PALISADE RISK MODELLING CONFERENCE
Using @Risk to optimise captive insurance and
reinsurance programme structures
Derek Thrumble; Partner – Alesco Risk Management Services
LONDON - JUNE 11, 2013
RISK MODELLING
AGENDA
• Upstream Energy Insurance Market
• Risk Transfer Products – “building blocks”
• Insurance Programme Structures
• Risk Modelling
• Conclusions
RISK MODELLING
Upstream Energy Insurance
• Total worldwide Offshore Energy Premium of US$ 4.54 billion
•
•
An increase of 11% between 2010 and 2011
Over half of which is placed in the UK;
(Lloyd’s 2011 - US$ 2.64 billion)
• Rapid increase in size of the world drilling rig fleet
•
The majority of which are deepwater or ultra deepwater rigs
• Large growth in drilling activity in new areas
•
•
•
•
Deepwater Gulf of Mexico
Brazil
West Africa
Europe West Shetland / Arctic
Source: IUMI 2012 (International Union of Marine Insurers)
RISK MODELLING
Upstream Energy Insurance
Combined Ratio (%)
2012
2010
2008
2006
2004
2002
2000
1998
1996
0
25
50
75
100
125
150 175
Ratio %
200
225
250
275
300
Source: Lloyds; Combined ratio = (Losses plus expenses) / premiums
325
RISK MODELLING
Upstream Energy Insurance
• Key Insurance coverages
• Physical Damage
• Removal of Wreck
• Control of Well / Making wells safe
• Re-drilling
• Business Interruption / Loss of Profits
• Pollution
• Third Party Liability
RISK MODELLING
Risk Transfer Products
• Captive Insurance Company – operating costs ~ 3-5% of premiums
• Most large oil companies have established their own insurance
subsidiary to support group risk financing and insurance activity
• Total Capacity varies from $10M up to $2bn (major oil companies)
• Oil Insurance Limited (OIL) – operating costs ~ 3-5% of premiums
•
•
•
•
Oil industry insurance vehicle
Formed in 1972 (to address crisis in Pollution Insurance)
53 members insuring over $2 trillion of assets
Total Capacity $300M
• Commercial Energy insurance market – operating costs 40% of premium
• Lloyds & London Market (insurance and reinsurance companies)
• Regional (Bermuda, USA, Dubai, Singapore, Oslo etc..)
• Total Capacity available up to $4bn
RISK MODELLING
Risk Transfer Products
• Stop Loss protections
• Protection against volatility of (retained) smaller losses
• Can smooth results over a period of time e.g. 3 years
• Reduces level of capitalisation required and the risk of
recapitalisation
• Parametric natural catastrophe (windstorm) products
• In simplest form not based upon idemnity (e.g. physical damage)
• Triggered by storm (e.g. Cat 4 or Cat 5) passing within a 25 mile
circle or box
• Underwritten by reinsurance companies and hedge funds
• Immediate cash settlement
• Total Capacity $500M+
RISK MODELLING
Catastrophe losses
RISK MODELLING
Programme Structures
Total written premium:
$27.5M
Total reinsurance premium:
$25.0M
RISK MODELLING
Programme Structures
Total written premium:
$27.5M
Total reinsurance premium:
$13.5M
RISK MODELLING
Programme Structures
Total written premium:
$27.5M
Total reinsurance premium:
$6M
OIL pool share:
1.25%
RISK MODELLING
Programme Structures
Total written premium:
$27.5M
Total reinsurance premium:
$6M
OIL pool share:
90% of 1.25% = 1.125%
RISK MODELLING
Fitted Distributions
Fit Comparison for Small Claims 2
1.48
3.0
RiskLognorm(3256836.6,3346776.9,RiskShift(1000000))
8.51
5.0%
3.3%
90.0%
88.7%
5.0%
8.0%
Input
Minimum
Maximum
Mean
Std Dev
Values
2.0
1.5
1,134,600.55
9,998,192.07
4,076,533.31
2,184,796.19
2218
Lognorm
Minimum 1,000,000.00
Maximum
+∞
Mean
4,256,836.60
Std Dev
3,346,776.90
1.0
0.5
Values in Millions
18
16
14
12
10
8
6
4
2
0.0
0
Values x 10^-7
2.5
RISK MODELLING
Fitted Distributions
Probability-Probability Plot of Physical Damage Offshore
RiskPareto(0.98529,10000000)
1.0
0.9
0.8
0.6
Pareto
0.5
0.4
0.3
0.2
0.1
Input p-Value
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0.0
Fitted p-Value
0.7
RISK MODELLING
Fitted distributions
Refer to Financial Model Example.xls
• ‘Risk Loss Model’ worksheet
• ‘Detailed Windstorm Loss Model’ worksheet
Overall results are summarised in
• ‘Summary All Loss Models’ worksheet
Observations
(1) Frequency generally based upon a simple Poisson model but experience
(in insurance claims) indicates that may understate the volatility.
