SARIMS BREAKFAST NOVEM NOVEMBER BER 6, 2014 6, 2014 DOWNSTREAM - - PowerPoint PPT Presentation

ENE ENERGY MA RGY MARKET UP RKET UPDATE DATE SARIM’S BREAKFAST

NOVEM NOVEMBER BER 6, 2014 6, 2014

DOWNSTREAM PROPE DOWNSTREAM PROPERTY RTY

DOWNSTREAM CAPACITY

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

USDm

Source: Willis

International North America Estimated “realistic” market capacities

Downstream market capacity is back up again - this time to its highest level for over 15 years

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MAJOR DOWNSTREAM MARKET LOSSES 2013/14

But how much of these losses has been paid by the market?

Year Type Cause Location Country PD USD BI USD Total USD 2013 Refinery Fire no explosion Buenos Aires Argentina 300,000,000 700,000,000 1,000,000,000 2014 Petrochemical Fire no explosion Texas USA 85,000,000 555,000,000 640,000,000 2013 Petrochemical Fire no explosion Louisiana USA 110,000,000 400,000,000 510,000,000 2013 Refinery Fire no explosion Illinois USA 90,000,000 325,000,000 415,000,000 2013 Refinery Fire + explosion/VCE Saskatchewan Canada 75,337,000 219,136,000 294,473,000 2013 Chemical Windstorm Leyte Philippines 220,000,000 220,000,000 2013 Refinery Fire no explosion Sohar Oman 25,000,000 189,000,000 214,000,000 2013 Pipeline Subsidence/landslide Gujarat India 10,000,000 200,000,000 210,000,000 2014 Tank farm/terminal Fire + explosion/VCE Mendoza Argentina 180,000,000 180,000,000 2014 Refinery Faulty work/op error Porvoo Finland 47,000,000 122,000,000 169,000,000 2014 Refinery Fire no explosion Rayong Thailand 40,000,000 120,000,000 160,000,000 2013 Refinery Fire + explosion/VCE Merseyside UK 26,000,000 130,000,000 156,000,000 2014 Petrochemical Mechanicalfailure Alberta Canada 25,000,000 85,000,000 110,000,000 2013 Gas plant Explosion no fire Map Ta Phut Thailand 13,000,000 90,000,000 103,000,000 2014 Refinery Fire no explosion Punjab India 100,000,000 100,000,000 2014 Chemical Faulty work/op error Alberta Canada 22,333,500 72,360,540 94,694,040 2013 Refinery Fire + explosion/VCE Merseyside UK 13,800,000 75,233,600 89,033,600 2014 Petrochemical Fire + explosion/VCE Stavropol Krai Russia 83,000,000 83,000,000 2013 Chemical Mechanicalfailure Sohar Oman 20,500,000 53,000,000 73,500,000 2013 Gas plant Fire + explosion/VCE West Virginia USA 31,000,000 41,000,000 72,000,000 2014 Refinery Fire no explosion Lysekil Sweden 3,445,000 65,460,000 68,905,000 2013 Refinery Fire + explosion/VCE Andhra Pradesh India 5,000,000 60,000,000 65,000,000 2014 Petrochemical Fire no explosion Eastern Province Saudi Arabia 25,000,000 40,000,000 65,000,000 2013 Petrochemical Fire no explosion Eastern Province Saudi Arabia 25,000,000 40,000,000 65,000,000 2014 Refinery Mechanicalfailure Lysekil Sweden 775,000 50,475,000 51,250,000 2013 Petrochemical Fire no explosion Bahia State Brazil 25,400,000 25,500,000 50,900,000 2013 Chemical Mechanicalfailure Texas USA 45,000,000 5,000,000 50,000,000 2013 Refinery Fire + explosion/VCE Wyoming USA 50,000,000 50,000,000 2013 Petrochemical Mechanicalfailure Yanbu Saudi Arabia 5,000,000 45,000,000 50,000,000

Source: Willis Energy Loss Database as at October 14 2014 (figures include both insured and uninsured losses)

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A PROFITABLE PORTFOLIO?

