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;
(Lloyds 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
0 25 50 75 100 125 150 175 200 225 250 275 300 325
1996
1998
2000
2002
2004
2006
2008
2010
2012
Ratio %
Combined Ratio (%)
Source: Lloyds; Combined ratio = (Losses plus expenses) / premiums
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
5.0% 90.0% 5.0%
3.3% 88.7% 8.0%
1.48 8.51
02468
1
0
1
2
1
4
1
6
1
8
Values in Millions
0.0
0.5
1.0
1.5
2.0
2.5
3.0
V
a
l
u
e
s

x

1
0
^
-
7
Fit Comparison for Small Claims 2
RiskLognorm(3256836.6,3346776.9,RiskShift(1000000))
Input
Minimum 1,134,600.55
Maximum 9,998,192.07
Mean 4,076,533.31
Std Dev 2,184,796.19
Values 2218
Lognorm
Minimum 1,000,000.00
Maximum +
Mean 4,256,836.60
Std Dev 3,346,776.90
RISK MODELLING
Fitted Distributions
0
.
0
0
.
1
0
.
2
0
.
3
0
.
4
0
.
5
0
.
6
0
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7
0
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8
0
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9
1
.
0
Input p-Value
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
F
i
t
t
e
d

p
-
V
a
l
u
e
Probability-Probability Plot of Physical Damage Offshore
RiskPareto(0.98529,10000000)
Pareto
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 (including Ike)
26 Cat 5
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 level 1 100% pay out
10-25 miles level 2 100% pay out
25-50 miles 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