1 U of H Presentation - January 2007
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 HoustonJanuary 25, 2007
2 U of H Presentation - January 2007
“Wonderful! Just wonderful!...So much for instilling them with a sense of awe.”
“Wonderful! Just wonderful!...So much for instilling them with a sense of awe.”
3 U of H Presentation - January 2007
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.
4 U of H Presentation - January 2007
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
5 U of H Presentation - January 2007
Insurance – It’s not just a job, it’s an adventure
6 U of H Presentation - January 2007
Discussion outline
• What is Risk Management? <5 minutes
• Why buy insurance? <5 minutes
• Types of Insurance <5 minutes
• Insurance program structure 10 minutes• The purpose of reinsurance <5
minutes• Insurance program marketing ???
7 U of H Presentation - January 2007
Discussion outline
• What is Risk Management?• Why buy insurance?• Types of Insurance• Insurance program structure• The purpose of reinsurance• Insurance program marketing
8 U of H Presentation - January 2007
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
9 U of H Presentation - January 2007
Risk Transfer
• Contractual risk transfer
• Insurance
10 U of H Presentation - January 2007
A fundamental principle of Insurance
…Stupidity is an insured peril
11 U of H Presentation - January 2007
An example of an insured peril
12 U of H Presentation - January 2007
Discussion outline
• What is Risk Management?• Why buy insurance?• Types of Insurance• Insurance program structure• The purpose of reinsurance• Insurance program marketing
13 U of H Presentation - January 2007
Why buy insurance?
What is insurance?
What does insurance do?
14 U of H Presentation - January 2007
Why buy insurance?
• Financial “protection” … from what?• Inability to absorb loss• Contractual requirements• Legal/regulatory requirements
15 U of H Presentation - January 2007
Discussion outline
• What is Risk Management?• Why buy insurance?• Types of Insurance• Insurance program structure• The purpose of reinsurance• Insurance program marketing
16 U of H Presentation - January 2007
Types of Insurance
• Property• Casualty• Control of Well• Management Liability• Marine• Aviation• Kidnap & Ransom• Environmental• Political Risk• Patent Infringement• Surety
17 U of H Presentation - January 2007
Types of Insurance
• Property– Physical Damage– Business Interruption (a.k.a. “Time element”)
• Casualty– Workers Compensation– General Liability (Legal [tort] and Contractual)– Auto Liability– Employer’s Liability
18 U of H Presentation - January 2007
Discussion outline
• What is Risk Management?• Why buy insurance?• Types of Insurance• Insurance program structure• The purpose of reinsurance• Insurance program marketing
19 U of H Presentation - January 2007
Insurance Program Structure
• Layers– Primary– Excess
• Quota Share (a.k.a. “Subscription” or “Participation”)
20 U of H Presentation - January 2007
Insurance Program Structure
ALWAYS starts with:
What is the client trying to accomplish?
The best process ~ yields ~
the best result
21 U of H Presentation - January 2007
Insurance Program Structure
Why a “layered” or “quota share” program?
• Client goals & objectives• Underwriter preference• Pricing considerations• Coverage considerations
22 U of H Presentation - January 2007
A successful renewal requires a strong foundation …
Minimum
Develop Risk Profile1-2 Weeks
Develop Marketing Strategy
2-3 Weeks
Develop Submission
2-3 Weeks
Broking All Viable Proposals
4 Weeks
Binding & Implementation
1 Week
Market Selection
Market Tactics (Access)
23 U of H Presentation - January 2007
Insurance Program Structure
A “layered” program
24 U of H Presentation - January 2007
Insurance Program Structure
A “layered” program (showing layer limits)
25 U of H Presentation - January 2007
Insurance Program Structure
A “quota share” program
26 U of H Presentation - January 2007
Insurance Program Structure
Combination of Layering and Quota Share
27 U of H Presentation - January 2007
Insurance Program Structure
“Underlying” Insurance
28 U of H Presentation - January 2007
Discussion outline
• What is Risk Management?• Why buy insurance?• Types of Insurance• Insurance program structure• The purpose of reinsurance• Insurance program marketing
29 U of H Presentation - January 2007
The purpose of reinsurance
• Spread of risk• Increases/supplements capacity• Facilitates writing broader coverage• Puts capacity in the control of qualified underwriters
30 U of H Presentation - January 2007
Types of Reinsurance
• Facultative• Treaty
• Quota Share• Excess of Loss
31 U of H Presentation - January 2007
Other Reinsurance Issues
• Risks Attaching vs. Losses Occurring
• Natural Catastrophe (“NatCat”) Accumulations
• NatCat Risk Modeling
32 U of H Presentation - January 2007
Catastrophic Event ModelingHurricane Loss Analysis
33 U of H Presentation - January 2007
NatCat Risk Modeling
34 U of H Presentation - January 2007
Future trends?
