0U of H Presentation - January 2007 Energy Insurance and Risk Management The insurance transaction...

1 U of H Presentation - January 2007

Energy Insurance and Risk Management

The insurance transaction distribution system

The role of the markets

The role of the broker

A presentation at The University of HoustonJanuary 25, 2007


“Wonderful! Just wonderful!...So much for instilling them with a sense of awe.”

“Wonderful! Just wonderful!...So much for instilling them with a sense of awe.”


Discussion outline

?Learning is finding out that you already know.Doing is demonstrating that you know it.Teaching is reminding others that they know just as well as you.


Discussion outline

• What is Risk Management?• Why buy insurance?• Types of Insurance• Insurance program structure• The purpose of reinsurance• Insurance program marketing – The Insurance

Transaction & Distribution System


Insurance – It’s not just a job, it’s an adventure


Discussion outline

• What is Risk Management? <5 minutes

• Why buy insurance? <5 minutes

• Types of Insurance <5 minutes

• Insurance program structure 10 minutes• The purpose of reinsurance <5

minutes• Insurance program marketing ???


Discussion outline

• What is Risk Management?• Why buy insurance?• Types of Insurance• Insurance program structure• The purpose of reinsurance• Insurance program marketing


What is “Risk Management?”

• Focus on Hazard risk

The Risk Management Process• Identify the Risk• Quantify the Risk

– Probability of loss– Severity of loss

• (Ignore the Risk)• Avoid the Risk• Minimize the Risk• Transfer the Risk


Risk Transfer

• Contractual risk transfer

• Insurance


A fundamental principle of Insurance

…Stupidity is an insured peril


An example of an insured peril


Discussion outline



Why buy insurance?

What is insurance?

What does insurance do?


Why buy insurance?

• Financial “protection” … from what?• Inability to absorb loss• Contractual requirements• Legal/regulatory requirements


Discussion outline



Types of Insurance

• Property• Casualty• Control of Well• Management Liability• Marine• Aviation• Kidnap & Ransom• Environmental• Political Risk• Patent Infringement• Surety


Types of Insurance

• Property– Physical Damage– Business Interruption (a.k.a. “Time element”)

• Casualty– Workers Compensation– General Liability (Legal [tort] and Contractual)– Auto Liability– Employer’s Liability


Discussion outline



Insurance Program Structure

• Layers– Primary– Excess

• Quota Share (a.k.a. “Subscription” or “Participation”)



ALWAYS starts with:

What is the client trying to accomplish?

The best process ~ yields ~

the best result



Why a “layered” or “quota share” program?

• Client goals & objectives• Underwriter preference• Pricing considerations• Coverage considerations


A successful renewal requires a strong foundation …

Minimum

Develop Risk Profile1-2 Weeks

Develop Marketing Strategy

2-3 Weeks

Develop Submission

2-3 Weeks

Broking All Viable Proposals

4 Weeks

Binding & Implementation

1 Week

Market Selection

Market Tactics (Access)



A “layered” program



A “layered” program (showing layer limits)



A “quota share” program



Combination of Layering and Quota Share



“Underlying” Insurance


Discussion outline



The purpose of reinsurance

• Spread of risk• Increases/supplements capacity• Facilitates writing broader coverage• Puts capacity in the control of qualified underwriters


Types of Reinsurance

• Facultative• Treaty

• Quota Share• Excess of Loss


Other Reinsurance Issues

• Risks Attaching vs. Losses Occurring

• Natural Catastrophe (“NatCat”) Accumulations

• NatCat Risk Modeling


Catastrophic Event ModelingHurricane Loss Analysis


NatCat Risk Modeling


Future trends?

Source: Weatherstreet.com


A disturbing trend…


A disturbing trend…


Discussion outline



Insurance Distribution System

• Insurance companies sell insurance• Insurance company agents sell insurance• Brokers help their clients buy insurance


Insurance Distribution System

• Insurance companies sell insurance• Insurance company agents sell insurance• Brokers help their clients buy insurance

(after first helping them decide whether to buy insurance, and if so, how much to buy)



• Transactional• Consultative



Transactional• Insurance placement

– Monitor insurer financial stability– Data gathering/risk analysis– Cash flow & actuarial analysis– Submission preparation– Manuscript policy design– Negotiations– Recommendations– (additions/deletions, M&A,

contract review)– Claims advocacy and

processing

• Documentation (policies, certificates, etc.)

