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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 The role of the broker A presentation at The University of Houston January 25, 2007 U of H Presentation - January 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 - January 2007 1

Discussion outline ? Learning is finding out that you already know. Doing is demonstrating 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 2

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 - January 2007 3

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 - January 2007 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 - January 2007 <5 minutes 10 minutes <5 minutes ? ? ? 5

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 - January 2007 6

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 - January 2007 7

Risk Transfer • Contractual risk transfer • Insurance U of H Presentation - January Risk Transfer • Contractual risk transfer • Insurance U of H Presentation - January 2007 8

A fundamental principle of Insurance …Stupidity is an insured peril U of H Presentation A fundamental principle of Insurance …Stupidity is an insured peril U of H Presentation - January 2007 9

An example of an insured peril U of H Presentation - January 2007 10 An example of an insured peril U of H Presentation - January 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 program structure The purpose of reinsurance Insurance program marketing U of H Presentation - January 2007 11

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 - January 2007 12

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 - January 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 The purpose of reinsurance Insurance program marketing U of H Presentation - January 2007 14

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 - January 2007 15

Types of Insurance • Property – Physical Damage – Business Interruption (a. k. a. Types of Insurance • 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 - January 2007 16

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 - January 2007 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 - January 2007 18

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 - January 2007 19

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 - January 2007 20

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 - January 2007 Binding & Implementation Broking All Viable Proposals Develop Submission Develop Marketing Strategy Market Tactics (Access) Market Selection Develop Risk Profile 21

Insurance Program Structure A “layered” program U of H Presentation - January 2007 22 Insurance Program Structure A “layered” program U of H Presentation - January 2007 22

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 - January 2007 23

Insurance Program Structure A “quota share” program U of H Presentation - January 2007 Insurance Program Structure A “quota share” program U of H Presentation - January 2007 24

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 - January 2007 25

Insurance Program Structure “Underlying” Insurance U of H Presentation - January 2007 26 Insurance Program Structure “Underlying” Insurance U of H Presentation - January 2007 26

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 - January 2007 27

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 - January 2007 28

Types of Reinsurance • Facultative • Treaty • Quota Share • Excess of Loss Types of Reinsurance • Facultative • Treaty • Quota Share • Excess of Loss U of H Presentation - January 2007 29

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 - January 2007 30

Catastrophic Event Modeling Hurricane Loss Analysis U of H Presentation - January 2007 31 Catastrophic Event Modeling Hurricane Loss Analysis U of H Presentation - January 2007 31

Nat. Cat Risk Modeling U of H Presentation - January 2007 32 Nat. Cat Risk Modeling U of H Presentation - January 2007 32

Future trends? U of H Presentation - January 2007 Source: Weatherstreet. com 33 Future trends? U of H Presentation - January 2007 Source: Weatherstreet. com 33

A disturbing trend… U of H Presentation - January 2007 34 A disturbing trend… U of H Presentation - January 2007 34

A disturbing trend… U of H Presentation - January 2007 35 A disturbing trend… U of H Presentation - January 2007 35

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 - January 2007 36

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 - January 2007 37

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 - January 2007 38

The role of the broker • Transactional • Consultative U of H Presentation - The role of the broker • Transactional • Consultative U of H Presentation - January 2007 39

The role of the broker Transactional • Insurance placement – – – – Monitor 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) – Claims advocacy and processing U of H Presentation - January 2007 • Documentation (policies, certificates, etc. ) • International • Analytical/actuarial work • Insurance program administration • Mid-term servicing 40

The role of the broker • Consultative – – – – – Total Cost 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 Risk bearing capacity analysis Manage retained losses Global network – the Risk Manager’s “eyes & ears” Captive Management; Captive Utilization High 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 41

Broker compensation • Commissions • Fees U of H Presentation - January 2007 42 Broker compensation • Commissions • Fees U of H Presentation - January 2007 42

U of H Presentation - January 2007 43 U of H Presentation - January 2007 43

Insurance Program Marketing Let the fun begin! U of H Presentation - January 2007 Insurance Program Marketing Let the fun begin! U of H Presentation - January 2007 44

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 - January 2007 45

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 - January 2007 46

Catastrophe Insurance for the Energy Industry U of H Presentation - January 2007 47 Catastrophe Insurance for the Energy Industry U of H Presentation - January 2007 47

Insurance Program Marketing Negotiation Leverage Relationships Trust U of H Presentation - January 2007 Insurance Program Marketing Negotiation Leverage Relationships Trust U of H Presentation - January 2007 48

