0 charles winter aon’s 11th energy insurance training seminar captives & risk financing...

1

Charles Winter

Aon’s 11th Energy Insurance Training Seminar

Captives & Risk Financing Decision Platform

2

Agenda• Risk Financing Strategy

• Risk Finance Decision Platform

• Managing Retained Risk & Captives

3

Risk Financing Strategy

4

In theory, companies have three options for financing group insurable risks:

– Transfer all insurable risk

– Retain all risks and associated volatility internally

– A combination of the two

Objective of a risk financing strategy– Safeguard business objectives

– Minimise the overall cost of insurable risk

A key tool is to optimise the level of retained risk

Risk Financing Strategy

5

Corporate Perspective of Risk

Probability

Provisions

Zero loss

Expectedloss

Unexpected lossfor which the company

has the capacity to bear

Risk Bearing Capacity

Loss1 2 3

Probability

Zero loss Loss

LossDistribution

Unexpected losswhich is unbearable

for the company

6

Risk Finance Decision Platform

7

Risk Finance Decision Platform

Are my insurance programmes:– Appropriate, optimal, and fairly priced?

– Aligned with financial management objectives and practices?

– Validated through quantitative measures and analytics?

Are my insurance programme decisions:– Transparent for Board and Executive

Committee review?

– Aligned with corporate governance practices?

DecisionSupport

Reporting

RFDP

InsuranceMarketplace

Risk Appetite Risk Profile

8

Risk-Bearing Capacity - Overview

Risk-Bearing Capacity is an objective measure of risk tolerance / appetite Serves as a valuable decision-making and contingency-planning tool Provides guidance for setting the retention levels Identifies and assesses financial and loss scenarios that threaten corporate financial

goals Alignment of corporate finance and risk financing

9

Risk Financing Decision Platform Components

Establishes appetite levels for enterprise risks and tolerance levels for insurable risks which are linked to corporate performance objectives and volatility thresholds

2. Risk Bearing Capacity Analysis

3. Design & Programme Stress Testing

Provides a cost/benefit comparison of various risk management strategies including captive and alternative risk strategies

Provides insight into technical pricing for various risk classes and risk transfer layers

Generates a thorough understanding of current insurance exposures, individually and in portfolio

1. Dynamic Risk Modelling

10

Key Outputs

Minimises the cost of riskwhilst managing volatility

Providing a decision–making framework for developing alternativerisk retention strategies from “low” to “high”

Within risk tolerance

Optimises the use of corporate capital

Supports the captive’s strategy and underwriting/funding requirements

11

Risk-Bearing Capacity - Process

Analyse range of loss quantum (forecast and scenarios) Build pro-forma financial statements

– Financial planning data, analyst reports, financial statements Agree KPIs, materiality thresholds and response mechanisms

– Interactive process with financial management Run loss scenarios through financial statements to evaluate financial impact Stress test Determine critical pressure points and RBC

12

Risk Bearing Capacity Results

Financial ImpactDetermined1 2 3Volatility Determined

Through SimulationsBreach PointDetermined

0

$1x

$2x

$3x

$4x

$5x

$6x

$7x

2 4 6 8 10 12 14 16 18 20

X Axis: Months Forward

Confidence Level 95% or 19 out of 20 years


Prices = Mean

0

$1x

$2x

$3x

$4x

$5x

$6x

$7x

2 4 6 8 10 12 14 16 18 20

0

$1x

$2x

$3x

$4x

$5x

$6x

$7x

2 4 6 8 10 12 14 16 18 20




Prices = Mean

$0

$1x

$2x

$3x

$4x

1 3 5 7 9 11 13 15 17 19 21X Axis: Months Forward


Prices = MeanConfidence Level 67% or 2 out of 3 years

$0

$1x

$2x

$3x

$4x

1 3 5 7 9 11 13 15 17 19 21

$0

$1x

$2x

$3x

$4x

1 3 5 7 9 11 13 15 17 19 21X Axis: Months Forward






$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Y-Axis: EBITDA (£ in millions)

X-Axis: Confidence Level (%)

Scenario A Threshold > 99.99%

100%

Scenario B Threshold - 93%EBITDA Threshold

13

Programme Optimisation – Loss ProfileLoss Severity Distribution

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 10 100 1,000 10,000 100,000 1,000,000 10,000,000 100,000,000

loss value

cum

ula

tive

pro

bab

ilit

y

From loss historyFrom industry dataMulti-parametric fit

NegBin(1, 0.24146)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

-2 0 2 4 6 8 10

12

14

16

18

>5.0%90.0%

0.00 10.00

Frequency Distribution

Inevitable Uncertain Remote

The portfolio of retained risks is a function of all risk classes’

1. retention levels

2. limits of cover

14

Aggregate Loss Forecasts

Increasing the retention from $10m (current) to $50m increases the expected retained losses from €7.7 million - €11.3 million