1 2 3 4 5 6 7 8 9 10

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

1 2 3 4 5 6 7 8 9 10

Losses excess USD1m Estimated Worldwide Premium (USD) WELD Downstream Energy losses 1990 – 2014 (excess of USD 1m) versus estimated global Downstream premium income USDbn USDbn

Recent losses have alarmed the Downstream market but overall composite market results are good

Source: Willis/Willis Energy Loss Database as at October 14 2014 (figures include both insured and uninsured losses)

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THE OUTLOOK FOR 2015

1,000 2,000 3,000 4,000 5,000 6,000 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 20 40 60 80 100 120

Onshore Capacities Average Composite Percentage of 1992 rates

USDm Estimated Average Rate Index (1992=100)

Is there any escape from the laws of supply and demand?

?

Source: Willis

Downstream Capacity versus Rating Levels, 1993 – 2014 (Excluding Gulf of Mexico Windstorm)

?

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UPS UPSTREA TREAM M PROP PROPERTY ERTY

UPSTREAM CAPACITY

Source: Willis 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

USDm

Estimated maximum realistic capacity

Capacity for Upstream business continues on its relentless upwards trajectory

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MAJOR UPSTREAM MARKET LOSSES 2013/14

Source: Willis Energy Loss Database as at October 14 2014 (figures include both insured and uninsured losses)

Year Type Cause Country Land / Offshore PD USD OEE USD BI USD Total USD 2013 Platform Mechanicalfailure Norway Offshore 80,280,000 300,000,000 380,280,000 2013 Rig Legpunchthrough Angola Offshore 247,300,000 247,300,000 2013 Platform Faulty work/op error China Offshore 237,000,000 237,000,000 2013 Rig Blowout Mexico Land 50,000,000 150,000,000 200,000,000 2013 Rig Blowout USA Offshore 64,000,000 81,844,000 145,844,000 2013 Platform Impact Angola Offshore 120,000,000 120,000,000 2013 Well Blowout Indonesia Offshore 105,000,000 105,000,000 2014 Rig Blowout Mexico Offshore 100,000,000 4,500,000 104,500,000 2013 Rig Faulty work/op error South Korea Offshore 100,000,000 100,000,000 2013 Well Blowout Russia Offshore 57,000,000 40,000,000 97,000,000 2014 Platform Pilingoperations Mexico Offshore 95,147,421 95,147,421 2014 Platform Subsidence/landslide Indonesia Offshore 89,000,000 89,000,000 2013 Rig Mechanicalfailure Brazil Offshore 4,500,000 70,700,000 75,200,000 2013 Well Heavyweather UK Offshore 65,000,000 65,000,000 2013 Rig Blowout Indonesia Offshore 65,000,000 65,000,000 2014 Pipeline Anchor/jacking/trawl Norway Offshore 63,000,000 63,000,000 2013 Rig Mechanicalfailure Brazil Offshore 60,000,000 60,000,000 2013 MOPU Corrosion Ivory Coast Offshore 50,000,000 50,000,000 2013 Pipeline Anchor/jacking/trawl China Offshore 50,000,000 50,000,000 2014 Well Blowout USA Land 50,000,000 50,000,000

The recent loss record has remained remarkably benign by historical standards

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A PROFITABLE PORTFOLIO?

2 4 6 8 10 12 14 16 18 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2 4 6 8 10 12 14 16 18 20

Upstream losses excess USD1m Estimated Worldwide Offshore Premium (USD)

USDbn USDbn

Upstream losses in excess of USD1 million, 2000-2014 (adjusted for inflation)

Source: Willis/Willis Energy Loss Database as at October 14 2014 (figures include both insured and uninsured losses)

Losses may be down – but so is premium income

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THE OUTLOOK FOR 2015

1,000 2,000 3,000 4,000 5,000 6,000 7,000 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 20 40 60 80 100 120 Upstream Capacities Average Composite Percentage of 1992 rates

USDm

Estimated Average Rate Index (1992=100)

Old Market Floor

Upstream Capacity versus Rating Levels, 1993 – 2014 (Excluding Gulf of Mexico Windstorm)

Predicted New Market Floor 2013

The last time the market faced this sort of competitive pressure was back in 1997

?