• International• Analytical/actuarial work• Insurance program

administration• Mid-term servicing



• Consultative– Total Cost of Risk (T.C.O.R.)– Safety & Loss Prevention/Risk Control– Risk Management Information Systems, AonLine, etc.– Master Service Agreements– Risk bearing capacity analysis– Manage retained losses– Global network – the Risk Manager’s “eyes & ears”– Captive Management; Captive Utilization– High level claims advocacy; economic forecasting, etc.– Enhanced claims-related services (Accelerated Claims Closure,

Structured Settlements, Loss Portfolio Transfer, etc.)


Broker compensation

• Commissions• Fees



Insurance Program Marketing

Let the fun begin!


Why buy insurance?

What is insurance?

What does insurance do?


What is insurance?

• CONTRACT

• Payment (of premium) in exchange for a promise of payment (of claim) under certain explicitly agreed circumstances

• Requires good faith


Catastrophe Insurance for the Energy Industry



Negotiation

Leverage

Relationships

Trust


The insurance profession



The bad news …

Insurance (including insurance brokerage) is a highly regulated industry

• Domestic vs. Foreign (“Surplus Lines”) vs. Alien• “Locally admitted insurers”• U.K. Financial Services Authority• Premium tax, Surplus lines tax, Federal Excise tax



The good news …

We can work through that.



Retail insurance brokers / “Agents”

Wholesale brokers / Intermediaries

Managing General Agents

Insurers/ Underwriters / “Carriers”

Coverholders / Facilities



The role of the Broker in the Insurance transaction



The role of the Broker in the Insurance transaction

• The client’s advocate• Broker vs. Agent



The Broker’s use of

Leverage

in the Insurance transaction



The importance of

Relationships

in the Insurance transaction



The (global) energy insurance market

• North American insurance companies• Bermuda insurance companies • U.K. and European insurance companies • Lloyd’s of London• Mutuals• Others


Insurance Companies – North America

• ACE Global• American Electric & Gas

Insurance Services (AEGIS)• American International Group

(AIG)• American Offshore Insurance

Syndicate (AOIS)• Arch• Chubb• CNA• Commonwealth Ins.

• FM Global• Houston Casualty• Lexington• Liberty International • Markel• Navigators• St. Paul/Travelers• Starr Companies• XL Insurance• Zurich Insurance


Insurance Companies – Bermuda

• ACE Bermuda• Allied World Assurance co.

(AWAC)• Arch Ins.• Axis• Endurance Re• Everest Re• Lancashire• MaxRe• Montpelier

• Starr Excess• XL Insurance• Zurich Insurance


Insurance Companies – U.K. & Europe

• ACE Europe• Allianz• Axis• GARD Marine & Energy• GE Frankona• Generali• Gerling• Glacier Re• Hannover Re• Houston Casualty• Infrassure

• Lancashire• Munich Re/Great

Lakes/Munich American Risk Partners (MARP)

• Navigators• Partner Re• QBE• SCOR• Swiss Re/SR International• Wurttembergische• Zurich Re



Mutuals•Assessable

•Non-Assessable


Mutual Insurers

• AEGIS• Oil Insurance Limited (O.I.L.)• Oil Casualty Insurance Limited (O.C.I.L.)• Nuclear energy Insurance Ltd. (N.E.I.L.)




What is Lloyd’s?

• A marketplace• First published reference – 1688• First “breakaway group of professional underwriters –

1769• First reinsurance contract (C.E.Heath) – 1880• San Francisco earthquake (1906) – “Pay all our

policyholders in full, irrespective of the terms of their policies.” – C.E. Heath

• Central Guarantee Fund – 1925• LATF – 1939• GAAP Accounting – 2005


Marketing at Lloyd’s

• The Lloyd’s Broker• The Lloyd’s Syndicates• Names

– Individual– Corporate

• The “Slip”


What is Lloyd’s today?

• The “Franchisor”

(The Managing Agents are the Franchisees)

• Franchise Board– Performance Management– Capital Management– Risk Management (RDS)


Performance Management

Risk Management

Capital Management Risk based capital

Central assets

Realistic Disaster Scenarios Risk management framework

Franchise management

Syndicate business planning

Monitoring / benchmarking

Claims, reinsurance and run-off management

Source: Lloyd’s


What is Lloyd’s today?

