Energy Insurance and Risk
Management
The insurance transaction distribution system
The role of the markets
The role of the broker
A presentation at The University of Houston
January 25, 2007
U of H Presentation - January 2007
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“Wonderful! Just wonderful!...So much for instilling
them with a sense of awe.”
U of H Presentation - January 2007
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Discussion outline
?
Learning is finding out that you already know.
Doing is demonstrating that you know it.
Teaching is reminding others that they know just as well as you.
U of H Presentation - January 2007
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Discussion outline
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What is Risk Management?
Why buy insurance?
Types of Insurance
Insurance program structure
The purpose of reinsurance
Insurance program marketing – The Insurance
Transaction & Distribution System
U of H Presentation - January 2007
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Insurance – It’s not just a job, it’s an adventure
U of H Presentation - January 2007
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Discussion outline
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What is Risk Management?
Why buy insurance?
Types of Insurance
Insurance program structure
The purpose of reinsurance
Insurance program marketing
U of H Presentation - January 2007
<5 minutes
<5 minutes
<5 minutes
10 minutes
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Discussion outline
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What is Risk Management?
Why buy insurance?
Types of Insurance
Insurance program structure
The purpose of reinsurance
Insurance program marketing
U of H Presentation - January 2007
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What is “Risk Management?”
• Focus on Hazard risk
The Risk Management Process
• Identify the Risk
• Quantify the Risk
– Probability of loss
– Severity of loss
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(Ignore the Risk)
Avoid the Risk
Minimize the Risk
Transfer the Risk
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Risk Transfer
• Contractual risk transfer
• Insurance
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A fundamental principle of Insurance
…Stupidity is an insured peril
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An example of an insured peril
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Discussion outline
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What is Risk Management?
Why buy insurance?
Types of Insurance
Insurance program structure
The purpose of reinsurance
Insurance program marketing
U of H Presentation - January 2007
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Why buy insurance?
What is insurance?
What does insurance do?
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Why buy insurance?
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Financial “protection” … from what?
Inability to absorb loss
Contractual requirements
Legal/regulatory requirements
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Discussion outline
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What is Risk Management?
Why buy insurance?
Types of Insurance
Insurance program structure
The purpose of reinsurance
Insurance program marketing
U of H Presentation - January 2007
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Types of Insurance
• Property
• Casualty
• Control of Well
• Management Liability
• Marine
• Aviation
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Kidnap & Ransom
Environmental
Political Risk
Patent Infringement
Surety
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Types of Insurance
• Property
– Physical Damage
– Business Interruption (a.k.a. “Time element”)
• Casualty
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Workers Compensation
General Liability (Legal [tort] and Contractual)
Auto Liability
Employer’s Liability
U of H Presentation - January 2007
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Discussion outline
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What is Risk Management?
Why buy insurance?
Types of Insurance
Insurance program structure
The purpose of reinsurance
Insurance program marketing
U of H Presentation - January 2007
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Insurance Program Structure
• Layers
– Primary
– Excess
• Quota Share (a.k.a. “Subscription” or “Participation”)
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Insurance Program Structure
ALWAYS starts with:
What is the client trying to accomplish?
The best process
~ yields ~
the best result
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Insurance Program Structure
Why a “layered” or “quota share” program?
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Client goals & objectives
Underwriter preference
Pricing considerations
Coverage considerations
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A successful renewal requires a strong
foundation …
1 Week
Minimum
4 Weeks
2-3 Weeks
2-3 Weeks
1-2 Weeks
U of H Presentation - January 2007
Binding &
Implementation
Broking All Viable
Proposals
Develop
Submission
Develop Marketing
Strategy
Market Tactics
(Access)
Market Selection
Develop Risk Profile
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Insurance Program Structure
A “layered” program
U of H Presentation - January 2007
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Insurance Program Structure
A “layered” program (showing layer limits)
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Insurance Program Structure
A “quota share” program
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Insurance Program Structure
Combination of Layering and Quota Share
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Insurance Program Structure
“Underlying” Insurance
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Discussion outline
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What is Risk Management?
