“big data” meets river / gulf vessel risk management...“big data” meets river / gulf vessel...

“Big Data” Meets River / Gulf Vessel Risk Management MARTIN MCCLUNEY, MARSH MARINE PRACTICE STEVEN JONES, MARSH GLOBAL ANALYTICS

MARSH

Goals of today’s

discussion

• Trends in River & Gulf Vessel

Risk Management

• Qualify Meaning of “Big Data”

• Risk Transfer Decision

Framework

• Understanding Your Company’s

Risk Tolerance

• Assessing Loss Potential

• Evaluating Efficiency of Insurance

Coverage

1

MARSH

A Volatile River & Gulf Vessel Industry Commodity pressure is increasing focus on operational efficiency

1. For OSVs and Shipyards, reduced oil prices have impacted activity and

pressured operating margins.

2. Diverse portfolios are faring better with improving economic activity.

Single industry operators, in a variety of segments, are either doing well

or doing poorly.

3. Crew Claims continue to occur, despite safety programs.

4. Inflexible Insurance Costs increasingly erode precious working capital.

2

MARSH

Common Risk Management Responses A majority of clients are seeking price and coverage reductions

1. Company wide S&GA cost reductions

2. Risk managers are seeking insurance rate and premium reductions

wherever possible including breaking continuity. Also receiving mid-term

cancel/rewrite penalty credit from new insurance company.

3. Risk Managers are seeking alternatives to retrospective premium credits

for reduced activity, e.g., eliminating prepayment of navigating activity.

4. Risk managers are reducing coverage in “discretionary” risk issues, e.g.,

looking to increase attachment / deductibles and reduce limits or hull

insured values on many of their policies.

5. In recognition of the suffering of member / vessel operators in many

sectors some international group P&I clubs (having achieved record

surpluses) are moderating inflationary increases and sometimes deferring

full calls.

3

MARSH

By The Way, What Is Big Data? Concept is more important than the definitions

4

“most data professionals didn’t know

the definition of big data before it no

longer had meaning” - Steve Jones ’14

“data is big when data size becomes

part of the problem.” - Mike Loukides ’10

Gartner’s 3 Vs to define “Big Data”

1. Volume

2. Velocity

3. Variety

“big data refers to using complex

datasets to drive focus, direction,

and decision making within a

company or organization.” - Jessica Kirkpatrick ’14

MARSH

AM I EXPOSING MY COMPANY TO TOO MUCH RISK?

ARE ALL MANDATORY INSURANCE COVERS TAKEN IN ALL GEOGRAPHIES?

ARE KEY RISKS OF MY BUSINESS INSURED OR TRANSFERRED?

IS MY RISK MANAGEMENT MOST EFFECTIVE?

DO WE EVALUATE OUR “TOTAL” COST OF RISK?

HOW MUCH RISK CAN MY COMPANY COMFORTABLY RETAIN?

Strategic Decision Making and Vessel Risk Management Questions clients are asking….

REGULATORY & COMPLIANCE

GLOBAL/LOCAL BENCHMARKING OF COVERS AND LIMITS PURCHASED

PORTFOLIO APPROACH TO RISK

BEST PRICING

BEST COVERAGE TERMS AND STRUCTURE

RISK TOLERANCE

DO I GET THE BEST RETURN ON RISK INVESTMENT? OPTIMAL PROGRAM

STRUCTURE

5

MARSH

• How much risk can your company tolerate?

• Is your company adequately protected against risk?

• Is your company getting the expected value from its

insurance purchase?

Risk Transfer Decision Process Purchase what is necessary, validate what is discretionary

Why buy insurance at all?

• Regulatory and contractual obligations?

• Balance sheet protection?

• For those at the company’s discretion, evaluate the risk and

financial benefit of purchasing insurance

What ?’s to answer to confirm your decisions?

Why?

How?

6

MARSH

Evolution of Risk Transfer Decision Capability Decisions support tools available to Risk Managers

BENCHMARKING ACTUARIAL

POINT ESTIMATES iMAP

7

MARSH

Key Analytics Questions for Risk Management

1 How much risk can your company tolerate?

• What are your company’s sources of capital and how do you

prefer to deploy those resources to deal with unexpected losses?

