jk slides offshore energy oslo 21sep10 final

8/10/2019 Jk Slides Offshore Energy Oslo 21sep10 Final

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Offshore EnergyOSLO 2010

Judy Knights

21 September 2010


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LloydsOffshore Energy Sep 20102

Agenda

GOM Wind, Physical Damage and COW OEE

Energy Packages Liability Implications

Marine and Energy Liability Implications


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Lloyd's Concerns

Performance data shows that off-shore energy has not delivered a

gross profit at a market level for some time

Limited confidence that offshore energy market is robustly managing

risk

Continued concern that effective methodologies are not being adopted

on a consistent basis

In the long term we are concerned about the impact of this sector on

the Society if improvements are not made our concern is prudential.

We are not interested in individual underwriting or pricing decisions.


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Energy Performance

Source: SRD / QMR / SBF / XIS

Source of data: 1998-2009 Solvency & Reserving Data (SRD), QMR premium figures will be largely based on exchange ratesused for business planning purposes. Energy is a Lloyds high level risk code.


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LloydsEnergy Insurance @ Lloyds 15 Dec 20095

Hurricanes Ivan vs. Katrina vs. Rita

vs. Ike

Ivan Katrina Rita Ike

Saffir Simpson Cat 4 Cat 5 Cat 4 Cat 2

Hurricane Severity

Index33 47 42 36

Integrated Kinetic

Energy4.4 5.1 4.3 5.2

No. of Platforms

Destroyed7 46 69 54

No. of Platforms

Damaged24 20 32 95

Commercial Market

LossUSD1,250m USD3,000m USD3,500m USD4,000m


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Ike Loss Deterioration &

Ivan/Katrina/Rita Comparison, Jan 2009


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Types of Loss by Hurricane

Since 2004 GOM hit by Ivan, Katrina, Rita &Ike = one per year

Ivan: subterranean landslides damagingpipelines

Katrina: unusually large storm

no aggregation management by Underwriters +

$1bn claims for Making Wells Safe (MWS) but

NO Wells out of Control +

Excessive Removal of Wreck claims

Rita: BI/LOPI & CBI/CLOPI with unscheduledcontingent losses and LOPI based on price ofoil per barrel

Ike: aggs post Katrina worked to reduce PDexposure, but OEE cover MWS, Redrill & P&Astill an issue = 40% of the loss +NO Wells out of Control


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Performance Concerns

Offshore energy has not delivered a gross

profit for some time

Post KRW changes to underwriting & pricingovertaken by events

Agg management - existing modellingtechniques ineffective forecasting scale

GOM wind losses

Ike exhausted 70-90% of Syndicates RDSnumbers - 100% exhaustion only expectedfrom category 4 or 5 storm

External factors to offshore energy book -Oil price ($38 Mar 09) & Global economiccrisis


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Review 2009: U/W Strategy & Pricing

Policy

Pricing methodology for attritional and Cat

New U/W strategy: PD, OEE, LOPI, CLOPI &Liability

As if Ike loss with new strategy


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Changes to Physical Damage (PD)

Cover in 2009:

Increase in PD Rates

Retentions: increased by X3 to X10and a percentage of TIV (Total

Insured Value)

Wind agg limits reduced by between

25% to 30%.


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OEE (Operators Extra Expenses)

- separate exposures

1. Control of well: effectively a blow out, requiring regaining control (think

Red Adair). Not historically a cover impacted by windstorms.

2. Seepage & pollution/re-drill: typically this follows a blow out, so again

is not usually windstorm related cover.

3. Extended re-drill: event triggering loss is PD to facility, causing

damage to the well, requiring re-drill. This is wind related exposure

4. Making well safe: as 3, this relates to a PD loss and involves

subsurface activity to make the well safe could be wind related

5. P&A Plug & Abandon: as 3, could result from a PD loss - thereforewindstorm exposure


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Changes: Control of Well/Operators

Extra Expenses (OEE) Cover:

Rated as PD: Wind exposed OEE cover for Redrill/MWS/P&A rated as

PD exposure for TIV of scheduled wells = new premium to the market

Wells Scheduled: Economic wells & cover provided each well (e.g.