Why buy insurance?
Types of Insurance
Insurance program structure
The purpose of reinsurance
Insurance program marketing
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The purpose of reinsurance
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Spread of risk
Increases/supplements capacity
Facilitates writing broader coverage
Puts capacity in the control of qualified underwriters
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Types of Reinsurance
• Facultative
• Treaty
• Quota Share
• Excess of Loss
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Other Reinsurance Issues
• Risks Attaching vs. Losses Occurring
• Natural Catastrophe (“NatCat”) Accumulations
• NatCat Risk Modeling
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Catastrophic Event Modeling
Hurricane Loss Analysis
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NatCat Risk Modeling
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Future trends?
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Source: Weatherstreet.com
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A disturbing trend…
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A disturbing trend…
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Discussion outline
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What is Risk Management?
Why buy insurance?
Types of Insurance
Insurance program structure
The purpose of reinsurance
Insurance program marketing
U of H Presentation - January 2007
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Insurance Distribution System
• Insurance companies sell insurance
• Insurance company agents sell insurance
• Brokers help their clients buy insurance
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Insurance Distribution System
• Insurance companies sell insurance
• Insurance company agents sell insurance
• Brokers help their clients buy insurance
(after first helping them decide whether to buy
insurance, and if so, how much to buy)
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The role of the broker
• Transactional
• Consultative
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The role of the broker
Transactional
• Insurance placement
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Monitor insurer financial stability
Data gathering/risk analysis
Cash flow & actuarial analysis
Submission preparation
Manuscript policy design
Negotiations
Recommendations
(additions/deletions, M&A,
contract review)
– Claims advocacy and
processing
U of H Presentation - January 2007
• Documentation (policies,
certificates, etc.)
• International
• Analytical/actuarial work
• Insurance program
administration
• Mid-term servicing
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The role of the broker
• Consultative
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Total Cost of Risk (T.C.O.R.)
Safety & Loss Prevention/Risk Control
Risk Management Information Systems, AonLine, etc.
Master Service Agreements
Risk bearing capacity analysis
Manage retained losses
Global network – the Risk Manager’s “eyes & ears”
Captive Management; Captive Utilization
High level claims advocacy; economic forecasting, etc.
Enhanced claims-related services (Accelerated Claims Closure,
Structured Settlements, Loss Portfolio Transfer, etc.)
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Broker compensation
• Commissions
• Fees
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Insurance Program Marketing
Let the fun begin!
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Why buy insurance?
What is insurance?
What does insurance do?
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What is insurance?
• CONTRACT
• Payment (of premium) in exchange for a promise
of payment (of claim) under certain explicitly agreed
circumstances
• Requires good faith
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Catastrophe Insurance for the Energy
Industry
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Insurance Program Marketing
Negotiation
Leverage
Relationships
Trust
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The insurance profession
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Insurance Program Marketing
The bad news …
Insurance (including insurance brokerage) is a
highly regulated industry
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Domestic vs. Foreign (“Surplus Lines”) vs. Alien
“Locally admitted insurers”
U.K. Financial Services Authority
Premium tax, Surplus lines tax, Federal Excise tax
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Insurance Program Marketing
The good news …
We can work through that.
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Insurance Program Marketing
Retail insurance brokers / “Agents”
Wholesale brokers / Intermediaries
Managing General Agents
Insurers/ Underwriters / “Carriers”
Coverholders / Facilities
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Insurance Program Marketing
The role of the Broker in the Insurance transaction
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Insurance Program Marketing
The role of the Broker in the Insurance transaction
• The client’s advocate
• Broker vs. Agent
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Insurance Program Marketing
The Broker’s use of
Leverage
in the Insurance transaction
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Insurance Program Marketing
The importance of
Relationships
in the Insurance transaction
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Insurance Program Marketing
The (global) energy insurance market
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North American insurance companies
Bermuda insurance companies
U.K. and European insurance companies
Lloyd’s of London
Mutuals
Others
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Insurance Companies – North America
• ACE Global
• American Electric & Gas
Insurance Services (AEGIS)
• American International Group
(AIG)
• American Offshore Insurance
Syndicate (AOIS)
• Arch
• Chubb
• CNA
• Commonwealth Ins.