• Is there agreement and “buy-in” from leadership on the risk

tolerance for the company?

Where do you draw the line in the sand?

8

MARSH

Developing a Corporate Risk Tolerance Three Perspectives

Liquidity

Cash Ratio

• Measure of companies

ability to meet short term

obligations

• Evaluate company‘s ratio

and determine capacity to a

predetermined minimum

(e.g, 1:1)

Debt Coverage

The Bondholders’ View

• Emphasis on interest or

coverage ratios.

• Looks at debt covenants

and evaluates capacity to

infringe on a required

leverage ratio.

• Could look at credit ratings

through a very similar lens.

Key Performance

Indicators (KPIs)

Qualitative View

• KPIs are selected from:

– Balance sheet.

– Income statement.

– Access to other funds.

• Flexibility allows for

reflection of company

culture.

1 How much risk can your company tolerate?

Cash & Cash Equivalents

Current Liabilities

9

MARSH

Assessing Adequacy of Protection

Is your company adequately protected against risk?

• Are your company’s limits and deductibles appropriate?

• Does your insurance structure reflect corporate risk tolerance?

2

P&I

Hull

D&O

Other Casualty

Other Lines

P&I

Hull

D&O

Other Casualty

Risk Tolerance

COST OF RISK BEFORE INSURANCE

COST OF RISK AFTER INSURANCE

OPTIMIZATION

Other Lines

10

MARSH

1 How much risk can the company tolerate?

Exploring Loss Potential Company & Industry Loss Data 2


• Potential considerations for P&I

Fleet size

Crew statistics

Cargo (e.g., types, quantities, values)

Geographies, routes and distances

Black swan events/scenarios

• Potential considerations for Hull

Fleet size

Vessels characteristics

Geographies, routes and distances

Additional operating costs in event of loss

Vessel finance obligations

Market for replacement vessels

Black swan events/scenarios

11

MARSH

1 How much risk can the company tolerate?

Exploring Loss Potential “Simulating” loss outcomes for the company 2


12

Building a Loss Distribution

0 10 20 30 40 50 75 100

in Millions

Loss Type Loss Number Loss Amount

Crew Injuries 1 6,000$

2 22,000$

3 150$

4 100,000$

5 -$

Cargo Liab./Salvage 1

2

Pollution 1

2

Collision/Allision 1

2

Fines/Legal Costs 1

2

Total Annual P&I Losses 1 128,150$

% F

req

ue

ncy


0 10 20 30 40 50 75 100

in Millions

% F

req

ue

ncy



2 34,000$

3 1,000$

4 25,000$

5 150,000$

Cargo Liab./Salvage 1 250,000$

2

Pollution 1

2

Collision/Allision 1 100,000$

2

Fines/Legal Costs 1

2

Total Annual P&I Losses 1 575,000$

Iteration 2


0 10 20 30 40 50 75 100

in Millions

% F

req

ue

ncy



2 45,000$

3 500$

4 105,000$

5 -$

Cargo Liab./Salvage 1

2

Pollution 1 2,500,000$

2

Collision/Allision 1

2

Fines/Legal Costs 1 250,000$

2

Total Annual P&I Losses 1 2,925,500$

Iteration 3


0 10 20 30 40 50 75 100

in Millions

% F

req

ue

ncy



2 400$

3 150$

4 24,000$

5 -$

Cargo Liab./Salvage 1 400,000$

2

Pollution 1

2

Collision/Allision 1 7,000,000$

2

Fines/Legal Costs 1 50,000$

2


Iteration 4


0 10 20 30 40 50 75 100

in Millions

% F

req

ue

ncy



2 15,000$

3 150$

4 100,000$

5 -$

Cargo Liab./Salvage 1 4,000,000$

2

Pollution 1 20,000,000$

2

Collision/Allision 1 25,000,000$

2

Fines/Legal Costs 1 5,000,000$

2


Iteration 5


0 10 20 30 40 50 75 100

in Millions

% F

req

ue

ncy

Iteration Total Loss Amt

1 128,150$

2 575,000$

3 2,925,500$

4 7,494,550$

5 54,123,150$

6 27,650$

7 -$

8 130,300,150$

9 15,560,000$

10 4,736,100$

MARSH

Assessing Efficiency of Insurance Coverage Quantifying volatility “in the tail”

Is your company getting the expected value from its insurance purchase?