Redrill) scheduled with sublimit per well & premium rated on OEE TIV

Sublimits per scheduled well & for scheduled cover offered: wind OEE

sublimited per well for Redrill/MWS/P&A and in any event part ofoverall wind agg.

Retentions: new PD retention structure applied to new OEE scheduled

TIV i.e. retention as a percentage of TIV - single combined retention

with PD cover


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2010 Plans in Oct 09 v ResubmittedPlans Apr 2010

In October 09 2010 plans were anticipating rates to be broadly flat

Benign 2009 Hurricane Season led to greater rate reductions thananticipated, particularly for GOM wind

Resubmitted 2010 plans reflected increased rate reductions

There was, however, encouraging evidence that managing agentswere maintaining better practices in respect of the wordings being

used and pricing methodologies

Overall Loss Ratios moved up in line with increased rate reductions

The markets approach reflected increased prudence in underwriting

methodologies.


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Resubmitted 2010 Plans

Good evidence of improved practices:

Premium rates for physical damage and OEE risks

Assureds retentions levels

Method of fixing retention charged as a percentage of TIV

Control of aggregate wind limit levels

Inclusion of OEE cover for wind as part of rating methodologies

Economic wells identified and scheduled with wind OEE sub-limits

Policy limits/sub-limits and retentions intrinsically linked to the total assetvalues declared to the policy

Nevertheless, continued rate reductions meant Lloyds remainedconcerned that pricing methodologies did not fully reflect exposure andthe potential for cat losses. But then came along


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Deepwater HorizonNet claim to Lloyds between $300m to $600m

Transocean:

PD (TL) and Liabilities Package 150m Xs50m

Policy for Liabilities only 150m Xs 50m

Excess Liabilities 200m Xs 350m

Anadarko:

Control of Well 25% of $250m

Liability 25% of $150m

MOEX: Control of Well 10% of $300m

Liability 10% of $150m


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Impact of Deepwater Horizon Loss

Widely reported that rates stabilised for GOM wind and hardened for

Risk Physical Damage and Control of Well cover, particularly in

deepwater

Major impact is to harden liability rating and an increased demand for

higher limits.

Uncertainty re the US factor and repercussions for liability exposure/contractual position between all joint venture partners and contractors

Underwriters requesting specific information on: any offshore drilling or

drilling interests, depth of wells, contractors involved in drilling and

their contractual relationship with principals.


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Moratorium on deepwater drilling in the GOM

Few shallow water drilling plans being approved by US regulators/BOEM - drilling has completely stopped in the GOM

Rigs have departed for other areas of the world

In future collateral may have to be put up before drilling takes place

and banks providing finance will demand that appropriate insurance

cover is in place


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Negligence exceptionally difficult to prove under the drilling contract

Anadarko and Mitsui may be liable for their shares of the costs

Possible D&O implications for Lloyds Transocean, BP and

Halliburton

Active 2010 hurricane season could exacerbate losses from the oil spill

Reinsurance treaties renew 1 January


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OPA 90 Energy Liabilities

US Congress is proposing to remove the OPA 90 limit of liability

Possible elimination of $75m liability limitation on non-removal costdamages for offshore facilities

COFRs for offshore facilities increased from maximum $150m to

$300m

COFRs (strict liability) and OPA liability insurance will be competing for

the same finite pot of insurance

Assureds may need to seek other avenues to manage their exposures

due to limitations on industry capacity

There may be more business to write, but underwriters need to have a

clear risk appetite for this type of exposure and must be satisfied that

exposures are being priced properly


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OPA 90 Marine Liabilities

Repercussions for the oil and shipping industries immense

Long-term serious problems for oil companies, all shipping companiescarrying oil, its products and bunker fuel into the US

With possible changes to limitations for economic costs, shipowners

may be unable to obtain third party liability insurance or provide the

COFRs for voyages to the US

Supplemental oil pollution funds would be completely extinguished in

the event of a large tanker spill, leading to insurers and bankers

restricting owners from trading to the US

Demand for Marine and Energy OPA 90/COFR and liability insurance

will be competing for the same finite pot


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Marine Liabilities & Marine XL

A market expectation that rates may increase substantially for the

upper layers of marine and energy liability programmes

Demand for more and higher layers of liability

Excess liability exposures accumulation with Energy PD policy due to

involvement with multi-assureds and hurricane wreck removal

exposure

January 2011 renewals of marine and energy whole account

reinsurances could see a hardening of rating for all marine and energy

classes.


