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IRDA Seminar, Hyderabad

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IRDA Seminar, Hyderabad March 13,2006 Airline Crashes What Causes Accidents ? the production platform 25th March 2001 Petrobras: 20.03.2001 P36 platform, Campos ... – PowerPoint PPT presentation

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Title: IRDA Seminar, Hyderabad


1
IRDA Seminar, Hyderabad March 13,2006
2
From a Study of the Airline Industry.. Performanc
e during wakeful period
IRDA Seminar, Hyderabad March 13,2006
3
Airline Crashes
IRDA Seminar, Hyderabad March 13,2006
4
  • Micro Sleep cannot be controlled !

Just after passing the Outer Marker I fell
asleep and awoke at 300 feet above
threshold (anonymous report from a British
Captain)
IRDA Seminar, Hyderabad March 13,2006
5
What Causes Accidents ?
IRDA Seminar, Hyderabad March 13,2006
6
Story No. 2..
Quote from an Executive, extolling the benefits
of cutting quality assurance and inspection
costs The Company has established new global
benchmarks for the generation of exceptional
shareholder wealth through an aggressive and
innovative program of cost cutting on its
production facility. Conventional constraints
have been successfully challenged and replaced
with new paradigms appropriate to the globalised
corporate market place. Through an integrated
network of facilitated workshops, the project
successfully rejected the established
constricting and negative influences of
prescriptive engineering, onerous quality
requirements, and outdated concepts of inspection
and client control. Elimination of these
unnecessary straitjackets has empowered the
project's suppliers and contractors to propose
highly economical solutions, with the win-win
bonus of enhanced profitability margins for
themselves. The facility shows the shape of
things to come in unregulated global market
economy of the 21st Century."
IRDA Seminar, Hyderabad March 13,2006
7
the production platform
IRDA Seminar, Hyderabad March 13,2006
8
25th March 2001
the shape of things to come?
IRDA Seminar, Hyderabad March 13,2006
9
Petrobras 20.03.2001P36 platform, Campos Basin
Petrobras P-36
  • platform sank after suffering three explosions
  • Insured claim PD 500 mio US (only PD)
  • Operating difficulties not reported
  • Down-sized, Out-sourced, Cost-cutting operations
  • Flawed risk analysis
  • Flawed crew training
  • Flawed communications

IRDA Seminar, Hyderabad March 13,2006
10
Story 3Closer home
  • extract from an international risk surveyors
    2003 report on an oil platform-gt A major
    release of gas from a riser. could result .an
    explosion-gt Alternatively, riser failure
    could result in a jet flame that would cause
    severe damage
  • Recommendation.The risers .. are unfortunately
    on the outside of the jacket envelope ..
    specifically require protection against boat
    impact riser protection guards have been placed
    where boat operations are envisaged but it is
    recommended these be reviewed to determine if
    impact . could be catastrophic

IRDA Seminar, Hyderabad March 13,2006
11
Story 3Aug 2005
  • extract from loss adjusters first report
  • . it is reported that the vessel impacted with
    the platform and, in particular, the helideck of
    the vessel struck the jacket in the area of the
    risers in the south west corner.
  • . loss reserved at 350 mn (PD)

IRDA Seminar, Hyderabad March 13,2006
12
  • Rating of Property Engineering Risks in a
    Detariffed Environment

IRDA Seminar, Hyderabad March 13,2006
13
We will look at..
  • -gt important aspects of risk management
  • -gt assessment of natural perils exposures
  • -gt rate determination, i.e. from risk premium to
    risk rate
  • -gt risk rate loadings
  • -gt some features of project insurance

IRDA Seminar, Hyderabad March 13,2006
14
  • Risk Management, Risk Management and Risk
    Management

IRDA Seminar, Hyderabad March 13,2006
15
The Dynamic of Incident Causation
near miss
IRDA Seminar, Hyderabad March 13,2006
16
The Dynamic of Incident Causation (2)
IRDA Seminar, Hyderabad March 13,2006
17
Comprehensive Safety Management
Safety culture