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FM Global
Houston Casualty
Lexington
Liberty International
Markel
Navigators
St. Paul/Travelers
Starr Companies
XL Insurance
Zurich Insurance
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Insurance Companies – Bermuda
• ACE Bermuda
• Allied World Assurance co.
(AWAC)
• Arch Ins.
• Axis
• Endurance Re
• Everest Re
• Lancashire
• MaxRe
• Montpelier
U of H Presentation - January 2007
• Starr Excess
• XL Insurance
• Zurich Insurance
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Insurance Companies – U.K. & Europe
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ACE Europe
Allianz
Axis
GARD Marine & Energy
GE Frankona
Generali
Gerling
Glacier Re
Hannover Re
Houston Casualty
Infrassure
U of H Presentation - January 2007
• Lancashire
• Munich Re/Great
Lakes/Munich American Risk
Partners (MARP)
• Navigators
• Partner Re
• QBE
• SCOR
• Swiss Re/SR International
• Wurttembergische
• Zurich Re
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Insurance Program Marketing
Mutuals
•Assessable
•Non-Assessable
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Mutual Insurers
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AEGIS
Oil Insurance Limited (O.I.L.)
Oil Casualty Insurance Limited (O.C.I.L.)
Nuclear energy Insurance Ltd. (N.E.I.L.)
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Insurance Program Marketing
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What is Lloyd’s?
• A marketplace
• First published reference – 1688
• First “breakaway group of professional underwriters –
1769
• First reinsurance contract (C.E.Heath) – 1880
• San Francisco earthquake (1906) – “Pay all our
policyholders in full, irrespective of the terms of their
policies.” – C.E. Heath
• Central Guarantee Fund – 1925
• LATF – 1939
• GAAP Accounting – 2005
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Marketing at Lloyd’s
• The Lloyd’s Broker
• The Lloyd’s Syndicates
• Names
– Individual
– Corporate
• The “Slip”
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What is Lloyd’s today?
• The “Franchisor”
(The Managing Agents are the Franchisees)
• Franchise Board
– Performance Management
– Capital Management
– Risk Management (RDS)
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Franchise management
Performance
Management
 Syndicate business
planning
 Monitoring / benchmarking
 Claims, reinsurance and
run-off management
Capital
Management
 Risk based capital
 Central assets
Risk
Management
 Realistic Disaster Scenarios
 Risk management framework
Source: Lloyd’s
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What is Lloyd’s today?
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Entrepreneurial, Dynamic, Diverse
Innovative
Consistent & Stable
Solvent
Global
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Lloyd’s results demonstrate challenge
1996
of sustaining profitability
£m
2002
CSG
R&R
1985 & prior
2,000
1999
APH
1,500
1,000
500
0
1988
1990
Piper
Alpha
90 A
European
Storms
1994
Northridge
Earthquake
Hurricane
Floyd
1987
1989
1992
1995
1998
2001
87 J
Hurricane
Hugo
Hurricane
Andrew
Hurricane
Marilyn
Hurricane
Georges
9/11
-500
Exxon
Valdez
-1,000
US Casualty
-1,500
Petrobras
-2,000
Toulouse
Refinery
-2,500
20
00
20
01
(f)
20
02
(f)
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
85
-3,000
(f) = forecast
Source: Lloyd’s, results and forecasts under 3 year accounting
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Why is Lloyd’s important?
• Second largest “surplus lines” market in the U.S.
(after AIG) [42% of Lloyd’s market premium is from
U.S.]
• Center of the energy, marine and aviation global
insurance markets
• 6th largest reinsurer
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Why is Lloyd’s important?
