Energy Insurance and Risk Management

The insurance transaction distribution systemThe role of the marketsThe role of the brokerA presentation at The University of HoustonJanuary 25, 2007

U of H Presentation - January 2007

Wonderful! Just wonderful!...So much for instilling them with a sense of awe.

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.

U of H Presentation - January 2007

Discussion outlineWhat is Risk Management?Why buy insurance?Types of InsuranceInsurance program structureThe purpose of reinsuranceInsurance program marketing The Insurance Transaction & Distribution System

U of H Presentation - January 2007

Insurance Its not just a job, its an adventure

U of H Presentation - January 2007

Discussion outlineWhat is Risk Management?

Discussion outlineWhat is Risk Management?Why buy insurance?Types of InsuranceInsurance program structureThe purpose of reinsuranceInsurance program marketing

U of H Presentation - January 2007

What is Risk Management?Focus on Hazard risk The Risk Management ProcessIdentify the RiskQuantify the RiskProbability of lossSeverity of loss(Ignore the Risk)Avoid the RiskMinimize the RiskTransfer the Risk

U of H Presentation - January 2007

Risk Transfer

Contractual risk transfer

Insurance

U of H Presentation - January 2007

A fundamental principle of Insurance

Stupidity is an insured peril

U of H Presentation - January 2007

An example of an insured peril

U of H Presentation - January 2007

Discussion outlineWhat is Risk Management?Why buy insurance?Types of InsuranceInsurance program structureThe purpose of reinsuranceInsurance program marketing

U of H Presentation - January 2007

Why buy insurance?

What is insurance?

What does insurance do?

U of H Presentation - January 2007

Why buy insurance?Financial protection from what?Inability to absorb lossContractual requirementsLegal/regulatory requirements

U of H Presentation - January 2007

Discussion outlineWhat is Risk Management?Why buy insurance?Types of InsuranceInsurance program structureThe purpose of reinsuranceInsurance program marketing

U of H Presentation - January 2007

Types of InsurancePropertyCasualtyControl of WellManagement LiabilityMarineAviationKidnap & RansomEnvironmentalPolitical RiskPatent InfringementSurety

U of H Presentation - January 2007

Types of InsurancePropertyPhysical DamageBusiness Interruption (a.k.a. Time element)CasualtyWorkers CompensationGeneral Liability (Legal [tort] and Contractual)Auto LiabilityEmployers Liability

U of H Presentation - January 2007

Discussion outlineWhat is Risk Management?Why buy insurance?Types of InsuranceInsurance program structureThe purpose of reinsuranceInsurance program marketing

U of H Presentation - January 2007

Insurance Program StructureLayersPrimaryExcess Quota Share (a.k.a. Subscription or Participation)

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

U of H Presentation - January 2007

Insurance Program StructureWhy a layered or quota share program?

Client goals & objectivesUnderwriter preferencePricing considerationsCoverage considerations

U of H Presentation - January 2007

A successful renewal requires a strong foundation MinimumDevelop Risk Profile1-2 WeeksDevelop Marketing Strategy2-3 WeeksDevelop Submission2-3 WeeksBroking All Viable Proposals4 WeeksBinding & Implementation1 WeekMarket SelectionMarket Tactics (Access)

U of H Presentation - January 2007

Insurance Program StructureA layered program

U of H Presentation - January 2007

Insurance Program StructureA layered program (showing layer limits)

U of H Presentation - January 2007

Insurance Program StructureA quota share program

U of H Presentation - January 2007

Insurance Program StructureCombination of Layering and Quota Share

U of H Presentation - January 2007

Insurance Program StructureUnderlying Insurance

U of H Presentation - January 2007

Discussion outlineWhat is Risk Management?Why buy insurance?Types of InsuranceInsurance program structureThe purpose of reinsuranceInsurance program marketing

U of H Presentation - January 2007

The purpose of reinsuranceSpread of riskIncreases/supplements capacityFacilitates writing broader coveragePuts capacity in the control of qualified underwriters

U of H Presentation - January 2007

Types of ReinsuranceFacultativeTreaty

Quota ShareExcess of Loss

U of H Presentation - January 2007

Other Reinsurance IssuesRisks Attaching vs. Losses Occurring Natural Catastrophe (NatCat) Accumulations

NatCat Risk Modeling

U of H Presentation - January 2007

Catastrophic Event ModelingHurricane Loss Analysis

U of H Presentation - January 2007

NatCat Risk Modeling

U of H Presentation - January 2007

Future trends?Source: Weatherstreet.com

U of H Presentation - January 2007

A disturbing trend

U of H Presentation - January 2007

A disturbing trend

U of H Presentation - January 2007

Discussion outlineWhat is Risk Management?Why buy insurance?Types of InsuranceInsurance program structureThe purpose of reinsuranceInsurance program marketing

