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8/10/2019 Jk Slides Offshore Energy Oslo 21sep10 Final
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Offshore EnergyOSLO 2010
Judy Knights
21 September 2010
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LloydsOffshore Energy Sep 20102
Agenda
GOM Wind, Physical Damage and COW OEE
Energy Packages Liability Implications
Marine and Energy Liability Implications
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LloydsOffshore Energy Sep 20103
Lloyd's Concerns
Performance data shows that off-shore energy has not delivered a
gross profit at a market level for some time
Limited confidence that offshore energy market is robustly managing
risk
Continued concern that effective methodologies are not being adopted
on a consistent basis
In the long term we are concerned about the impact of this sector on
the Society if improvements are not made our concern is prudential.
We are not interested in individual underwriting or pricing decisions.
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LloydsOffshore Energy Sep 20104
Energy Performance
Source: SRD / QMR / SBF / XIS
Source of data: 1998-2009 Solvency & Reserving Data (SRD), QMR premium figures will be largely based on exchange ratesused for business planning purposes. Energy is a Lloyds high level risk code.
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LloydsEnergy Insurance @ Lloyds 15 Dec 20095
Hurricanes Ivan vs. Katrina vs. Rita
vs. Ike
Ivan Katrina Rita Ike
Saffir Simpson Cat 4 Cat 5 Cat 4 Cat 2
Hurricane Severity
Index33 47 42 36
Integrated Kinetic
Energy4.4 5.1 4.3 5.2
No. of Platforms
Destroyed7 46 69 54
No. of Platforms
Damaged24 20 32 95
Commercial Market
LossUSD1,250m USD3,000m USD3,500m USD4,000m
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LloydsEnergy Insurance @ Lloyds 15 Dec 20096
Ike Loss Deterioration &
Ivan/Katrina/Rita Comparison, Jan 2009
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LloydsEnergy Insurance @ Lloyds 15 Dec 20097
Types of Loss by Hurricane
Since 2004 GOM hit by Ivan, Katrina, Rita &Ike = one per year
Ivan: subterranean landslides damagingpipelines
Katrina: unusually large storm
no aggregation management by Underwriters +
$1bn claims for Making Wells Safe (MWS) but
NO Wells out of Control +
Excessive Removal of Wreck claims
Rita: BI/LOPI & CBI/CLOPI with unscheduledcontingent losses and LOPI based on price ofoil per barrel
Ike: aggs post Katrina worked to reduce PDexposure, but OEE cover MWS, Redrill & P&Astill an issue = 40% of the loss +NO Wells out of Control
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LloydsEnergy Insurance @ Lloyds 15 Dec 20098
Performance Concerns
Offshore energy has not delivered a gross
profit for some time
Post KRW changes to underwriting & pricingovertaken by events
Agg management - existing modellingtechniques ineffective forecasting scale
GOM wind losses
Ike exhausted 70-90% of Syndicates RDSnumbers - 100% exhaustion only expectedfrom category 4 or 5 storm
External factors to offshore energy book -Oil price ($38 Mar 09) & Global economiccrisis
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LloydsEnergy Insurance @ Lloyds 15 Dec 20099
Review 2009: U/W Strategy & Pricing
Policy
Pricing methodology for attritional and Cat
New U/W strategy: PD, OEE, LOPI, CLOPI &Liability
As if Ike loss with new strategy
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LloydsEnergy Insurance @ Lloyds 15 Dec 200910
Changes to Physical Damage (PD)
Cover in 2009:
Increase in PD Rates
Retentions: increased by X3 to X10and a percentage of TIV (Total
Insured Value)
Wind agg limits reduced by between
25% to 30%.
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LloydsEnergy Insurance @ Lloyds 15 Dec 200911
OEE (Operators Extra Expenses)
- separate exposures
1. Control of well: effectively a blow out, requiring regaining control (think
Red Adair). Not historically a cover impacted by windstorms.
2. Seepage & pollution/re-drill: typically this follows a blow out, so again
is not usually windstorm related cover.
3. Extended re-drill: event triggering loss is PD to facility, causing
damage to the well, requiring re-drill. This is wind related exposure
4. Making well safe: as 3, this relates to a PD loss and involves
subsurface activity to make the well safe could be wind related
5. P&A Plug & Abandon: as 3, could result from a PD loss - thereforewindstorm exposure
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LloydsEnergy Insurance @ Lloyds 15 Dec 200912
Changes: Control of Well/Operators
Extra Expenses (OEE) Cover:
Rated as PD: Wind exposed OEE cover for Redrill/MWS/P&A rated as
PD exposure for TIV of scheduled wells = new premium to the market
Wells Scheduled: Economic wells & cover provided each well (e.g.