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 Portfolio still generally profitable, despite falling rating levels  Loss record still basically benign in comparison to hurricane-affected years (2004, 2005, 2008)  Capacity:

 Outgoing: Arch pulled out of Canada (-$75M)  Incoming: Aspen +$50M, AWAC, +$40M, Ironshore +$30M, BH…….  OIL increasing their limit from $300M occ/$900M agg to $400M occ/$1.2B agg

 Discipline:

 Insurers still having to underwrite the risk and justify their decisions to their management  Retentions holding steady, as are policy forms

 However, no sign of any market floor – nothing materialising that could act as a brake on softening

process at this stage

 Buyers left with a decision:

 Stick with trusted insurer partners? What is the value of a relationship?  Move to more competitive markets? Short term vs long term buying patterns

ISSUES FACING THE PROPERTY MARKET TODAY

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CASUA CASUALTY LTY

THEORETICAL VS ACTUAL CAPACITY

NB: Supply and Demand conditions operate: The greater the limit required, the greater the pressure on price, as the most economic capacity used up first.

Theoretical Capacity $ 2.8 billion Realistic Onshore Capacity $1.4 billion Realistic Onshore/Offshore Capacity $ 800 million – $ 1.0 billion Onshore/Offshore Follow form Capacity $ 500 m

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PROPERTY: A NIGHT AT THE THEATRE…

 Short Tail  Dynamic  High Drama  Volatile Rating  High cost

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LIABILITY: A QUIET NIGHT IN FRONT OF THE TV?

 Long tail  Less volatile  More considered  Lower Cost

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WHEN IT GOES WRONG

MACONDO OIL WELL BLOWOUT Loss Date: 20 April 2010

 11 people died  17 people were injured  2.4 - 4.2 million barrels est. of oil spilled

POTENTIAL LOSS AMOUNT Property Value of Rig : USD 0.56 bln Potential Liability: USD 42.7 bln est.

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IMPACT ON JV PARTNERS OR CONTRACTORS…

COMPANY INTEREST LIABILITY POLICY LIMIT LIABILITY BP 65% JV partner/Operator Self Insured $ 42.7 bln est. Anadarko 25% JV partner $675m = $168m/interest $ 4.0 bln MOEX/Mitsui Oil 10% JV partner Under Judgement $ 1.0 bln Transocean Rig Owner $ 950m $ 1.4 bln Halliburton Cement Casing $ 600m $ 1.1 bln Cameron Blowout Preventer $ 500m $ 250 mln Weatherford Collar manufacturer Unknown $ 75m Oceaneering 3 employees on rig Unknown $ 22m

Notes: Anadarko, Mitsui & Weatherford and Cameron all settled with BP in exchange for indemnity from claims. Transocean: 1.4 bln = 1 bln liabilities plus 400m Criminal penalties

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TOTAL: AZF PLANT, TOULOUSE, FRANCE

LOSS AMOUNT Property & BI: USD 492 m Liability: USD 2,700 m est. (Liability policy limit: $700m)

 Insured: Total Elf Fina  Date: 21 Sept 2001  Explosion of Ammonium Nitrate  30 people killed  2,240 wounded  Extensive third party property damage

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LOSS AMOUNT Property/BI: £ 208m (USD 0. 335 billion) Liability: £ 700m (USD 1.12 billion)

 Insured: Total, Chevron/Texaco JV  Date: 11 December 2005  Vapour Cloud Explosion at Oil Storage depot

Extensive third party property damage and business interruption.

