GUIDE TO OIL INSURANCE LIMITED Prepared by JLT Speciality Limited

GUIDE TO OIL INSURANCE LIMITED Prepared by JLT Speciality Limited CONTENTS INTRODUCTION 1 BACKGROUND/HISTORY 2 MEMBERSHIP QUALIFICATION 3 STA...
Author: Marylou Welch
253 downloads 0 Views 567KB Size
GUIDE TO OIL INSURANCE LIMITED Prepared by JLT Speciality Limited

CONTENTS

INTRODUCTION

1

BACKGROUND/HISTORY

2

MEMBERSHIP QUALIFICATION

3

STANDARD LIMIT AND DEDUCTIBLE

4

LIMIT OPTIONS

5

PREMIUMS

6

EXPERIENCE MODIFIER

7

ADDITIONAL COST OF MEMBERSHIP

8

ATLANTIC NAMED WINDSTORM

8

LAW AND JURISDICTION

9

POLICY PERIOD

9

CAPTIVE INSURANCE COMPANIES

10

INTEGRATING OIL WITH COMMERCIAL MARKET PLACEMENTS

11

SOME CONSIDERATIONS WHEN DECIDING WHETHER OR NOT TO JOIN OIL

16

GUIDE TO OIL INSURANCE LIMITED (OIL) 1

INTRODUCTION Oil Insurance Limited (OIL) is a Bermuda based energy industry mutual insurer that provides a USD 400mm block of capacity without any aggregates or sub-limits (other than in respect of Atlantic Named Windstorm as referenced herein), subject to an overall USD 1.2bn ‘per event' limit over all members. The coverage provided by OIL includes Property Damage, Control of Well/Redrilling and Pollution Liability (limited to 'Sudden & Accidental') for both onshore and offshore, for qualifying Energy companies.

2 JLT SPECIALTY LIMITED

BACKGROUND/HISTORY OIL was founded in 1970 by 15 US oil companies, in the face of a dearth of available capacity from the commercial insurance markets for their ever increasing risk transfer needs. The original OIL began operations on 1 January, 1971 but was liquidated and reconstituted as a new company effective 1 January, 1972 following a US tax ruling relating to the treatment of insurance premiums. The 'new' OIL began operations on 1 January, 1972 with 16 shareholders (15 based in the United States and 1 based in Europe) selling its insurance product 'at cost'. As of the end of 2014 OIL provides its coverage to 56 members based in Australia, the Caribbean, Canada, Europe, Latin America, and the United States, covering over USD 2 trillion worth of assets worldwide, with original concept of selling the product at cost still remaining strong. OIL currently enjoys a rating of 'A-' (stable) by Standard & Poor's and an A2 insurance financial strength rating from Moody’s.

GUIDE TO OIL INSURANCE LIMITED (OIL) 3

MEMBERSHIP QUALIFICATION To qualify as a member a company must have at least 50% of their gross assets or annual revenues derived from 'Energy' operations, must have balance sheet gross assets (property plant & equipment before depreciation) of at least USD 1bn and a minimum credit rating of S&P BBB- or Moody's Baa3. In the event a company does not have a credit rating from S&P or Moody’s, it must pass certain financial tests as prescribed by OIL.

Energy operations include oil & gas exploration and development, refining & marketing, petrochemicals, pipelines, gas & electric utilities, power generators and mining operations. A members Report and Accounts / balance sheet must comply with US GAAP / IFRS or equivalent International Accounting Standard and must be certified by an auditor. Drilling and Service Contractors are not eligible.

4 JLT SPECIALTY LIMITED

STANDARD LIMIT AND DEDUCTIBLE OIL's standard limit is currently USD 400mm for Insured's interest (having increased from USD 300mm at 1/1/2015). OIL's minimum attachment point is currently USD 10mm (100%), although higher attachment points may be elected at a discount to the base premium. The deductible is a combined single deductible applicable to all coverages (PD, OEE and pollution) whether onshore or offshore, other than in respect of Atlantic Named Windstorm (ANWS) losses where the Insured bears a separate deductible for onshore and offshore losses. OIL's deductible is "100%" scaling to interest, subject to a minimum of USD 1,000,000 for interest, other than in respect of ANWS losses where it applies for interest.