Redrill) scheduled with sublimit per well & premium rated on OEE TIV
Sublimits per scheduled well & for scheduled cover offered: wind OEE
sublimited per well for Redrill/MWS/P&A and in any event part ofoverall wind agg.
Retentions: new PD retention structure applied to new OEE scheduled
TIV i.e. retention as a percentage of TIV - single combined retention
with PD cover
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LloydsOffshore Energy Sep 201013
2010 Plans in Oct 09 v ResubmittedPlans Apr 2010
In October 09 2010 plans were anticipating rates to be broadly flat
Benign 2009 Hurricane Season led to greater rate reductions thananticipated, particularly for GOM wind
Resubmitted 2010 plans reflected increased rate reductions
There was, however, encouraging evidence that managing agentswere maintaining better practices in respect of the wordings being
used and pricing methodologies
Overall Loss Ratios moved up in line with increased rate reductions
The markets approach reflected increased prudence in underwriting
methodologies.
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LloydsOffshore Energy Sep 201014
Resubmitted 2010 Plans
Good evidence of improved practices:
Premium rates for physical damage and OEE risks
Assureds retentions levels
Method of fixing retention charged as a percentage of TIV
Control of aggregate wind limit levels
Inclusion of OEE cover for wind as part of rating methodologies
Economic wells identified and scheduled with wind OEE sub-limits
Policy limits/sub-limits and retentions intrinsically linked to the total assetvalues declared to the policy
Nevertheless, continued rate reductions meant Lloyds remainedconcerned that pricing methodologies did not fully reflect exposure andthe potential for cat losses. But then came along
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LloydsOffshore Energy Sep 201015
Deepwater HorizonNet claim to Lloyds between $300m to $600m
Transocean:
PD (TL) and Liabilities Package 150m Xs50m
Policy for Liabilities only 150m Xs 50m
Excess Liabilities 200m Xs 350m
Anadarko:
Control of Well 25% of $250m
Liability 25% of $150m
MOEX: Control of Well 10% of $300m
Liability 10% of $150m
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LloydsOffshore Energy Sep 201016
Impact of Deepwater Horizon Loss
Widely reported that rates stabilised for GOM wind and hardened for
Risk Physical Damage and Control of Well cover, particularly in
deepwater
Major impact is to harden liability rating and an increased demand for
higher limits.
Uncertainty re the US factor and repercussions for liability exposure/contractual position between all joint venture partners and contractors
Underwriters requesting specific information on: any offshore drilling or
drilling interests, depth of wells, contractors involved in drilling and
their contractual relationship with principals.
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LloydsOffshore Energy Sep 201017
Impact of Deepwater Horizon Loss
Moratorium on deepwater drilling in the GOM
Few shallow water drilling plans being approved by US regulators/BOEM - drilling has completely stopped in the GOM
Rigs have departed for other areas of the world
In future collateral may have to be put up before drilling takes place
and banks providing finance will demand that appropriate insurance
cover is in place
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LloydsOffshore Energy Sep 201018
Impact of Deepwater Horizon Loss
Negligence exceptionally difficult to prove under the drilling contract
Anadarko and Mitsui may be liable for their shares of the costs
Possible D&O implications for Lloyds Transocean, BP and
Halliburton
Active 2010 hurricane season could exacerbate losses from the oil spill
Reinsurance treaties renew 1 January
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LloydsOffshore Energy Sep 201019
Impact of Deepwater Horizon Loss
OPA 90 Energy Liabilities
US Congress is proposing to remove the OPA 90 limit of liability
Possible elimination of $75m liability limitation on non-removal costdamages for offshore facilities
COFRs for offshore facilities increased from maximum $150m to
$300m
COFRs (strict liability) and OPA liability insurance will be competing for
the same finite pot of insurance
Assureds may need to seek other avenues to manage their exposures
due to limitations on industry capacity
There may be more business to write, but underwriters need to have a
clear risk appetite for this type of exposure and must be satisfied that
exposures are being priced properly
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LloydsOffshore Energy Sep 201020
Impact of Deepwater Horizon Loss
OPA 90 Marine Liabilities
Repercussions for the oil and shipping industries immense
Long-term serious problems for oil companies, all shipping companiescarrying oil, its products and bunker fuel into the US
With possible changes to limitations for economic costs, shipowners
may be unable to obtain third party liability insurance or provide the
COFRs for voyages to the US
Supplemental oil pollution funds would be completely extinguished in
the event of a large tanker spill, leading to insurers and bankers
restricting owners from trading to the US
Demand for Marine and Energy OPA 90/COFR and liability insurance
will be competing for the same finite pot
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LloydsOffshore Energy Sep 201021
Impact of Deepwater Horizon Loss
Marine Liabilities & Marine XL
A market expectation that rates may increase substantially for the
upper layers of marine and energy liability programmes
Demand for more and higher layers of liability
Excess liability exposures accumulation with Energy PD policy due to
involvement with multi-assureds and hurricane wreck removal
exposure
January 2011 renewals of marine and energy whole account
reinsurances could see a hardening of rating for all marine and energy
classes.