U of H Presentation - January 2007

Insurance Distribution System

Insurance companies sell insuranceInsurance company agents sell insuranceBrokers help their clients buy insurance

U of H Presentation - January 2007

Insurance Distribution System

Insurance companies sell insuranceInsurance company agents sell insuranceBrokers help their clients buy insurance(after first helping them decide whether to buy insurance, and if so, how much to buy)

U of H Presentation - January 2007

The role of the brokerTransactionalConsultative

U of H Presentation - January 2007

The role of the brokerTransactionalInsurance placementMonitor insurer financial stabilityData gathering/risk analysisCash flow & actuarial analysisSubmission preparationManuscript policy designNegotiationsRecommendations(additions/deletions, M&A, contract review)Claims advocacy and processing

Documentation (policies, certificates, etc.) InternationalAnalytical/actuarial workInsurance program administrationMid-term servicing

U of H Presentation - January 2007

The role of the brokerConsultativeTotal Cost of Risk (T.C.O.R.)Safety & Loss Prevention/Risk ControlRisk Management Information Systems, AonLine, etc.Master Service AgreementsRisk bearing capacity analysisManage retained lossesGlobal network the Risk Managers eyes & earsCaptive Management; Captive UtilizationHigh level claims advocacy; economic forecasting, etc.Enhanced claims-related services (Accelerated Claims Closure, Structured Settlements, Loss Portfolio Transfer, etc.)

U of H Presentation - January 2007

Broker compensationCommissionsFees

U of H Presentation - January 2007

U of H Presentation - January 2007

Insurance Program Marketing

Let the fun begin!

U of H Presentation - January 2007

Why buy insurance?

What is insurance?

What does insurance do?

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

U of H Presentation - January 2007

Catastrophe Insurance for the Energy Industry

U of H Presentation - January 2007

Insurance Program MarketingNegotiation

Leverage

Relationships

Trust

U of H Presentation - January 2007

The insurance profession

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. AlienLocally admitted insurersU.K. Financial Services AuthorityPremium tax, Surplus lines tax, Federal Excise tax

U of H Presentation - January 2007

Insurance Program Marketing

The good news

We can work through that.

U of H Presentation - January 2007

Insurance Program MarketingRetail insurance brokers / Agents

Wholesale brokers / Intermediaries

Managing General Agents

Insurers/ Underwriters / Carriers

Coverholders / Facilities

U of H Presentation - January 2007

Insurance Program MarketingThe role of the Broker in the Insurance transaction

U of H Presentation - January 2007

Insurance Program Marketing

The role of the Broker in the Insurance transaction

The clients advocateBroker vs. Agent

U of H Presentation - January 2007

Insurance Program MarketingThe Brokers use of

Leverage

in the Insurance transaction

U of H Presentation - January 2007

Insurance Program MarketingThe importance of

Relationships

in the Insurance transaction

U of H Presentation - January 2007

Insurance Program MarketingThe (global) energy insurance market

North American insurance companiesBermuda insurance companies U.K. and European insurance companies Lloyds of LondonMutualsOthers

U of H Presentation - January 2007

Insurance Companies North AmericaACE GlobalAmerican Electric & Gas Insurance Services (AEGIS)American International Group (AIG)American Offshore Insurance Syndicate (AOIS)ArchChubbCNACommonwealth Ins.

FM GlobalHouston CasualtyLexingtonLiberty International MarkelNavigatorsSt. Paul/TravelersStarr CompaniesXL InsuranceZurich Insurance

U of H Presentation - January 2007

Insurance Companies BermudaACE BermudaAllied World Assurance co. (AWAC)Arch Ins.AxisEndurance ReEverest ReLancashireMaxReMontpelier

Starr ExcessXL InsuranceZurich Insurance

U of H Presentation - January 2007

Insurance Companies U.K. & EuropeACE EuropeAllianzAxisGARD Marine & EnergyGE FrankonaGeneraliGerlingGlacier ReHannover ReHouston CasualtyInfrassure

LancashireMunich Re/Great Lakes/Munich American Risk Partners (MARP)NavigatorsPartner ReQBESCORSwiss Re/SR InternationalWurttembergischeZurich Re

U of H Presentation - January 2007

Insurance Program Marketing

MutualsAssessableNon-Assessable

U of H Presentation - January 2007

Mutual InsurersAEGISOil Insurance Limited (O.I.L.)Oil Casualty Insurance Limited (O.C.I.L.)Nuclear energy Insurance Ltd. (N.E.I.L.)