GUIDE TO OIL INSURANCE LIMITED (OIL) 5

LIMIT OPTIONS There are various entry options into OIL, but essentially the decision is between 'Pool A only' (where 60% of members' losses are pooled) or 'Pool A and Pool B' (where 100% of members' losses are pooled over two pools). Pool A is the limit equivalent of $240 million part of $400 million and Pool B is $160 million part of $400 million. Participation in Pool A is mandatory. A member who elects to be in 'Pool A' only, must self insure (or insure elsewhere) the other 40% (termed a minimum premium only entry), or opt to have a 'Retroactive Entry' for the remaining 40% whereby 40% of their own losses are paid back to OIL over a 5 year period (these losses paid back under the 'Retro' scheme are not pooled with other members). Alternatively an Insured can also enter 'Pool B' or the remaining 40% that gives them a 100% fixed premium entry. The 40% portion of the limit may be constructed in multiple 10% increments utilizing Pool B, Retro, Self Insurance and/or Commercial Insurance.

6 JLT SPECIALTY LIMITED

PREMIUMS OIL's base premium is calculated to collect back losses (and operating expenses) over a period of 5 years. A member’s premium is formulated off a base calculation at a deductible of USD 10mm and a limit of USD 400mm. Discounts off the base calculation are available for deductibles that are higher than USD 10MM and for limit profiles that are less than USD 400mm (to have a limit lower than USD400mm the Insured must warrant that they do not purchase excess limits elsewhere.) An individual member's share of each pool is assessed on that member's gross assets (as reported in the member's latest report and accounts) that are ‘modified’ (loaded or credited) by coverage elections and industry sector, based upon that sector's prior loss history to OIL (over a 20 year rolling period). Other than the ‘sector weighting’, each member pays the same rate regardless of geographic location (i.e. there is no loading for catastrophe exposed locations, whether quake, flood or wind etc). Assets exposed to windstorm in the Atlantic, Caribbean and Gulf of Mexico regions are exceptions to this rule.

GUIDE TO OIL INSURANCE LIMITED (OIL) 7

EXPERIENCE MODIFIER In 2014 OIL introduced an Experience Modifier whereby a surcharge applies on premiums of those members with a “reserve ratio” in excess of 150% relative to that member’s share of the total losses in OIL over the same 3 year period of time. The Experience Modifier is, calculated over a 3 year rolling period and would be capped at a maximum surcharge of 25% (although the OIL board have authority to increase this up to 50%). The total sum of surcharges is reimbursed to all members proportionate to their share of the mutual pools. The purpose of the Experience Modifier is that members with good loss records are rewarded while those with less than stellar loss records are surcharged. OIL believes this will incentivise members to select appropriate limits and deductible options that are consistent with their risk profiles, and will also make OIL more attractive to potential new joiners.

8 JLT SPECIALTY LIMITED

ADDITIONAL COST OF MEMBERSHIP There is no capital contribution beyond the purchasing of a single “A” voting stock of USD 10,000

ATLANTIC NAMED WINDSTORM Following significant losses from Hurricanes Katrina, Rita and Ike, it is only possible to purchase 60% part of USD 250mm (i.e. USD 150mm in all) for Atlantic Named Windstorm (ANWS) from OIL This is further restricted in respect of each Insured to a maximum annual aggregate limit of two times their per occurrence limit for ANWS - i.e. an annual aggregate per member of USD 300mm. OIL also changed how ANWS losses are pooled, and now only the first USD 300mm in the aggregate of ANWS losses are pooled among all members, with losses above USD 300mm going into separate onshore and offshore ANWS Excess Pools consisting of just members with ANWS exposures.

GUIDE TO OIL INSURANCE LIMITED (OIL) 9

LAW AND JURISDICTION The governing law of the OIL policy is New York subject to arbitration in England and Wales. The governing law of the shareholder agreement is Bermuda.

POLICY PERIOD An eligible Energy company may apply to join OIL at any stage in the year. Once accepted the initial policy period will run from the agreed joining date to the 31 December of that year. Thereafter policies are automatically renewed on 1 January each year unless notice of cancellation is received by OIL by the prior 30 September.

10 JLT SPECIALTY LIMITED

CAPTIVE INSURANCE COMPANIES A member can elect to have their wholly owned captive insurance company as the member, in which case the entire OIL coverage will be a reinsurance, or they may elect to just have certain risks reinsured to OIL via their captive, in which case the policy will be issued on a direct and reinsurance basis (this is particularly useful where OIL is a non-admitted insurer in certain jurisdictions.)