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LloydsOffshore Energy Sep 201022
Risk Losses Advised Totalling over
$2bn Including:
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LloydsOffshore Energy Sep 201023
Why are we discussing Marine?
Although Lloyds initial focus was on Energy it is clear that many of the
concerns apply equally to Marine.
Cat risk from hurricanes carry through to affect Marine results
For Removal of Wreck
Excess Energy Liabilities
Energy XL
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LloydsOffshore Energy Sep 201024
Marine Performance
Source of data: 1998-2009 Solvency & Reserving Data (SRD), QMR premium figures will be largely based on exchange ratesused for business planning purposes. Risk codes. Marine is a Lloyds high level risk code.
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LloydsOffshore Energy Sep 201025
Liabili ty Underwriting in Crisis?
The era of the mega claim
20 identifiable losses above $100m since 2000
Onshore losses
Offshore losses
Effects of the Deepwater Horizon
Rate technical adequacy going forward
Terms and conditions
Aggregates
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LloydsOffshore Energy Sep 201026
Liability Lloyds Concerns Included in package policies with the concern that it is not being
separately rated, despite material levels of cover provided.
Is there the right level of underwriting expertise? Often written by theEnergy underwriter, not a Liability underwriter
What lies beneath? Is there proper understanding of scheduled
underlyings? e.g. scheduling 1st party expenses (OEE) in excess
liability policy
Contingent OEE scheduled as underlying
Concern as to whether aggregate exposures are being properlyrecognised:
Aggregating all the liability parties Contractor/operator/BOP
manufacturer/cement manufacturer
Excess liability exposures accumulation with PD policy due to involvement
with multi-assureds.
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LloydsOffshore Energy Sep 201027
Liability Concerns - Poor wordings &Practises
There is evidence that inadequate attention is being given to wordings.
Poor practices are creeping in:
1st Party hurricane exposed removal of wreck in excess liability policy
should be included in Aggregates
Seepage and pollution exclusion amended in liability section of package
and standalone liability policies Are you charging for it?
Limit for interest versus limits for 100% scaling for interest
Floating limits OEE
Pricing adequacy for deepwater wells exposure
Contracts should have aggregate limit across all sections total
amount to be paid
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LloydsOffshore Energy Sep 201028
Pricing Methodology v. Capacity &
Clash
Anchoring: Is the right point of reference being adopted?
Rerating requires a Back to Basics approach in view of OPA90/COFRs
It is not enough merely to look at increases against previous year rates
Pricing methodologies must reflect increased exposures
Proper pricing and exposure management means syndicates must
know what their exposures are:
OPA 90 and COFRs/Removal of Wreck/Deepwater COW and Wind COW &
Wind PD clash/aggregation Hurricane is NOT an Act of God!
Multi assureds clash
Reinsurance of non-poolable P&I Club risks/special operations clash
Giving the pen away
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LloydsOffshore Energy Sep 201029
Consider New Energy PD/Liability RDS
Example:
Deepwater Horizon highlights the need to ensure the right RDS is
being used - Consider including:
Deepwater Horizon Scenario with PD, loss of life, pollution, well out
of control and OEE etc
OPA 90/COFRs
Multiple assureds
Rig lands on third party pipeline
Wreck removal costs
D&O implications
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LloydsOffshore Energy Sep 201030
Consider Hurricane Scenario with
Multiple COFRs
GOM hurricane multiple Total Losses; Consider including:
Wind PD limits exhausted including WR, S&L & OEE Third party liabilities for pollution clean up under OPA 90
COFRs-strict Liabilities
Multiple assureds
Wreck removal in liabilities placements & excess liabilities book
D&O implications
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LloydsOffshore Energy Sep 201031
Challenges for 2011
Offshore energy not out of the woods
Underwriting approaches to RISK need to be addressed particularly inmarine and energy liabilities
Viewed as a whole GOM and RISK Lloyd's continues to have
concerns about the viability of the class
Lloyds will be looking for evidence that the market is addressing the
challenges
Robust methodologies
Understanding the exposures/Clear risk appetite
The right expertise being applied