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Energy Insurance and Risk Management The insurance transaction distribution system The role of the Energy Insurance and Risk Management The insurance transaction distribution system The role of the markets (especially Lloyd’s) The role of the broker A presentation at The University of Houston - October 9, 2007 Jerry Mc. Aloon – Aon Risk Services U of H Presentation - October 2007 0

“Wonderful! Just wonderful!. . . So much for instilling them with a sense of “Wonderful! Just wonderful!. . . So much for instilling them with a sense of awe. ” U of H Presentation - October 2007 1

Discussion outline • • • What is Risk Management? Why buy insurance? Types of Discussion outline • • • What is Risk Management? Why buy insurance? Types of Insurance program structure The purpose of reinsurance Insurance program marketing – The Insurance Transaction & Distribution System U of H Presentation - October 2007 2

Insurance – It’s not just a job, it’s an adventure U of H Presentation Insurance – It’s not just a job, it’s an adventure U of H Presentation - October 2007 3

Discussion outline • • • What is Risk Management? Why buy insurance? Types of Discussion outline • • • What is Risk Management? Why buy insurance? Types of Insurance program structure The purpose of reinsurance Insurance program marketing U of H Presentation - October 2007 <3 minutes <5 minutes <3 minutes ? ? ? 4

Discussion outline • • • What is Risk Management? Why buy insurance? Types of Discussion outline • • • What is Risk Management? Why buy insurance? Types of Insurance program structure The purpose of reinsurance Insurance program marketing U of H Presentation - October 2007 5

What is “Risk Management? ” • Focus on Hazard risk The Risk Management Process 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 U of H Presentation - October 2007 6

Risk Transfer • Contractual risk transfer – – Hold harmless Indemnification Additional Assured status Risk Transfer • Contractual risk transfer – – Hold harmless Indemnification Additional Assured status Waiver of Subrogation • Insurance U of H Presentation - October 2007 7

Discussion outline • • • What is Risk Management? Why buy insurance? (3 minutes? Discussion outline • • • What is Risk Management? Why buy insurance? (3 minutes? ) Types of Insurance program structure The purpose of reinsurance Insurance program marketing U of H Presentation - October 2007 8

Why buy insurance? What is insurance? What does insurance do? U of H Presentation Why buy insurance? What is insurance? What does insurance do? U of H Presentation - October 2007 9

Why buy insurance? • • Financial “protection” … from what? Inability to absorb loss Why buy insurance? • • Financial “protection” … from what? Inability to absorb loss Contractual requirements Legal/regulatory requirements U of H Presentation - October 2007 10

Discussion outline • • • What is Risk Management? Why buy insurance? Types of Discussion outline • • • What is Risk Management? Why buy insurance? Types of Insurance (3 minutes? ) Insurance program structure The purpose of reinsurance Insurance program marketing U of H Presentation - October 2007 11

Types of Insurance • Property • Casualty • Control of Well • Management Liability Types of Insurance • Property • Casualty • Control of Well • Management Liability • Marine • Aviation • • • Kidnap & Ransom Environmental Political Risk Patent Infringement Surety U of H Presentation - October 2007 12

Types of Insurance – Broadly speaking • Property – Physical Damage – Business Interruption Types of Insurance – Broadly speaking • Property – Physical Damage – Business Interruption (a. k. a. “Time element”) • Casualty – – Workers Compensation General Liability (Legal [tort] and Contractual) Auto Liability Employer’s Liability U of H Presentation - October 2007 13

Discussion outline • • • What is Risk Management? Why buy insurance? Types of Discussion outline • • • What is Risk Management? Why buy insurance? Types of Insurance program structure (3 minutes? ) The purpose of reinsurance Insurance program marketing U of H Presentation - October 2007 14

Insurance Program Structure ALWAYS starts with: What is the client trying to accomplish? The Insurance Program Structure ALWAYS starts with: What is the client trying to accomplish? The best process ~ yields ~ the best result U of H Presentation - October 2007 15