(2) Severity generally based upon Pareto models which are very “heavy tail”
but have been shown to adequately represent large claims in this sector.
RISK MODELLING
Programme Structures
Total written premium:
$60M
Total reinsurance premium:
$22M
OIL pool share:
90% of 1.25% = 1.125%
RISK MODELLING
Windstorm Insurance
• Since 1960 there have been 85 hurricanes which are all
included in our model
– 59 Cat 4
– 26 Cat 5
(including Ike)
• In this 60 year period we estimate only 14 storms would
have had an impact upon the current Statoil portfolio
– Cat 4: Hilda (1964), Betsy (1965), Carmen (1974), Frederic (1979), Opal
(1995), Georges (1998), Lili (2002), Gustav (2008)
– Cat 5: Ethel (1960), Camille (1969), Andrew (1992), Ivan (2004), Katrina
(2005), Rita(2005).
• By “serious” we define within 50 miles of the eye of the
storm
– 0-10 miles
– 10-25 miles
– 25-50 miles
level 1 100% pay out
level 2 100% pay out
level 3 50% pay out
RISK MODELLING
Windstorm Insurance
Hurricane Andrew (1992)
RISK MODELLING
Outputs
Refer to Financial Model Example.xls
• ‘Live demonstrations of @Risk outputs
e.g. Cells I51..M51 from ‘Financial Projections’ worksheet showing
projected Retained Earnings at 31/12/2013 under each of the
proposed Structures (1) to (5).
Observations
(1) Further stress-testing required particularly in terms of parameter
uncertainty and testing volatility
(2) Additional conditions can be applied e.g. testing capital adequacy level;
assessing the impact of an automatic dividend policy etc…
RISK MODELLING
Conclusions
• Energy insurance programmes for larger oil companies are complex and
require regular review and restructure
• Participation of in-house captive insurance companies and the industry
mutual OIL can produce significant overall cost savings over a period of
term but may introduce short-term volatility
• Industry data sets and statistical modelling has been applied for many
years. The premium rating and capital model developed by Oil Insurance
Limited is an analytical approach (no traditional underwriting).
• Most large captive insurance companies have adopted a risk-based
approach to develop
•
•
•
•
Capital adequacy testing
Regulatory Compliance (e.g. Solvency II)
Analysis of alternative reinsurance products (windstorm, stop loss)
Stress testing of changes to exposure or new coverages
RISK MODELLING
Thank you.
Alesco Risk Management Services Limited (Alesco) is an independent
Energy insurance broker and risk management consultant providing
insurance and risk management solutions to the global Energy industry.
Our core focus is to provide exemplary service and value. We have dedicated
Energy specialist practitioners that provide risk management, risk consultancy
and risk transfer needs for clients across a global reach and capability.
Our team have a shared ambition to develop Alesco into the leading wholesaler
in the Energy sector complimented by our excellent relationships with the new
generation of Underwriters who are now the decision makers.
For more information please contact:
Derek Thrumble (+44)0 207 204 8575