• Cost of retaining risk vs. cost of transferring risk (premium)?

• Whose capital is cheaper: your company’s or your insurance carrier’s?

3

13

MARSH

Key Statistics Before Insurance Retained After Insurance (Cost) / Benefit

Average Annual Losses 5,506,858 3,780,731 314,487

Standard Deviation 23,875,866 13,111,817

Coefficient of Variation 5.30 3.40

1 in 1.33 Years 25% Perc 0 3,020,342 -3,020,342

1 in 2 Years 50% Perc 0 3,020,342 -3,020,342

1 in 4 Years 75% Perc 0 3,020,342 -3,020,342

1 in 10 Years 90% Perc 1,619,223 3,270,342 -1,651,119

1 in 100 Years 99% Perc 85,679,570 3,520,342 82,159,228

1 in 250 Years 99.6% Perc 151,915,728 34,936,070 116,979,658

Assessing Efficiency of Insurance Coverage Using Economic Cost of Risk

Evaluating the trade-off regarding retaining risk on your company’s balance sheet as

compared to paying a premium to transfer the risk, e.g., insurance. Similar approach

used in other hedging strategies.

Economic Cost of Risk (ECOR)

Sign Components No Insurance Current Program Option A Option B

+ Discounted Average Retained Losses 5,146,309 3,402,658 3,814,605 3,938,994

+ Premium 0 3,020,342 2,416,274 2,265,257

+ Implied Risk Charge 2,036,577 510,399 572,191 669,629

+ Collateral and Other Admin Costs 110,000 45,000 57,000 70,000

= Economic Cost of Risk 7,292,886 6,978,399 6,860,070 6,943,880

3 Is your company getting the expected value from its insurance purchase?

14

MARSH

TRANSITION SLIDE

Key Statistics Before Insurance Retained After Insurance (Cost) / Benefit




1 in 1.33 Years 25% Perc 0 3,020,342 -3,020,342

1 in 2 Years 50% Perc 0 3,020,342 -3,020,342

1 in 4 Years 75% Perc 0 3,020,342 -3,020,342

1 in 10 Years 90% Perc 1,619,223 3,270,342 -1,651,119

1 in 100 Years 99% Perc 85,679,570 3,520,342 82,159,228

1 in 250 Years 99.6% Perc 151,915,728 34,936,070 116,979,658







+ Premium 0 3,020,342 2,416,274 2,265,257




3 Is your company getting the expected value from its insurance purchase?


15

MARSH

Theme 3

Key Statistics Before

Insurance

Retained After

Insurance

(Cost) /

Benefit




1 in 1.33 Years 25% Perc 0 3,020,342 -3,020,342

1 in 2 Years 50% Perc 0 3,020,342 -3,020,342

1 in 4 Years 75% Perc 0 3,020,342 -3,020,342

1 in 10 Years 90% Perc 1,619,223 3,270,342 -1,651,119

1 in 100 Years 99% Perc 85,679,570 3,520,342 82,159,228

1 in 250 Years 99.6% Perc 151,915,728 34,936,070 116,979,658

Insurance looks like only a cost when you don’t have losses

Insurance begins to pay off

Substantial benefit, multiples of premium paid




+ Premium 0 3,020,342 2,416,274 2,265,257







3

Optimized Program

Is your company getting the expected value from its insurance purchase?


16

MARSH

Today’s

Accomplishments?

• Risk management is evaluating and

restructuring their programs

• “Big Data” is important for informing

decisions and strategy

• Use a decision framework to validate

insurance is the right purchase for

the company

• Get buy in from leadership and

finance in the company’s risk

tolerance

• Move beyond peer groups

benchmarking to evaluating your

exposure & risk

• Assess insurance with a commodity

hedge “lens”

17

MARSH

QUESTIONS & CONTACT INFORMATION

18

Steven Jones Marsh Global Analytics

O: 212.345.2711

M: 347.702.0257

Email: [email protected]

“big data” meets river / gulf vessel risk management...“big data” meets river / gulf vessel...

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