Insurance Program Structure Followed closely by: What is reasonably achievable in the current insurance Insurance Program Structure Followed closely by: What is reasonably achievable in the current insurance market conditions? The best process ~ yields ~ the best result U of H Presentation - October 2007 16

A successful renewal requires a strong foundation … 1 Week Minimum 4 Weeks 2 A successful renewal requires a strong foundation … 1 Week Minimum 4 Weeks 2 -3 Weeks 1 -2 Weeks U of H Presentation - October 2007 Binding & Implementation Broking All Viable Proposals Develop Submission Develop Marketing Strategy Market Tactics (Access) Market Selection Develop Risk Profile 17

Insurance Program Structure • Layers – Primary – Excess • Quota Share (a. k. Insurance Program Structure • Layers – Primary – Excess • Quota Share (a. k. a. “Subscription” or “Participation”) U of H Presentation - October 2007 18

Insurance Program Structure Why a “layered” or “quota share” program? • • Client goals Insurance Program Structure Why a “layered” or “quota share” program? • • Client goals & objectives Underwriter preference Pricing considerations Coverage considerations U of H Presentation - October 2007 19

Insurance Program Structure A “layered” program U of H Presentation - October 2007 20 Insurance Program Structure A “layered” program U of H Presentation - October 2007 20

Insurance Program Structure A “layered” program (showing layer limits) U of H Presentation - Insurance Program Structure A “layered” program (showing layer limits) U of H Presentation - October 2007 21

Insurance Program Structure A “quota share” program U of H Presentation - October 2007 Insurance Program Structure A “quota share” program U of H Presentation - October 2007 22

Insurance Program Structure Combination of Layering and Quota Share U of H Presentation - Insurance Program Structure Combination of Layering and Quota Share U of H Presentation - October 2007 23

Insurance Program Structure “Underlying” Insurance U of H Presentation - October 2007 24 Insurance Program Structure “Underlying” Insurance U of H Presentation - October 2007 24

Discussion outline • • • What is Risk Management? Why buy insurance? Types of Discussion outline • • • What is Risk Management? Why buy insurance? Types of Insurance program structure The purpose of reinsurance (5 minutes? ) Insurance program marketing U of H Presentation - October 2007 25

The purpose of reinsurance • • Spread of risk Increases/supplements capacity Facilitates writing broader The purpose of reinsurance • • Spread of risk Increases/supplements capacity Facilitates writing broader coverage Puts capacity in the control of qualified underwriters U of H Presentation - October 2007 26

Types of Reinsurance • Facultative • Treaty • Quota Share • Excess of Loss Types of Reinsurance • Facultative • Treaty • Quota Share • Excess of Loss U of H Presentation - October 2007 27

Other Reinsurance Issues • Risks Attaching vs. Losses Occurring • Natural Catastrophe (“Nat. Cat”) Other Reinsurance Issues • Risks Attaching vs. Losses Occurring • Natural Catastrophe (“Nat. Cat”) Accumulations • Nat. Cat Risk Modeling U of H Presentation - October 2007 28

Catastrophic Event Modeling Hurricane Loss Analysis U of H Presentation - October 2007 29 Catastrophic Event Modeling Hurricane Loss Analysis U of H Presentation - October 2007 29

Nat. Cat Risk Modeling U of H Presentation - October 2007 30 Nat. Cat Risk Modeling U of H Presentation - October 2007 30

A disturbing trend… U of H Presentation - October 2007 31 A disturbing trend… U of H Presentation - October 2007 31

A disturbing trend… U of H Presentation - October 2007 32 A disturbing trend… U of H Presentation - October 2007 32

Discussion outline • • • What is Risk Management? Why buy insurance? Types of Discussion outline • • • What is Risk Management? Why buy insurance? Types of Insurance program structure The purpose of reinsurance Insurance program marketing (3 minutes? ) U of H Presentation - October 2007 33

