Energy Insurance and Risk Management

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Energy Insurance and Risk Management The
insurance transaction distribution system The
role of the markets (especially Lloyds) The role
of the broker
A presentation at The University of Houston -
October 9, 2007 Jerry McAloon Aon Risk Services
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Wonderful! Just wonderful!...So much for
instilling them with a sense of awe.
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Discussion outline

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

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Insurance Its not just a job, its an
adventure
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Discussion outline

• What is Risk Management? lt3 minutes
• Why buy insurance? lt3 minutes
• Types of Insurance lt3 minutes
• Insurance program structure lt5 minutes
• The purpose of reinsurance lt3 minutes
• Insurance program marketing ???

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Discussion outline

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

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

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Risk Transfer

• Contractual risk transfer
• Hold harmless
• Indemnification
• Additional Assured status
• Waiver of Subrogation
• Insurance

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Discussion outline

• What is Risk Management?
• Why buy insurance? (3 minutes?)
• Types of Insurance
• Insurance program structure
• The purpose of reinsurance
• Insurance program marketing

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Why buy insurance?

• What is insurance?
• What does insurance do?

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Why buy insurance?

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

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Discussion outline

• What is Risk Management?
• Why buy insurance?
• Types of Insurance (3 minutes?)
• Insurance program structure
• The purpose of reinsurance
• Insurance program marketing

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Types of Insurance

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

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Types of Insurance Broadly speaking

• Property
• Physical Damage
• Business Interruption (a.k.a. Time element)
• Casualty
• Workers Compensation
• General Liability (Legal tort and Contractual)
• Auto Liability
• Employers Liability

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Discussion outline

• What is Risk Management?
• Why buy insurance?
• Types of Insurance
• Insurance program structure (3 minutes?)
• The purpose of reinsurance
• Insurance program marketing

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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

• Followed closely by
• What is reasonably achievable in the current
  insurance market conditions?
• The best process
• yields
• the best result

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A successful renewal requires a strong foundation

Binding Implementation
1 Week
Minimum
Broking All Viable Proposals
4 Weeks
Develop Submission
Market Tactics (Access)
2-3 Weeks
Develop Marketing Strategy
Market Selection
2-3 Weeks
Develop Risk Profile
1-2 Weeks
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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

• Why a layered or quota share program?
• Client goals objectives
• Underwriter preference
• Pricing considerations
• Coverage considerations

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Insurance Program Structure

• A layered program

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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

• What is Risk Management?
• Why buy insurance?
• Types of Insurance
• Insurance program structure
• The purpose of reinsurance (5 minutes?)
• Insurance program marketing

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The purpose of reinsurance

• 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 ModelingHurricane Loss
Analysis
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NatCat Risk Modeling
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A disturbing trend
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A disturbing trend
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Discussion outline

• What is Risk Management?
• Why buy insurance?
• Types of Insurance
• Insurance program structure
• The purpose of reinsurance
• Insurance program marketing (3 minutes?)

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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
• Monitor insurer financial stability
• Data gathering/risk analysis
• Cash flow actuarial analysis
• Submission preparation
• Manuscript policy design
• Negotiations
• Recommendations
• (additions/deletions, MA, contract review)

• Documentation (policies, certificates, etc.)
• Premium billing and remittance
• International (admitted policies)
• Analytical/Actuarial work
• Insurance program administration
• Mid-term servicing
• Claims advocacy and processing

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The role of the broker

• Consultative
• Total Cost of Risk (T.C.O.R.)
• Safety Loss Prevention/Risk Control
• Risk Management Information Systems, AonLine,
  etc.
• Master Service Agreements
• Contractor insurance programs
• Risk bearing capacity analysis
• Manage retained losses

• Global network the Risk Managers eyes ears
• Captive Management Captive Utilization
• Tax-driven strategies
• 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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(No Transcript)
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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
• Transparency Disclosure
• 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 (and do) work through all 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 clients advocate
• Broker vs. Agent

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Insurance Program Marketing

• The Brokers role in
• Negotiation
• during the Insurance transaction

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Insurance Program Marketing

• The Brokers use of
• Leverage
• in the Insurance transaction

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Insurance Program Marketing

• The importance of
• Relationships and Trust
• in the Insurance transaction

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Insurance Program Marketing

• The (global) energy insurance market
• North American insurance companies
• Bermuda insurance companies
• U.K. and European insurance companies
• Lloyds 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.

• 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
• Starr Excess
• XL Insurance
• Zurich Insurance

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Insurance Companies U.K. Europe

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

• Lancashire
• Munich Re/Great Lakes/Munich American Risk
  Partners (MARP)
• Navigators
• Partner Re
• QBE
• SCOR
• Swiss Re/SR International
• Wurttembergische
• Zurich Re

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Insurance Program Marketing

• Mutuals
• Assessable
• Non-Assessable

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Mutual Insurers

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

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Insurance Program Marketing
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What is Lloyds?

• A marketplace NOT an insurance company
• 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 Lloyds Who does the work?

• The Lloyds Broker
• The Lloyds Syndicates
• Names
• Individual
• Corporate
• The Slip

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What is Lloyds today?

• The Franchisor
• (The Managing Agents are the Franchisees)
• Franchise Board
• Performance Management
• Capital Management
• Risk Management (RDS)

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Franchise management

• Syndicate business planning
• Monitoring / benchmarking
• Claims, reinsurance and run-off management

Performance Management
Risk Management
Capital Management

• Realistic Disaster Scenarios
• Risk management framework

• Risk based capital
• Central assets

Source Lloyds
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What is Lloyds today?

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

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Lloyds results demonstrate challenge of
sustaining profitability
(f) forecast
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Why is Lloyds important to us?

• Second largest surplus lines market in the U.S.
  (after AIG) 42 of Lloyds 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 Lloyds important to us?

• Does business in over 200 countries territories
• Insures
• 93 of all Dow Jones Industrial Average companies
• 94 of FTSE 100 companies
• 85 of Fortune 500
• 82 of Fortune European Top 50
• The top 7 pharmaceuticals
• The top 20 banks

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Marketing at Lloyds 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 Lloyds 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 brokerage firms
• 4,000 people daily

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Lloyds syndicate trends 1983-2005
2005 average syndicate capacity 221m
m
409
201
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2005
1983
Source Lloyds
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Investors at Lloyds
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Investors at Lloyds

• 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 Lloyds

• The Lloyds broker
• Negotiations at the Box
• Standing in the queue
• Meetings with clients

• Contract documentation
• The Slip
• The Wording
• The POLICY
• ConCert
• Uberrimae fidei
• Lloyds in the 21st Century

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Placing business at Lloyds - Market dynamics

• Subscription market - Anti-trust implications?
• Leaders Followers (?)
• The (underwriting) decision making process
• Accept or decline
• Coverage (incl. Limits/Retentions)
• Price
• Line size
• Facilities / Lineslips
• Information sharing
• Choosing a Leader

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Placing business at Lloyds - Market dynamics

• Subscription marketAnti-trust implications?
• Leaders Followers
• The (underwriting) decision making process
• Coverage (incl. Limits/Retentions)
• Price
• Line size

• Facilities / Lineslips
• Information sharing
• Choosing a Leader

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Upstream underwriting capacities, 2004-06
USm
max. OEE limits purchased in commercial market
typically US 300m
Source Aon Limited
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Energy Property underwriting capacities, 2004-06
USm
SourceAon Limited
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Energy Insurance and Risk Management
A presentation at The University of
Houston October 9, 2007 Jerry McAloon Aon Risk
Services 832-476-6998 Jerry_McAloon_at_ars.aon.com