U of H Presentation - January 2007

Insurance Program Marketing

U of H Presentation - January 2007

What is Lloyds?A marketplaceFirst published reference 1688First breakaway group of professional underwriters 1769First reinsurance contract (C.E.Heath) 1880San Francisco earthquake (1906) Pay all our policyholders in full, irrespective of the terms of their policies. C.E. HeathCentral Guarantee Fund 1925LATF 1939GAAP Accounting 2005

U of H Presentation - January 2007

Marketing at LloydsThe Lloyds BrokerThe Lloyds SyndicatesNamesIndividualCorporateThe Slip

U of H Presentation - January 2007

What is Lloyds today?The Franchisor

(The Managing Agents are the Franchisees)

Franchise BoardPerformance ManagementCapital ManagementRisk Management (RDS)

U of H Presentation - January 2007

Performance ManagementRisk ManagementCapital ManagementRisk based capitalCentral assetsRealistic Disaster ScenariosRisk management frameworkFranchise managementSyndicate business planningMonitoring / benchmarkingClaims, reinsurance and run-off managementSource: Lloyds

U of H Presentation - January 2007

What is Lloyds today?

Entrepreneurial, Dynamic, DiverseInnovativeConsistent & StableSolventGlobal

U of H Presentation - January 2007

Lloyds results demonstrate challenge of sustaining profitability(f) = forecast

U of H Presentation - January 2007

Why is Lloyds important?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 markets6th largest reinsurer

U of H Presentation - January 2007

Why is Lloyds important?Does business in over 200 countries & territoriesInsures 93% of all Dow Jones Industrial Average companies94% of FTSE 100 companies85% of Fortune 50082% of Fortune European Top 50The top 7 pharmaceuticalsThe top 20 banks

U of H Presentation - January 2007

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)

U of H Presentation - January 2007

The Lloyds Market

46 Managing Agents437 active syndicates in 1980; 62 in 2006Underwriters, Claims professionals, Accountants, Attorneys, Support staff, etc. Average Syndicate stamp capacity $411 million163 accredited brokers4,000 people daily

U of H Presentation - January 2007

Lloyds syndicate trends 1983-2005409201200519832005 average syndicate capacity 221mSource: Lloyds4462m

U of H Presentation - January 2007

Investors at Lloyds

U of H Presentation - January 2007

Investors at Lloyds111 corporate members1,497 individual (unlimited liability) Names468 Name Companies (representing limited liability individuals)132 Scottish Limited Partnerships

U of H Presentation - January 2007

Placing business at LloydsThe Lloyds brokerNegotiations at the BoxStanding in the queueMeetings with clientsContract documentationThe SlipThe WordingConCertUberrimae fideiLloyds in the 21st Century

U of H Presentation - January 2007

Placing business at Lloyds - Market dynamicsSubscription market Anti-trust implications?Leaders & FollowersThe (underwriting) decision making processCoverage (incl. Limits/Retentions)PriceLine sizeFacilities / LineslipsInformation sharingChoosing a Leader

U of H Presentation - January 2007

Lloyds: 8% overall capacity increase in 2006Syndicate Capacity increase 2006Amlin 200117.70%Argenta 212118.73%Ascot 141426.50%Beazley 623/262311.30%Cathedral 201025.00%Chaucer 108412.50%Heritage 120020.00%Kiln 55714.50%Kiln 80710.00%MAP 279122.70%Omega 95811.00%Wellington 2020 9.60%

Source: Lloyds/company announcementsCapacity (bn)(anticipated)(Would have reduced by 8% in absence of hurricanes)65% of capacity in the hands of the top 20 direct capital providers

U of H Presentation - January 2007

Upstream underwriting capacities, 2004-06US$mSource: Aon Limited* max. OEE limits purchased in commercial market typically US$ 300m

U of H Presentation - January 2007

Energy Property underwriting capacities, 2004-06US$mSource:Aon Limited

U of H Presentation - January 2007

Energy Insurance and Risk Management

The insurance transaction distribution systemThe role of the marketsThe role of the brokerA presentation at The University of HoustonJanuary 25, 2007

U of H Presentation - January 2007

Compiled by Commercial Directorate October 2004Source Graph: Pre-tax profit for Members form p.6 Statistics relating to Lloyds for 2001.Compiled by the Commercial Directorate November 2003Notes: Northridge: Los Angeles Earthquake and Fire90A: Storm Damage

Source Graph: Catastrophe Aggregate Report q3 2003, James Orr, Loss ModellingLine graph dataSource: Lloyds Global Results 2002 and SQR data results as at Q2 2003Source:MSU Capacity Information 1983 2005Compiled by: Lloyds Commercial Directorate Jan 2005