Speech given by Nick Coffey at conference on Contractual Risk Managment in Aberdeen, Scotland.

1. Successfully Utilising Insurance
Options in Your Risk Management
Strategy
Aberdeen
18th November 2008
Nick Coffey
Managing Partner
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2. Introduction
• Risk Profile of Parties.
• Contractual Risk Allocation
• What is Insurance
• Contractor Insurances.
• Operator Insurances.
• Mechanism for Risk Transfer.
• Current Market Trends.
• Construction Insurance.
– Limitations
– Solutions
• Can Captives fill the gap.
• Conclusions.
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3. Risk Profiles of Parties
• Operator
– As Owner or Lessee of Production Facilities
• Property Damage.
• Removal of Wreck.
• Pollution.
• Control of Well / Redrill.
• Business Interruption.
• Employees.
• Third Party Liability.
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7. Risk Profiles of Parties
• Contractor
– Property Damage to vessels / equipment
– Loss of Hire / Business Interruption
– Employees
– Third Party Liability
• Removal of Wreck (contractual Liability)
• Pollution
• Collision Liability
– Professional Indemnity
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9. Contractual Risk Allocation
• Indemnity and Warranty provisions are base for
allocating risk
– Knock for Knock
• Personnel
• Property
• Pollution
– Oil Company Responsibility
• Pollution from the Well
– Contractor
• The “Work”
• Company provided items Care Custody and Control.
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10. What is Insurance
• Eventuality for loss or damage that is
– (1) definable,
– (2) fortuitous,
– (3) similar to a large number of known exposures,
– (4) pays a premium that is commensurate with the potential loss,
– (5) It is a “Pure Risk” – no possibility of a gain and,
– (6) not against public policy.
• Transfer of defined risks to third party (insurance
company) who has a group of similar risks.
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11. Contractor Insurances
• Property Damage
– Hull and Machinery
• Liability Coverage
– Comprehensive General Liability
– Protection and Indemnity
– Employers Liability / Workers Compensation
• Marine Cargo
• Aviation Liability
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12. Operator Insurance
• Property Damage
– Production Facilities
• Liability Coverage
– Comprehensive General Liability
– Protection and Indemnity
– Workers Comp. / Employers Liability
• Marine Cargo
• Operators Extra Expense
– Control of Well
– Redrill
– Pollution
• Construction All Risks
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13. Mechanisms for Risk Transfer
• Commercial Market Insurers (Lloyds of London,
Composite Insurers).
• Mutual Insurance Companies (P&I clubs).
• Captive Insurance Company.
– Accumulate disparate risks in a single company.
– Access to “Reinsurance” Markets
– “Smooth out” cycles in the market
– Manage attritional losses where transfer to insurance
market is inefficient.
• Self (No) Insurance is not Risk Transfer
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14. Lloyds of London Results 1985-2007
Lloyd’s of London pure year profit/loss,1985-2007 (£m)
£m
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08?
Lloyd’s recently reported 47% drop in profits for first 6 months of 2008 – largely as a result of
reduced investment incomes
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15. CURRENT OFFSHORE ESTIMATE FOR GUSTAV/IKE – IN CONTEXT
(INCLUDES INSURED AND UNINSURED LOSSES)
US$bn
8
7
6
5
4 ?
3
2
1
0
Ivan Katrina Rita Gustav/Ike
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16. The Long Term Trend
Net Premium and Incurred Losses
£2,500,000,000 300.00%
Loss Ratio (Losses/Premium)
250.00%
£2,000,000,000
200.00%
£1,500,000,000
150.00%
£1,000,000,000
100.00%
£500,000,000
50.00%
Prem ium
£0 0.00%
19 96
19 97
19 98
19 99
20 00
20 01
20 02
20 03
20 04
20 05
20 06
20 07
20 08
Claim s
Loss Ratio
Data from Willis
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17. Current Market Trend
• Insurers suffering in 2008
– Reducing premium income.
– Significantly reduced investment income.
– Increases losses in specific coverage areas.
• Fall of AIG appears to be affecting market.
• New capacity arriving in market in 2009
– Insurance sector is seen as safer haven for capital.
• Reduced demand for insurance due to effects of
recession.
• Ike and Gustav hurricanes caused significant offshore
and onshore losses.
• 2009 may be year of two halves.
• Premium costs increasing by 10%-20%
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18. Construction All Risks Market
• WELCAR wording
• Limitations on coverage
– Schedule A and B for Insured Values.
– Sub-limits apply
– Exclusion of “Faulty Part”
– Limited Buy-back
– Higher deductibles (>USD5 Million).
– Lack of clarity in interpretation of wording
– Limitation for Mobilisation and Demobilisation of vessels to
undertake repairs.
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19. Effects of limitations
• Welcar does not cover all the exposures
Company and Contractor has in the event of
physical loss or damage to the Work.
• Significant exposures remain.
• Does Contractor carry too much risk for the
opportunity to make a return on the Contract?
• Operator or JV choosing not to buy CAR
insurance.
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20. Solutions
• Indemnity for damage to Work from Operator.
• Limited Indemnity from Operator
– Difference in deductibles
– Reimbursed for areas for where sub-limit applies.
– Does not apply to “faulty part” which remains Contractor
risk.
• Contractor buys insurance to cover gaps.
– Professional Indemnity / Warranty Insurance
– Defective Part.
– Utilise internal funding – possibly using Captive.
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21. Can Captive Insurers fill gap
• 100% subsidiary of the parent company.
• Only insurers group company risks.
• Very effective for managing attritional losses over the
long term.
– Auto
– Tools and Equipment
– Employers Liability / Workers Compensation
– Speciality risks not catered for by insurers.
• Not effective at providing catastrophe protection or
“long tail liabilities” without Reinsurance.
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22. Conclusions
• Risk Profiles of Parties are not the same.
• Areas of commonality particularly in Construction
Projects.
• Insurance can provide a partial solution for managing
particular risks.
• Insurance should be used as a tool in a suite of
solutions.
• Insurance market is still very volatile.
• Entering period of a hard market.
• Captive Insurers can provide part of the solution in a
larger jigsaw.
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