GUIDE TO OIL INSURANCE LIMITED (OIL) 11

INTEGRATING OIL WITH COMMERCIAL MARKET PLACEMENTS OIL capacity's can be used in a number of ways. • Primary

These can be shown graphically in the following examples:

• Excess • Ventilated • 'External' Quota Share (using OIL as a part of a larger limit) • 'Internal' Quota Share (using OIL for less than 100% of USD 400mm and introducing commercial market capacity within the USD 400mm limit)

‘PRIMARY’ EXAMPLE

‘EXCESS’ EXAMPLE

COMMERCIAL MARKET EXCESS (IF REQUIRED)

OIL USD 400MM

OIL USD 400MM

COMMERCIAL MARKET PLACEMENT

OIL DEDUCTIBLE

RETENTION

12 JLT SPECIALTY LIMITED

‘VENTILATED EXAMPLE’

OIL USD 100MM (FOR EXAMPLE)

COMMERCIAL MARKET EXCESS

OIL USD 300MM (FOR EXAMPLE)

OIL DEDUCTIBLE

GUIDE TO OIL INSURANCE LIMITED (OIL) 13

‘EXTERNAL’ QUOTA SHARE EXAMPLE

OIL USD 400MM

COMMERCIAL MARKET USD 400MM

OIL DEDUCTIBLE

‘INTERNAL’ QUOTA SHARE EXAMPLE

60% OFUSD 400MM OIL

40% COMMERCIAL MARKET

OIL DEDUCTIBLE

OIL allows either 10%, 20%, 30% or 40% “Internal” Quota Share

14 JLT SPECIALTY LIMITED

Regardless of how OIL is used there are also different ways any commercial market supporting/complementary capacity can be used which are:

• ‘Wrap-Around’ (providing a Deductible Buy-Down if applicable, plus Excess and ‘Difference In Conditions’ (DIC) coverage, if available) • Stand-Alone complementary coverage These can be shown graphically in the following examples:

‘WRAP-AROUND’ EXAMPLE

COMMERCIAL

MARKET

EXCESS

OIL USD 400MM

DIC

DEDUCTIBLE BUY-DOWN

DEDUCTIBLE

BI WAITING PERIOD

GUIDE TO OIL INSURANCE LIMITED (OIL) 15

Difference in Conditions (DIC) can include the following coverages that are not provided by OIL: • Business Interruption • Extra Expense • Expediting Expenses • Deliberate Damage (to avoid pollution or loss of life) • Fire Brigade Charges/Extinguishing Costs • Voluntary Removal of Debris/Wreck • Difference between ‘Replacement Cost’ and ‘Depreciated Cost’ if property not rebuilt. • T&D Line coverage (if and as available)

‘STAND-ALONE’ COMPLIMENTARY CAPACITY EXAMPLE

COMMERCIAL MARKET EXCESS COMMERCIAL MARKET EXCESS (IF REQUIRED) OIL USD 400MM

DEDUCTIBLE BUY-DOWN

WAITING PERIOD

Either of the above examples can be used with OIL as either 'Internal' or 'External' Quota Share (as above).

16 JLT SPECIALTY LIMITED

SOME CONSIDERATIONS WHEN DECIDING WHETHER OR NOT TO JOIN OIL ADVANTAGES: • One of the largest single blocks of capacity available worldwide • Automatic coverage for new assets built or acquired with no restrictions often seen in the commercial market. • ‘For Interest limits’ for well control, redrilling and pollution/clean-up costs that are usually scaled down to Insured's interest in the commercial market • Full limits available for the following coverage usually sublimited or aggregated in the commercial markets: - Terrorism - Flood - Earthquake

damage to surface equipment (commercial market usually named perils) - Making Wells Safe triggered by 'all risks' of Physical damage to surface equipment (commercial market usually named perils) - No Underground Blowout exclusion and buyback (so arguably broader than commercial market limited buyback) • 'No additional cost' OEE coverage, as no charge in OIL on drilling or producing well activity (premium is only generated against ‘gross assets’) • ‘No additional cost’ construction coverage, as no charge in OIL until a new build property is added to reports and accounts as a gross asset. • No potential gap between construction policy, and operational policy to be dealt with that

