triggered a statutory capital deficiency per the Bermuda Monetary Authority (BMA) regulations . Management sought alternative ways to raise new capital but the premium assessments were the most cost effective . OIL has since negotiated with S&P and the BMA to receive capital credit for a significant portion (over 70%) of its future uncollected premium (TWP) . As a result, the likelihood of OIL falling into technical default of its statutory capital requirements and needing to make any premium assessments in the future is considered remote .
Note, as soon as OIL suffers an incurred loss, those losses create an immediate future five-year contractual obligation from the membership on a dollar for dollar basis . This revenue stream then, in turn, creates a capital credit of over 70% . If 2005 were to happen again (which is extremely unlikely now that GOM offshore wind coverage has been eliminated), a US$2 .8bn loss to OIL would immediately generate a capital credit of approximately US$1 .96bn (2005 premium assessment was US$1 .7bn) .
Marsh welcomes your feedback on additional questions to be answered and we may issue these periodically.
Marsh • 33
Loss Recovery Examples for a US$100 Million LossUS$100 million property damage loss 100% interest, all options show the claim recovery for a Pool A entry with a range of alternative
scenarios for the remaining capacity . Deductible US$10 million (except where shown) .
POOL B BASIS
(D/A 10 MILLION)
US$
POOL B BASIS
(D/A 100
MILLION)
US$
NO POOL B#
(RETRO)
US$
40% INTERNAL#
QS (SPO)
US$
100 MILLION
EXTERNAL QS
US$
CLAIM 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000
DEDUCTIBLE 10,000,000 100,000,000 10,000,000 10,000,000 10,000,000
RECOVERY 90,000,000 N/A 90,000,000 54,000,000** 72,000,000***
INDIVIDUAL PAYBACK N/A N/A 36,000,000* N/A N/A
TOTAL RETENTION 10,000,000 100,000,000 46,000,000 46,000,000 28,000,000
*US$90,000,000 x 40% = US$36,000,000 x 20% = US$7,200,000 annual **US$90,000,000 x 60% = US$54,000,000 ***US$90,000,000 x 80% (US$400 p/o US$500) = US$72,000,000 # Examples apply equally to DNWS losses
Loss Recovery Examples for a US$260 Million LossUS$260 million property damage loss 100% interest .
Deductible US$10 million (except where shown) .
POOL B BASIS
(D/A 10 MILLION)
US$
POOL B BASIS
(D/A 100
MILLION)
US$
NO POOL B#
(RETRO)
US$
40% INTERNAL#
QS (SPO)
US$
100 MILLION
EXTERNAL QS
US$
CLAIM 260,000,000 260,000,000 260,000,000 260,000,000 260,000,000
DEDUCTIBLE 10,000,000 100,000,000 10,000,000 10,000,000 10,000,000
RECOVERY 250,000,000 160,000,000 250,000,000 150,000,000** 200,000,000***
INDIVIDUAL PAYBACK N/A N/A 100,000,000* N/A N/A
TOTAL RETENTION 10,000,000 100,000,000 110,000,000 110,000,000 60,000,000
*US$250,000,000 x 40% = US$100,000,000 x 20% = US$20,000,000 annual **US$250,000,000 x 60% = US$150,000,000 ***US$250,000,000 x 80% (US$400 p/o US$500) =
34 • The Oil Insurance Limited (OIL) Companion 2019
Loss Recovery Examples for a US$410 Million LossUS$410 million property damage loss 100% interest .
Deductible US$10 million (except where shown) .
POOL B BASIS
(D/A 10 MILLION)
US$
POOL B BASIS
(D/A 100 MILLION)
US$
NO POOL B#
(RETRO)
US$
40% INTERNAL#
QS (SPO)
US$
100 MILLION
EXTERNAL QS
US$
CLAIM 410,000,000 410,000,000 410,000,000 410,000,000 410,000,000
DEDUCTIBLE 10,000,000 100,000,000 10,000,000 10,000,000 10,000,000
RECOVERY 400,000,000 310,000,000 400,000,000 240,000,000** 320,000,000***
INDIVIDUAL
PAYBACK
N/A N/A 160,000,000* N/A N/A
TOTAL
RETENTION
10,000,000 100,000,000 170,000,000 170,000,000 90,000,000
*US$400,000,000 x 40% = US$160,000,000 x 20% = US$32,000,000 annual **US$400,000,000 x 60% = US$240,000,000 ***US$400,000,000 x 80% (US$400 p/o US$500) = US$320,000,000 # DNWS losses capped at US$250,000,000 (per previous example)
Marsh • 35
This is a marketing communication .
The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only .
The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such .
In the United Kingdom, Marsh Ltd is authorised and regulated by the Financial Conduct Authority .
Copyright © 2019 Marsh Ltd All rights reserved GRAPHICS NO . 17-0556
For further information, please contact your local Marsh office or visit our website at marsh .com .
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