Insurance Distribution System • Insurance companies sell insurance • Insurance company agents sell insurance Insurance Distribution System • Insurance companies sell insurance • Insurance company agents sell insurance • Brokers help their clients buy insurance U of H Presentation - October 2007 34

Insurance Distribution System • Insurance companies sell insurance • Insurance company agents sell insurance 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) U of H Presentation - October 2007 35

The role of the broker • Transactional U of H Presentation - October 2007 The role of the broker • Transactional U of H Presentation - October 2007 • Consultative 36

The role of the broker Transactional • Insurance placement – Monitor insurer financial stability 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) U of H Presentation - October 2007 • Documentation (policies, certificates, etc. ) • Premium billing and remittance • International (admitted policies) • Analytical/Actuarial work • Insurance program administration • Mid-term servicing • Claims advocacy and processing 37

The role of the broker • Consultative – Total Cost of Risk (T. C. The role of the broker • Consultative – Total Cost of Risk (T. C. O. R. ) – Safety & Loss Prevention/Risk Control – Risk Management Information Systems, Aon. Line, etc. – Master Service Agreements – Contractor insurance programs – Risk bearing capacity analysis – Manage retained losses U of H Presentation - October 2007 – Global network – the Risk Manager’s “eyes & ears” – Captive Management; Captive Utilization – Tax-driven strategies – High level claims advocacy; economic forecasting, etc. – Enhanced claims-related services (Accelerated Claims Closure, Structured Settlements, Loss Portfolio Transfer, etc. ) 38

Broker compensation • Commissions • Fees U of H Presentation - October 2007 39 Broker compensation • Commissions • Fees U of H Presentation - October 2007 39

U of H Presentation - October 2007 40 U of H Presentation - October 2007 40

Insurance Program Marketing Let the fun begin! U of H Presentation - October 2007 Insurance Program Marketing Let the fun begin! U of H Presentation - October 2007 41

Why buy insurance? What is insurance? What does insurance do? U of H Presentation Why buy insurance? What is insurance? What does insurance do? U of H Presentation - October 2007 42

What is insurance? • CONTRACT • Payment (of premium) in exchange for a promise 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 - October 2007 43

Catastrophe Insurance for the Energy Industry U of H Presentation - October 2007 44 Catastrophe Insurance for the Energy Industry U of H Presentation - October 2007 44

Insurance Program Marketing Negotiation Leverage Relationships Trust U of H Presentation - October 2007 Insurance Program Marketing Negotiation Leverage Relationships Trust U of H Presentation - October 2007 45

The insurance profession U of H Presentation - October 2007 46 The insurance profession U of H Presentation - October 2007 46

Insurance Program Marketing The bad news … Insurance (including insurance brokerage) is a highly Insurance Program Marketing The bad news … Insurance (including insurance brokerage) is a highly regulated industry • • • “Transparency & Disclosure” Domestic vs. Foreign (“Surplus Lines”) vs. Alien “Locally admitted insurers” U. K. Financial Services Authority Premium tax, Surplus lines tax, Federal Excise Tax U of H Presentation - October 2007 47

Insurance Program Marketing The good news … We can (and do) work through all Insurance Program Marketing The good news … We can (and do) work through all that. U of H Presentation - October 2007 48

Insurance Program Marketing Retail insurance brokers / “Agents” Wholesale brokers / Intermediaries Managing General Insurance Program Marketing Retail insurance brokers / “Agents” Wholesale brokers / Intermediaries Managing General Agents Insurers/ Underwriters / “Carriers” Coverholders / Facilities U of H Presentation - October 2007 49

Insurance Program Marketing The role of the Broker in the Insurance transaction U of Insurance Program Marketing The role of the Broker in the Insurance transaction U of H Presentation - October 2007 50

Insurance Program Marketing The role of the Broker in the Insurance transaction • The Insurance Program Marketing The role of the Broker in the Insurance transaction • The client’s advocate • Broker vs. Agent U of H Presentation - October 2007 51