Source: Weatherstreet.com
35 U of H Presentation - January 2007
A disturbing trend…
36 U of H Presentation - January 2007
A disturbing trend…
37 U of H Presentation - January 2007
Discussion outline
• What is Risk Management?• Why buy insurance?• Types of Insurance• Insurance program structure• The purpose of reinsurance• Insurance program marketing
38 U of H Presentation - January 2007
Insurance Distribution System
• Insurance companies sell insurance• Insurance company agents sell insurance• Brokers help their clients buy insurance
39 U of H Presentation - January 2007
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)
40 U of H Presentation - January 2007
The role of the broker
• Transactional• Consultative
41 U of H Presentation - January 2007
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, M&A,
contract review)– Claims advocacy and
processing
• Documentation (policies, certificates, etc.)
• International• Analytical/actuarial work• Insurance program
administration• Mid-term servicing
42 U of H Presentation - January 2007
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– 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.)
43 U of H Presentation - January 2007
Broker compensation
• Commissions• Fees
44 U of H Presentation - January 2007
45 U of H Presentation - January 2007
Insurance Program Marketing
Let the fun begin!
46 U of H Presentation - January 2007
Why buy insurance?
What is insurance?
What does insurance do?
47 U of H Presentation - January 2007
What is insurance?
• CONTRACT
• Payment (of premium) in exchange for a promise of payment (of claim) under certain explicitly agreed circumstances
• Requires good faith
48 U of H Presentation - January 2007
Catastrophe Insurance for the Energy Industry
49 U of H Presentation - January 2007
Insurance Program Marketing
Negotiation
Leverage
Relationships
Trust
50 U of H Presentation - January 2007
The insurance profession
51 U of H Presentation - January 2007
Insurance Program Marketing
The bad news …
Insurance (including insurance brokerage) is a highly regulated industry
• Domestic vs. Foreign (“Surplus Lines”) vs. Alien• “Locally admitted insurers”• U.K. Financial Services Authority• Premium tax, Surplus lines tax, Federal Excise tax
52 U of H Presentation - January 2007
Insurance Program Marketing
The good news …
We can work through that.
53 U of H Presentation - January 2007
Insurance Program Marketing
Retail insurance brokers / “Agents”
Wholesale brokers / Intermediaries
Managing General Agents
Insurers/ Underwriters / “Carriers”
Coverholders / Facilities
54 U of H Presentation - January 2007
Insurance Program Marketing
The role of the Broker in the Insurance transaction
55 U of H Presentation - January 2007
Insurance Program Marketing
The role of the Broker in the Insurance transaction
• The client’s advocate• Broker vs. Agent
56 U of H Presentation - January 2007
Insurance Program Marketing
The Broker’s use of
Leverage
in the Insurance transaction
57 U of H Presentation - January 2007
Insurance Program Marketing
The importance of
Relationships
in the Insurance transaction
58 U of H Presentation - January 2007
Insurance Program Marketing
The (global) energy insurance market
• North American insurance companies• Bermuda insurance companies • U.K. and European insurance companies • Lloyd’s of London• Mutuals• Others
59 U of H Presentation - January 2007
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
60 U of H Presentation - January 2007
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
61 U of H Presentation - January 2007
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
62 U of H Presentation - January 2007
Insurance Program Marketing
Mutuals•Assessable
•Non-Assessable
63 U of H Presentation - January 2007
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.)