• Does business in over 200 countries & territories
• Insures
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93% of all Dow Jones Industrial Average companies
94% of FTSE 100 companies
85% of Fortune 500
82% of Fortune European Top 50
The top 7 pharmaceuticals
The top 20 banks
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Marketing at Lloyd’s – How much
“CAPACITY” is available?
• Capacity to provide limits of insurance
• “Stamp” capacity – the ability to accept
premium on behalf of “Names” ($31.4
billion for 2007)
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The Lloyd’s Market
• 46 Managing Agents
• 437 active syndicates in 1980; 62 in 2006
– Underwriters, Claims professionals, Accountants,
Attorneys, Support staff, etc.
• Average Syndicate stamp capacity $411 million
• 163 accredited brokers
• 4,000 people daily
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Lloyd’s syndicate trends 1983-2005
2005 average syndicate
capacity £221m
450
£m
240
409
220
400
200
350
No. of
syndicates
& managing
agents
180
300
160
140
250
201
120
200
Average
syndicate
capacity
100
150
80
62
100
60
40
50
44
0
19
8
19 4
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
04
0
20
Average syndicate capacity
No. of syndicates
No. of managing agents
Source: Lloyd’s
U of H Presentation - January 2007
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Investors at Lloyd’s
Worldwide insurance industry - 13%
US insurance industry - 15%
Bermudian insurance industry - 7%
UK and other corporate - 48%
Private individuals (limited liability) - 7%
Private individuals (unlimited liability) - 10%
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Investors at Lloyd’s
• 111 corporate members
• 1,497 individual (unlimited liability) “Names”
• 468 Name Companies (representing limited liability
individuals)
• 132 Scottish Limited Partnerships
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Placing business at Lloyd’s
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The Lloyd’s broker
Negotiations at “the Box”
Standing in “the queue”
Meetings with clients
Contract documentation
– The “Slip”
– The “Wording”
– ConCert
• Uberrimae fidei
• Lloyd’s in the 21st Century
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Placing business at Lloyd’s Market dynamics
• Subscription market
Anti-trust implications?
• Leaders & Followers
• The (underwriting) decision making process
– Coverage (incl. Limits/Retentions)
– Price
– Line size
• Facilities / Lineslips
• Information sharing
• Choosing a Leader
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Lloyd’s: 8% overall capacity increase in 2006
Syndicate
Capacity
increase 2006
(Would have reduced by 8% in absence of hurricanes)
Capacity (£bn)
Amlin 2001
17.70%
Argenta 2121
18.73%
Ascot 1414
26.50%
Beazley 623/2623
11.30%
Cathedral 2010
25.00%
10.00
Chaucer 1084
12.50%
8.00
Heritage 1200
20.00%
6.00
Kiln 557
14.50%
4.00
Kiln 807
10.00%
2.00
MAP 2791
22.70%
0.00
Omega 958
11.00%
16.00
Wellington 2020
U of H Presentation - January 2007
9.60%
14.00
12.00
00
01
02
03
04
05
06?
(anticipated)
65% of capacity in the hands of the top 20 direct capital providers
Source: Lloyd’s/company
announcements
79
Upstream underwriting capacities, 2004-06
US$m
3000
2500
2000
1500
1000
500
0
Platforms
E&P property
2004
* max.
U of H Presentation - January
2007 OEE
2005
Mobiles
2006
Control of well*
Offshore
Construction
2006 Gulf Wind (est)
limits purchased in commercial market typically US$ 300m
Source: Aon Limited
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Energy Property underwriting capacities, 2004-06
US$m
3000
2500
2000
1500
1000
500
0
Refineries
Utilities
2004
U of H Presentation - January 2007
2005
Mining
2006
Construction
2006 Gulf Wind (est)
Source:Aon81
Limited
Energy Insurance and Risk
Management
The insurance transaction distribution system
The role of the markets
The role of the broker
A presentation at The University of Houston
January 25, 2007
U of H Presentation - January 2007
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