Insurance Program Marketing The Broker’s role in Negotiation during the Insurance transaction U of Insurance Program Marketing The Broker’s role in Negotiation during the Insurance transaction U of H Presentation - October 2007 52

Insurance Program Marketing The Broker’s use of Leverage in the Insurance transaction U of Insurance Program Marketing The Broker’s use of Leverage in the Insurance transaction U of H Presentation - October 2007 53

Insurance Program Marketing The importance of Relationships and Trust in the Insurance transaction U Insurance Program Marketing The importance of Relationships and Trust in the Insurance transaction U of H Presentation - October 2007 54

Insurance Program Marketing The (global) energy insurance market • • • North American insurance 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 U of H Presentation - October 2007 55

Insurance Companies – North America • ACE Global • American Electric & Gas Insurance 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. U of H Presentation - October 2007 • • • FM Global Houston Casualty Lexington Liberty International Markel Navigators St. Paul/Travelers Starr Companies XL Insurance Zurich Insurance 56

Insurance Companies – Bermuda • ACE Bermuda • Allied World Assurance co. (AWAC) • Insurance Companies – Bermuda • ACE Bermuda • Allied World Assurance co. (AWAC) • Arch Ins. • Axis • Endurance Re • Everest Re U of H Presentation - October 2007 • • • Lancashire Max. Re Montpelier Starr Excess XL Insurance Zurich Insurance 57

Insurance Companies – U. K. & Europe • • • ACE Europe Allianz Axis Insurance Companies – U. K. & Europe • • • ACE Europe Allianz Axis GARD Marine & Energy GE Frankona Generali Gerling Glacier Re Hannover Re Houston Casualty Infrassure U of H Presentation - October 2007 • Lancashire • Munich Re/Great Lakes/Munich American Risk Partners (MARP) • Navigators • Partner Re • QBE • SCOR • Swiss Re/SR International • Wurttembergische • Zurich Re 58

Insurance Program Marketing Mutuals • Assessable • Non-Assessable U of H Presentation - October Insurance Program Marketing Mutuals • Assessable • Non-Assessable U of H Presentation - October 2007 59

Mutual Insurers • • • AEGIS Oil Insurance Limited (O. I. L. ) Oil 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. ) Energy Insurance Managers (E. I. M. ) U of H Presentation - October 2007 60

Insurance Program Marketing U of H Presentation - October 2007 61 Insurance Program Marketing U of H Presentation - October 2007 61

What is Lloyd’s? • A marketplace – NOT an insurance company • First published What is Lloyd’s? • A marketplace – NOT an insurance company • 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 U of H Presentation - October 2007 62

Marketing at Lloyd’s – Who does the work? • The Lloyd’s Broker • The Marketing at Lloyd’s – Who does the work? • The Lloyd’s Broker • The Lloyd’s Syndicates • Names – Individual – Corporate • The “Slip” U of H Presentation - October 2007 63

What is Lloyd’s today? • The “Franchisor” (The Managing Agents are the Franchisees) • What is Lloyd’s today? • The “Franchisor” (The Managing Agents are the Franchisees) • Franchise Board – Performance Management – Capital Management – Risk Management (RDS) U of H Presentation - October 2007 64

Franchise management Performance Management § Syndicate business planning § Monitoring / benchmarking § Claims, Franchise management Performance Management § Syndicate business planning § Monitoring / benchmarking § Claims, reinsurance and run-off management Capital Management § Risk based capital § Central assets Risk Management § Realistic Disaster Scenarios § Risk management framework Source: Lloyd’s U of H Presentation - October 2007 65

What is Lloyd’s today? • • • Entrepreneurial, Dynamic, Diverse Innovative Consistent & Stable What is Lloyd’s today? • • • Entrepreneurial, Dynamic, Diverse Innovative Consistent & Stable Solvent Global U of H Presentation - October 2007 66