• Entrepreneurial, Dynamic, Diverse• Innovative• Consistent & Stable• Solvent• Global


Lloyd’s results demonstrate challenge of sustaining profitability

Source: Lloyd’s, results and forecasts under 3 year accounting

(f) = forecast

£m

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

(f)

2002

(f)

1987

87 J

APH

1985 & prior

1988Piper Alpha

1989Hurricane

Hugo

ExxonValdez

1990

90 A

1992Hurricane Andrew

1994Northridge Earthquake

2001

ToulouseRefinery

Petrobras

9/11

1999

HurricaneFloyd

EuropeanStorms

1995HurricaneMarilyn

HurricaneGeorges

US Casualty

1998

2002

CSG

1996

R&R


Why is Lloyd’s important?

• Second largest “surplus lines” market in the U.S. (after AIG) [42% of Lloyd’s market premium is from U.S.]

• Center of the energy, marine and aviation global insurance markets

• 6th largest reinsurer


Why is Lloyd’s important?

• Does business in over 200 countries & territories• Insures

– 93% of all Dow Jones Industrial Average companies– 94% of FTSE 100 companies– 85% of Fortune 500– 82% of Fortune European Top 50– The top 7 pharmaceuticals– The top 20 banks


Marketing at Lloyd’s – How much “CAPACITY” is available?

• Capacity to provide limits of insurance

• “Stamp” capacity – the ability to accept premium on behalf of “Names” ($31.4 billion for 2007)


The Lloyd’s Market

• 46 Managing Agents• 437 active syndicates in 1980; 62 in 2006

– Underwriters, Claims professionals, Accountants, Attorneys, Support staff, etc.

• Average Syndicate stamp capacity $411 million• 163 accredited brokers• 4,000 people daily


0

50

100

150

200

250

300

350

400

450

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

No. of syndicates

& managing agents

0

20

40

60

80

100

120

140

160

180

200

220

240

Average syndicate capacity

Average syndicate capacity No. of syndicates No. of managing agents

Lloyd’s syndicate trends 1983-2005

409

201

2005

1983

2005 average syndicate capacity £221m

Source: Lloyd’s

44

62

£m


Investors at Lloyd’s

Worldwide insurance industry - 13%

US insurance industry - 15%

Bermudian insurance industry - 7%

UK and other corporate - 48%

Private individuals (limited liability) - 7%Private individuals (unlimited liability) - 10%


Investors at Lloyd’s

• 111 corporate members• 1,497 individual (unlimited liability) “Names”• 468 Name Companies (representing limited liability

individuals)• 132 Scottish Limited Partnerships


Placing business at Lloyd’s

• The Lloyd’s broker• Negotiations at “the Box”• Standing in “the queue”• Meetings with clients• Contract documentation

– The “Slip”– The “Wording”– ConCert

• Uberrimae fidei• Lloyd’s in the 21st Century


Placing business at Lloyd’s - Market dynamics

• Subscription marketAnti-trust implications?

• Leaders & Followers• The (underwriting) decision making process

– Coverage (incl. Limits/Retentions)– Price– Line size

• Facilities / Lineslips• Information sharing• Choosing a Leader


Lloyd’s: 8% overall capacity increase in 2006

Syndicate Capacity

increase 2006

Amlin 2001 17.70%

Argenta 2121 18.73%

Ascot 1414 26.50%

Beazley 623/262311.30%

Cathedral 2010 25.00%

Chaucer 1084 12.50%

Heritage 1200 20.00%

Kiln 557 14.50%

Kiln 807 10.00%

MAP 2791 22.70%

Omega 958 11.00%

Wellington 2020 9.60%

Source: Lloyd’s/company announcements

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

00 01 02 03 04 05 06?

Capacity (£bn)

(anticipated)

(Would have reduced by 8% in absence of hurricanes)

65% of capacity in the hands of the top 20 direct capital providers


US$m

Upstream underwriting capacities, 2004-06

0

500

1000

1500

2000

2500

3000

Platforms E&P property Mobiles Control of well* OffshoreConstruction

2004 2005 2006 2006 Gulf Wind (est)

Source: Aon Limited* max. OEE limits purchased in commercial market typically US$ 300m


US$m

Energy Property underwriting capacities, 2004-06

0

500

1000

1500

2000

2500

3000

Refineries Utilities Mining Construction

2004 2005 2006 2006 Gulf Wind (est)

Source:Aon Limited


Energy Insurance and Risk Management

The insurance transaction distribution system

The role of the markets


A presentation at The University of HoustonJanuary 25, 2007

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