 43 injured. No fatalities

TOTAL: BUNCEFIELD OIL TERMINAL, UK

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LOSS AMOUNT Property: USD 380m (USD 200m PD + 180m BI) Liability: USD 2 billion + Insured: BP (sold to Marathon on 1 Feb 2013) Date: 23 March 2005 Vapour Cloud Explosion at the second largest refinery in Texas. Overfilling of raffinate splitter lead to vapour cloud, which was ignited by a contractors truck. Extensive third party property damage and business interruption. 15 fatalities. 170 injured.

BP: TEXAS CITY REFINERY, USA

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PDVSA

Explosion at Amuay Oil refinery, Venezuela Loss Date: 25 August 2012 Gas leaking from a pipeline ignited by a National Guard vehicle, resulting in a massive explosion. 48 people killed and 151 injured. > 1,600 homes damaged by shockwave Potential Liability: USD 180-300mm (Now deemed terrorist act)

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RAIL CAR LIABILITY

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Lac-Megantic, Quebec Canada July 6, 2013

 Rail cars rolled down an incline into

the town of Lac-Megantic, derailed and exploded.

 47 people killed  Clean-up of Lake: $1mm a day  Loaded in the Bakken Shale area of

North Dakota

 Headed for Irving Oil Refinery in

Eastern Canada

 Liability regime for Railroads makes

railroad responsible, but this short- line railroad only bought $25mm of Liability limit

 Matter of “unallocated liability”

HOT BUTTON ISSUES FOR ENERGY CASUALTY

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 Rail Cars  Regulatory Requirements (Bill C22/ DECC/ OPA/ OPOL)  Pipeline Maintenance  Fracking  Environmental  Cyber Liability  Contractual Integrity

CASUALTY MARKET OVERVIEW

 Relatively benign Liability claims environment  Global liability at an all time high: USD 2.8 bln  Increased capacities and new entrants / re-entrants to the market (Marketform, Apollo, Ascot)

But:

 All insurers watching aggregations (Prevalence of Joint Venture Clauses for E&P)  Some major carriers cutting back line sizes (eg: AIG: Eur 150m to Eur 100m)  Some of new capacity is “vanilla” with restrictions on US exposures, Offshore, Rail etc  Underwriting discipline still maintained. (Information requirements and Coverage)

Result:

 Measured softening of market but less price volatility on capacity & complex risks  Migration to quality: Differentiation of risk is key to obtaining the best terms

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CLOS CLOSING ING THO THOUGHTS UGHTS

WHY IS A LIABILITY PROGRAM LIKE A STAMPEDE COCKTAIL?

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 You need a strong base

= Used a recognised leader with proven claims paying ability

 If the top burns, you need another

= Limit should be per loss or reinstatable, where aggregated

 Layer carefully for best results

= Maximise access to all markets

WHY IS A LIABILITY PROGRAMME LIKE A STAMPEDE COCKTAIL?

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 Remember the umbrella…

= Global policies should give DIC/DIL coverage

 Cheap quality can give you a headache

= Don’t economise on coverage!

EN ENERG ERGY MARKET UPDATE

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THANK THANK YOU OU

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SUMMARY: MAJORS ARE STILL MAKING MONEY

Company Combined Ratio on Property/Casualty business 2013: AIG 98.4% Swiss Re 83.3% Munich Re 92.1% Zurich 95.5% Liberty Global Specs 95.5%

Source: Company websites

RAIL CAR LIABILITY: THE NEW FRACKING?

 Market keen to understand clients

• exposures. This is becoming an

education matter just like Fracking

 Pressure for liability from spills/events

to be moved to or shared with shipper.

 Insurers concerned with accumulation:

shippers, loaders, r/c owners, lessors, maintenance, end customer

 It will be of concern at renewal, but we

do not expect restrictions on cover What underwriters want to know:

 Number of Railcars  Owned/leased  Type  Age  Lessor details  Maintenance detail including contract

services

 Years in operation (history)

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