1 in 20 year “bad” case scenario increases retained losses from €19.9m to €50.2m

Percentile Statistic Agg. LossAgg. Loss Layer 5m

Agg. Loss Layer 10m

Agg. Loss Layer 25m

Agg. Loss Layer 50m

Agg. Loss Layer 100m

25% 1 in every 4 years (Good Case) 2,955,000 2,955,000 2,955,000 2,955,000 2,955,000 2,955,000

Mean Average Long-Term Loss Projection 13,109,000 6,440,000 7,667,000 9,752,000 11,348,000 12,450,000

80% 1 in every 5 years (Bad Case) 14,264,000 9,884,000 12,477,000 14,264,000 14,264,000 14,264,000




15

Programme Optimisation - Pricing

For each line of risk, a premium / pricing model is developed to assess the risk transfer cost at alternative attachment points

200,000,000

165,000,000

130,000,000

95,000,000

60,000,000

25,000,000

100,

000

200,

000

300,

000

400,

000

500,

000

600,

000

700,

000

800,

000

900,

000

1,00

0,00

01,

100,

000

1,20

0,00

01,

300,

000

1,40

0,00

01,

500,

000

1,60

0,00

01,

700,

000

1,80

0,00

01,

900,

000

2,00

0,00

0

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Premium

Limit of Cover

Per-Occurrence Retention

Premium as Function of Retention and Limits of Cover

16

270

275

280

285

290

295

300

305

310

92 93 94 95 96 97 98

Mill

ion

s

MillionsTotal Cost of Risk (Mean Retained Losses + Premium)

Net

Cap

ital

Req

uir

em

ent

(Va

lue

at R

isk

i.e

99.9

th P

erce

nti

le)

All Points

Eff icient Points

Gross Point

Current Programme

Programme Stress Testing Results – Efficient Frontier

High-Risk Strategy

Low-Risk Strategy

Medium-Risk Strategy

Lev

el o

f R

isk

Through stress testing many programme options, an Efficient Frontier, based on expected value and volatility, can be mapped

17

Captives & Managing Retained Risk

18

Managing Retained Risk

Following optimisation retained risk may be:– First loss – e.g. deductibles / SIRs / waiting periods

– Residual risk – above the limits of the programme

– Uninsured exposures – e.g. policy exclusions

$5m

$500mInsured

First Loss

Uni

nsur

ed

Residual

19

Financing of Retained Risk

DecentralisedDecentralised CentralisedCentralised

Paid from groupoperating revenues

Paid from groupoperating revenues

Structured inrisk retention

vehicle e.g. captive

Structured inrisk retention

vehicle e.g. captive

Paid from localoperating revenues

Paid from localoperating revenues

Optimal Retained RiskOptimal Retained Risk

20

Captive Insurance Drivers

Cost effective to retain risk

Access to specialist markets

Alignment of stakeholder interests

International co-ordination of programmes

Structured reserving for retained risk exposures

Fiscal benefits in some circumstances

Creation of identifiable budget for variable costs

21

Captive Insurance Options

Captives have a long history– Mutuals 100 years +

– Onshore captives 80 years

– Offshore captives 40 years

– Now 5,000 + captives in existence

Pure captive definition– An insurance company whose insurance business is primarily supplied and controlled by its

owner, who is the principal beneficiary

Cell captive– A risk financing structure that mimics many of the features of an owned captive but in which

the core capital and operational structure is provided by a party other than the insured participant

• Protected Cell Companies and equivalents

• Incorporated Cell Companies

22

Captives In The Energy Sector

Oil Majors

Service Companies

National Oil Companies

Property damage / business interruption Control of well Liability Marine Aviation Constriction Environmental Terrorism Employee benefits

23

Captive Participation

Local Deductible

Layered / Group Deductible

(Re)Insurance Market

Quota Share


Each and Every Loss

Aggregate LossesDesirable

UnusualCan deliver good returns

Avoids pound-swapping

Common

Captive may give greater

control Excess of loss


StopLoss

Protection

24

Captive Insurance Practicalities

Over 30 territories with specific captive legislation– Flexible regulation and capitalisation approach

– Ability to provide admitted insurance

– Stability and international acceptability

– Infrastructure

– Alignment of fiscal rules

Operation– Operational management mainly outsourced

Programme structuring– Net versus gross lines

– Collateral

– Compliance

25

Trends

New formations flow– Soft market

– But no mass retreat to the insurance market

Increasing use of existing companies– New lines of business

– Diversification

Regulation– Solvency II

– Responses including equivalence

Taxation– Increased scrutiny

Compliance– Increased focus on global insurance regulations

0 charles winter aon’s 11th energy insurance training seminar captives & risk financing...

Documents