Lloyd’s results demonstrate challenge 1996 of sustaining profitability 2002 CSG R&R 1985 & prior Lloyd’s results demonstrate challenge 1996 of sustaining profitability 2002 CSG R&R 1985 & prior 1999 APH 1988 1990 Piper Alpha European Storms 1994 Northridge Earthquake 90 A Hurricane Floyd 1987 1989 1992 1995 1998 2001 87 J Hurricane Hugo Hurricane Andrew Hurricane Marilyn Hurricane Georges 9/11 Exxon Valdez US Casualty Petrobras Toulouse Refinery (f) = forecast Source: Lloyd’s, results and forecasts under 3 year accounting U of H Presentation - October 2007 67

Why is Lloyd’s important to us? • Second largest “surplus lines” market in the Why is Lloyd’s important to us? • 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 • 6 th largest reinsurer U of H Presentation - October 2007 68

Why is Lloyd’s important to us? • Does business in over 200 countries & Why is Lloyd’s important to us? • 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 U of H Presentation - October 2007 69

Marketing at Lloyd’s – How much “CAPACITY” is available? • Capacity to provide limits 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) U of H Presentation - October 2007 70

The Lloyd’s Market • 46 Managing Agents • 437 active syndicates in 1980; 62 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 brokerage firms • 4, 000 people daily U of H Presentation - October 2007 71

Lloyd’s syndicate trends 1983 -2005 average syndicate capacity £ 221 m £m 409 201 Lloyd’s syndicate trends 1983 -2005 average syndicate capacity £ 221 m £m 409 201 62 44 3 8 19 5 00 2 Source: Lloyd’s U of H Presentation - October 2007 72

Investors at Lloyd’s U of H Presentation - October 2007 73 Investors at Lloyd’s U of H Presentation - October 2007 73

Investors at Lloyd’s • 111 corporate members • 1, 497 individual (unlimited liability) “Names” Investors at Lloyd’s • 111 corporate members • 1, 497 individual (unlimited liability) “Names” • 468 Name Companies (representing limited liability individuals) • 132 Scottish Limited Partnerships U of H Presentation - October 2007 74

Placing business at Lloyd’s • The Lloyd’s broker • Negotiations at “the Box” • 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” The POLICY Con. Cert • Uberrimae fidei • Lloyd’s in the 21 st Century U of H Presentation - October 2007 75

Placing business at Lloyd’s Market dynamics • Subscription market - Anti-trust implications? • Leaders Placing business at Lloyd’s Market dynamics • Subscription market - Anti-trust implications? • Leaders & Followers (? ) • The (underwriting) decision making process: – – Accept or decline Coverage (incl. Limits/Retentions) Price Line size • Facilities / Lineslips • Information sharing • Choosing a Leader U of H Presentation - October 2007 76

Placing business at Lloyd’s Market dynamics • Subscription market Anti-trust implications? • Leaders & Placing business at Lloyd’s Market dynamics • Subscription market Anti-trust implications? • Leaders & Followers • The (underwriting) decision making process • Facilities / Lineslips • Information sharing • Choosing a Leader – Coverage (incl. Limits/Retentions) – Price – Line size U of H Presentation - October 2007 77

Upstream underwriting capacities, 2004 -06 US$m * max. U of H Presentation - October Upstream underwriting capacities, 2004 -06 US$m * max. U of H Presentation - October 2007 OEE limits purchased in commercial market typically US$ 300 m Source: Aon 78 Limited

Energy Property underwriting capacities, 2004 -06 US$m U of H Presentation - October 2007 Energy Property underwriting capacities, 2004 -06 US$m U of H Presentation - October 2007 Source: Aon 79 Limited

Energy Insurance and Risk Management A presentation at The University of Houston October 9, Energy Insurance and Risk Management A presentation at The University of Houston October 9, 2007 Jerry Mc. Aloon – Aon Risk Services 832 -476 -6998 Jerry_Mc. [email protected] aon. com U of H Presentation - October 2007 80