64 U of H Presentation - January 2007
Insurance Program Marketing
65 U of H Presentation - January 2007
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
66 U of H Presentation - January 2007
Marketing at Lloyd’s
• The Lloyd’s Broker• The Lloyd’s Syndicates• Names
– Individual– Corporate
• The “Slip”
67 U of H Presentation - January 2007
What is Lloyd’s today?
• The “Franchisor”
(The Managing Agents are the Franchisees)
• Franchise Board– Performance Management– Capital Management– Risk Management (RDS)
68 U of H Presentation - January 2007
Performance Management
Risk Management
Capital Management Risk based capital
Central assets
Realistic Disaster Scenarios Risk management framework
Franchise management
Syndicate business planning
Monitoring / benchmarking
Claims, reinsurance and run-off management
Source: Lloyd’s
69 U of H Presentation - January 2007
What is Lloyd’s today?
• Entrepreneurial, Dynamic, Diverse• Innovative• Consistent & Stable• Solvent• Global
70 U of H Presentation - January 2007
Lloyd’s results demonstrate challenge of sustaining profitability
Source: Lloyd’s, results and forecasts under 3 year accounting
(f) = forecast
£m
-3,000
-2,500
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
(f)
2002
(f)
1987
87 J
APH
1985 & prior
1988Piper Alpha
1989Hurricane
Hugo
ExxonValdez
1990
90 A
1992Hurricane Andrew
1994Northridge Earthquake
2001
ToulouseRefinery
Petrobras
9/11
1999
HurricaneFloyd
EuropeanStorms
1995HurricaneMarilyn
HurricaneGeorges
US Casualty
1998
2002
CSG
1996
R&R
71 U of H Presentation - January 2007
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
72 U of H Presentation - January 2007
Why is Lloyd’s important?
• 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
73 U of H Presentation - January 2007
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)
74 U of H Presentation - January 2007
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
75 U of H Presentation - January 2007
0
50
100
150
200
250
300
350
400
450
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
No. of syndicates
& managing agents
0
20
40
60
80
100
120
140
160
180
200
220
240
Average syndicate capacity
Average syndicate capacity No. of syndicates No. of managing agents
Lloyd’s syndicate trends 1983-2005
409
201
2005
1983
2005 average syndicate capacity £221m
Source: Lloyd’s
44
62
£m
76 U of H Presentation - January 2007
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%
77 U of H Presentation - January 2007
Investors at Lloyd’s
• 111 corporate members• 1,497 individual (unlimited liability) “Names”• 468 Name Companies (representing limited liability
individuals)• 132 Scottish Limited Partnerships
78 U of H Presentation - January 2007
Placing business at Lloyd’s
• 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
79 U of H Presentation - January 2007
Placing business at Lloyd’s - 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
80 U of H Presentation - January 2007
Lloyd’s: 8% overall capacity increase in 2006
Syndicate Capacity
increase 2006
Amlin 2001 17.70%
Argenta 2121 18.73%
Ascot 1414 26.50%
Beazley 623/262311.30%
Cathedral 2010 25.00%
Chaucer 1084 12.50%
Heritage 1200 20.00%
Kiln 557 14.50%
Kiln 807 10.00%
MAP 2791 22.70%
Omega 958 11.00%
Wellington 2020 9.60%
Source: Lloyd’s/company announcements
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
00 01 02 03 04 05 06?
Capacity (£bn)
(anticipated)
(Would have reduced by 8% in absence of hurricanes)
65% of capacity in the hands of the top 20 direct capital providers
81 U of H Presentation - January 2007
US$m
Upstream underwriting capacities, 2004-06
0
500
1000
1500
2000
2500
3000
Platforms E&P property Mobiles Control of well* OffshoreConstruction
2004 2005 2006 2006 Gulf Wind (est)
Source: Aon Limited* max. OEE limits purchased in commercial market typically US$ 300m
82 U of H Presentation - January 2007
US$m
Energy Property underwriting capacities, 2004-06
0
500
1000
1500
2000
2500
3000
Refineries Utilities Mining Construction
2004 2005 2006 2006 Gulf Wind (est)
Source:Aon Limited
83 U of H Presentation - January 2007
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 HoustonJanuary 25, 2007