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Risk Losses Advised Totalling over

$2bn Including:


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Why are we discussing Marine?

Although Lloyds initial focus was on Energy it is clear that many of the

concerns apply equally to Marine.

Cat risk from hurricanes carry through to affect Marine results

For Removal of Wreck

Excess Energy Liabilities

Energy XL


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Marine Performance

Source of data: 1998-2009 Solvency & Reserving Data (SRD), QMR premium figures will be largely based on exchange ratesused for business planning purposes. Risk codes. Marine is a Lloyds high level risk code.


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Liabili ty Underwriting in Crisis?

The era of the mega claim

20 identifiable losses above $100m since 2000

Onshore losses

Offshore losses

Effects of the Deepwater Horizon

Rate technical adequacy going forward

Terms and conditions

Aggregates


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Liability Lloyds Concerns Included in package policies with the concern that it is not being

separately rated, despite material levels of cover provided.

Is there the right level of underwriting expertise? Often written by theEnergy underwriter, not a Liability underwriter

What lies beneath? Is there proper understanding of scheduled

underlyings? e.g. scheduling 1st party expenses (OEE) in excess

liability policy

Contingent OEE scheduled as underlying

Concern as to whether aggregate exposures are being properlyrecognised:

Aggregating all the liability parties Contractor/operator/BOP

manufacturer/cement manufacturer

Excess liability exposures accumulation with PD policy due to involvement

with multi-assureds.


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Liability Concerns - Poor wordings &Practises

There is evidence that inadequate attention is being given to wordings.

Poor practices are creeping in:

1st Party hurricane exposed removal of wreck in excess liability policy

should be included in Aggregates

Seepage and pollution exclusion amended in liability section of package

and standalone liability policies Are you charging for it?

Limit for interest versus limits for 100% scaling for interest

Floating limits OEE

Pricing adequacy for deepwater wells exposure

Contracts should have aggregate limit across all sections total

amount to be paid


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Pricing Methodology v. Capacity &

Clash

Anchoring: Is the right point of reference being adopted?

Rerating requires a Back to Basics approach in view of OPA90/COFRs

It is not enough merely to look at increases against previous year rates

Pricing methodologies must reflect increased exposures

Proper pricing and exposure management means syndicates must

know what their exposures are:

OPA 90 and COFRs/Removal of Wreck/Deepwater COW and Wind COW &

Wind PD clash/aggregation Hurricane is NOT an Act of God!

Multi assureds clash

Reinsurance of non-poolable P&I Club risks/special operations clash

Giving the pen away


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Consider New Energy PD/Liability RDS

Example:

Deepwater Horizon highlights the need to ensure the right RDS is

being used - Consider including:

Deepwater Horizon Scenario with PD, loss of life, pollution, well out

of control and OEE etc

OPA 90/COFRs

Multiple assureds

Rig lands on third party pipeline

Wreck removal costs

D&O implications


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Consider Hurricane Scenario with

Multiple COFRs

GOM hurricane multiple Total Losses; Consider including:

Wind PD limits exhausted including WR, S&L & OEE Third party liabilities for pollution clean up under OPA 90

COFRs-strict Liabilities

Multiple assureds

Wreck removal in liabilities placements & excess liabilities book

D&O implications


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Challenges for 2011

Offshore energy not out of the woods

Underwriting approaches to RISK need to be addressed particularly inmarine and energy liabilities

Viewed as a whole GOM and RISK Lloyd's continues to have

concerns about the viability of the class

Lloyds will be looking for evidence that the market is addressing the

challenges

Robust methodologies

Understanding the exposures/Clear risk appetite

The right expertise being applied

jk slides offshore energy oslo 21sep10 final

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