- Care Custody & Control of contractor’s equipment • No ‘Cyber Exclusion’ • Risk transfer ‘at cost’ (claims and expenses)

sometimes created by commercial market “Testing and Commissioning” clauses. • Significant block of Atlantic Named Windstorm capacity

without any profit element that the commercial market require • No withdrawal of coverage following a loss • Broad Form coverage, wider than commercial market in some areas, such as: - No sublimits for Removal of Wreck, Sue & Labour or equipment separated from platform - No OEE form 'warranties' - Simpler Well out of Control/Well Under

(commercial market will often pull out of a class or impose exclusions or limitations following loss experience) • Long-term hedge against commercial market • No requirement of surveys or engineering visits • Ownership benefits accrue to Insureds

Control definitions (and therefore arguably wider coverage) - No percentage limitations on Redrill - Redrill triggered by 'all risks' of Physical

• Shareholder input • ‘Insured-friendly’ claims adjustment

GUIDE TO OIL INSURANCE LIMITED (OIL) 17

DISADVANTAGES:

- No Inherent Vice

• Not suitable for Insureds who regularly tender

- No Assignment / Beneficial owners coverage

markets or with a short term opportunistic approach to insurance buying • No 'low deductible' option, although deductible buy-down may be available in commercial

- No General Average guarantees issued - Straight Replacement Cost valuation (no Cost Insurance and Freight etc options)

market • No ability to name 'third parties' as Additional

• Other Limitations

Insureds (though OIL will issue certificates, waive subrogation, and name Loss Payees) • Limit can potentially be eroded by other members’ losses from the same insured event

- No Business Interruption - No Extra Expense - No Expediting Expenses

(USD 1.2bn'event' limit) however this would require 4 or more members suffering from the same event and all with significant losses • Premium directly affected by other members’ losses - i.e. ‘mutualisation’ (though commercial

- No Deliberate Damage (to avoid pollution or loss of life) - No Fire Brigade Charges/Extinguishing Costs - No Voluntary Removal of Debris/Wreck

markets of course also react to losses to the overall market)

- Valuation limited to ‘Depreciated Cost’ if property not rebuilt

• Deductible applies to Total Loss which would not normally be the case in the commercial market for offshore property Damage

- No electric Transmission and Distribution line (T&D) coverage (limited cover may be available from commercial market)

• Limited Construction coverage (pure PD only) - No War Coverage for FPSOs (available in - No Additional Insureds - No Faulty Part/Latent Defect cover - No Stand-By/Cancellation Costs

commercial market) • Long term commitment: a share holder leaving OIL must pay its share of unfunded pooled losses

- No Third Party Liabilities • No tailoring of coverage - No Evacuation Expenses • No credit for 'high class' risks or exceptional - No Leak/Search Cost charges • Limited Cargo cover - No Guaranteed Out-turn

loss records (other than credit resulting from Experience Modification) • Adverse effect on commercial market relationships

- No Marine War

18 JLT SPECIALTY LIMITED

SOME CONSIDERATIONS WHEN DECIDING WHETHER OR NOT TO JOIN OIL (CONTINUED) • GAAP accounting ruling that retrospective premium due upon potential exit from OIL (even if exit not being planned) must be accounted for as a ‘contingent liability’ (termed Theoretical Withdrawal Premium or TWP) • Following the commercial market paying a significant amount of ‘drop-down’ coverage following breach of OIL per event aggregate from Hurricanes Katrina and Rita, drop-down coverage over OIL’s USD 1.2bn aggregate is difficult to secure from the commercial market (especially for Named Windstorm coverage) • Unbudgeted ‘AP’s’ (as seen post Hurricane’s Rita and Katrina ) can cause Insureds cash-flow problems - although OIL have now got regulatory approval to account for Theoretical Withdrawal Premiums (TWPs) of its members, which they state would have prevented them having to make additional premium calls to demonstrate solvency. Also a re-engineering of the windstorm product (see above) was partly designed to avoid such an event happening again in the future

This document is compiled as a guide only. The full details of OIL's coverages, terms, clauses, conditions and restrictions can be found on their website: www.oil.bm This document is intended only to highlight certain issues and does not necessarily deal with every important issue nor cover every aspect of the issue with which it deals. It is not designed to provide specific advice on the subject matter. Views and opinions expressed in this document are those of JLT Speciality Limited unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, neither JLT Speciality nor its parent or affiliated or subsidiary companies accept any responsibility for any error, omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice and verify its content.

JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW Tel +44 (0)20 7528 4000 Fax +44 (0)20 7528 4500 www.jltspecialty.com

Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 01536540. VAT No. 244 2321 96. © January 2015 269444

Suggest Documents