The Oil Insurance Limited (OIL) Companion 2019 · The Oil Insurance Limited (OIL) Companion 2019 A...

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


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


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 .


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


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:


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:


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 .


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


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) .


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 .


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


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)” .


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) .


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:


• 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


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


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”?


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) =


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 .

GUY BESSISOIL Technical Accreditation(OTA) CertifiedEnergy & Power Practice - Dubai+971 4212 9128guy .bessis@marsh .com

AMY BARNESOIL Technical Accreditation(OTA) CertifiedEnergy & Power Practice - London+44 (0) 20 7357 5215amy .barnes@marsh .com

ANGUS RODGEROIL Technical Accreditation(OTA) CertifiedEnergy & Power Practice - London+44 (0)20 7357 3488 angus .rodger@marsh .com

RICHARD W . BRYAN, JR . OIL Technical Accreditation (OTA) CertifiedEnergy & Power Practice - Houston+1 713-346-1271Ricky .bryan@worthaminsurance .com

JAMES F . HUGHES IIIOIL Technical Accreditation(OTA) Certified Energy & Power Practice- Houston+1 713-276-8135James .hughes@marsh .com

CRYSTAL KINGSMITH OIL Technical Accreditation (OTA) CertifiedEnergy & Power Practice - Calgary+1 403 476 3425 crystal .kingsmith@marsh .com

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