The insurance profession U of H Presentation - January 2007 49 The insurance profession U of H Presentation - January 2007 49

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 • • 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 - January 2007 50

Insurance Program Marketing The good news … We can work through that. U of Insurance Program Marketing The good news … We can work through that. U of H Presentation - January 2007 51

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 - January 2007 52

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 - January 2007 53

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 - January 2007 54

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 - January 2007 55

Insurance Program Marketing The importance of Relationships in the Insurance transaction U of H Insurance Program Marketing The importance of Relationships in the Insurance transaction U of H Presentation - January 2007 56

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 - January 2007 57

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 - January 2007 • • • FM Global Houston Casualty Lexington Liberty International Markel Navigators St. Paul/Travelers Starr Companies XL Insurance Zurich Insurance 58

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 • Lancashire • Max. Re • Montpelier U of H Presentation - January 2007 • Starr Excess • XL Insurance • Zurich Insurance 59

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 - January 2007 • Lancashire • Munich Re/Great Lakes/Munich American Risk Partners (MARP) • Navigators • Partner Re • QBE • SCOR • Swiss Re/SR International • Wurttembergische • Zurich Re 60

Insurance Program Marketing Mutuals • Assessable • Non-Assessable U of H Presentation - January Insurance Program Marketing Mutuals • Assessable • Non-Assessable U of H Presentation - January 2007 61

Mutual Insurers • • AEGIS Oil Insurance Limited (O. I. L. ) Oil Casualty 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. ) U of H Presentation - January 2007 62

Insurance Program Marketing U of H Presentation - January 2007 63 Insurance Program Marketing U of H Presentation - January 2007 63

What is Lloyd’s? • A marketplace • First published reference – 1688 • First What is Lloyd’s? • A marketplace • 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 - January 2007 64

Marketing at Lloyd’s • The Lloyd’s Broker • The Lloyd’s Syndicates • Names – Marketing at Lloyd’s • The Lloyd’s Broker • The Lloyd’s Syndicates • Names – Individual – Corporate • The “Slip” U of H Presentation - January 2007 65

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 - January 2007 66

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 - January 2007 67

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 - January 2007 68

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 - January 2007 69

Why is Lloyd’s important? • Second largest “surplus lines” market in the U. S. Why is Lloyd’s important? • 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 - January 2007 70

Why is Lloyd’s important? • Does business in over 200 countries & territories • Why is Lloyd’s important? • 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 - January 2007 71

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 - January 2007 72

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 brokers • 4, 000 people daily U of H Presentation - January 2007 73

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 - January 2007 74

Investors at Lloyd’s U of H Presentation - January 2007 75 Investors at Lloyd’s U of H Presentation - January 2007 75

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 - January 2007 76

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” – Con. Cert • Uberrimae fidei • Lloyd’s in the 21 st Century U of H Presentation - January 2007 77

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 – Coverage (incl. Limits/Retentions) – Price – Line size • Facilities / Lineslips • Information sharing • Choosing a Leader U of H Presentation - January 2007 78

Lloyd’s: 8% overall capacity increase in 2006 Syndicate Capacity increase 2006 Amlin 2001 17. Lloyd’s: 8% overall capacity increase in 2006 Syndicate Capacity increase 2006 Amlin 2001 17. 70% Argenta 2121 26. 50% Beazley 623/2623 11. 30% Cathedral 2010 25. 00% Chaucer 1084 12. 50% Heritage 1200 20. 00% Kiln 557 14. 50% Kiln 807 10. 00% MAP 2791 22. 70% Omega 958 11. 00% (Would have reduced by 8% in absence of hurricanes) 18. 73% Ascot 1414 Capacity (£bn) Wellington 2020 U of H Presentation - January 2007 9. 60% (anticipated) 65% of capacity in the hands of the top 20 direct capital providers Source: Lloyd’s/company announcements 79

Upstream underwriting capacities, 2004 -06 US$m * max. U of H Presentation - January Upstream underwriting capacities, 2004 -06 US$m * max. U of H Presentation - January 2007 OEE limits purchased in commercial market typically US$ 300 m Source: Aon 80 Limited

Energy Property underwriting capacities, 2004 -06 US$m U of H Presentation - January 2007 Energy Property underwriting capacities, 2004 -06 US$m U of H Presentation - January 2007 Source: Aon 81 Limited

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 The role of the broker A presentation at The University of Houston January 25, 2007 U of H Presentation - January 2007 82