Liveware
Risks
Interactive
Software
Hardware
IRDA Seminar, Hyderabad March 13,2006
18
Summing up of information
IRDA Seminar, Hyderabad March 13,2006
19
Assessment Matrix for Refineries and
Petrochemical Plants
IRDA Seminar, Hyderabad March 13,2006
20
Expanding the BoxesExample .. Process control
  • control systems
  • building protection
  • alarm
  • number, spread
  • emergency block valves
  • pump seal types, doublemechanical seal
  • emergency shut-down system
  • fired heater controls
  • flare system
  • alarm systems hard-wired

IRDA Seminar, Hyderabad March 13,2006
21
Expanding the Boxes (2)Example .. Management
  • maintenance
  • inspection
  • contractors
  • training
  • procedures
  • permit systems
  • safe work practices
  • HAZOP studies
  • self-auditing
  • incident analysis, reco control
  • emergency procedures
  • housekeeping, order
  • safety policy
  • safety culture

IRDA Seminar, Hyderabad March 13,2006
22
Assessment Matrix for Refineries and
Petrochemical Plants
IRDA Seminar, Hyderabad March 13,2006
23
Relative Inherent Risk (RIR) vs. Protect Level
(PL)
A Challenge for the Detariffed marketMultilocati
on Multi-occupation risks in one account
All locations showed in the graph above would
most likely have been described as average
risks although their RIR vs PL relationships are
quite different. The full use of the RIR vs PL
landscape allows for an enhanced separation
between risks showing different risk profiles and
hence for a better risk selection by the UW.
IRDA Seminar, Hyderabad March 13,2006
24
A final word.know your abbreviation
  • MPL Maximum Possible LossMPL Maximum Probabale
    LossMPL Maximum Potential LossPML Possible
    Maximum LossPML Probable Maximum
    LossMAS Maximum Amount SubjectMML Maximum
    Monetary LossNML Normal Monetary LossNML Normal
    Maximum LossNLE Normal Loss ExpectancyLLP Large
    Loss PossibilityLLP Large Loss
    ProbabilityELLP Expected Large Loss
    Poss.ELLP Estd Large Loss ProbabilityEPML Estd
    Probable Maximum Loss
  • EPML Estd Possible Maximum LossMFL Maximum
    Foreseeable LossUML Ultimate Maximum
    LossAML Absolute Maximum LossTPL Total Probable
    LossTPL Total Possible LossMLE Maximum Loss
    ExpectancyAS Amount SubjectPS Percent
    SubjectVS Value SubjectLE Loss
    ExpectancyLE Loss EstimationEML Estimated
    Maximum Loss

IRDA Seminar, Hyderabad March 13,2006
25
  • Assessment of Natural Perils Exposures

IRDA Seminar, Hyderabad March 13,2006
26
Underwriting natural catastrophe perils
  • Features as distinct from fire losses
  • ? low frequency / high severity
  • ? accumulation control necessary (per
    peril and exposed area)
  • ? company solvency is threatened if commitments
    exceed ability to pay losses
  • ? full coverage may not be available
  • ? high deductibles may be considered necessary
  • ? insurance coverage may be prohibitively
    expensive, or in soft markets, exposure may
    be forgotten and insufficient premium
    charged

IRDA Seminar, Hyderabad March 13,2006
27
Underwriting natural catastrophe perils (2)
  • For example, earthquake -gt
  • 1. What exactly is covered? (shock only? fire
    following? BI?)
  • 2. Is premium sufficient?
  • 3. Are deductibles high enough to eliminate
    numerous (costly!) smaller losses?
  • 4. Is there a sublimit or co-insurance for the
    cover?
  • 5. Is building construction shock resistant?
  • 6. What is the seismicity of the area? Are
    coastal regions exposed to tsunami?
  • 7. Is accumulation strictly controlled?

IRDA Seminar, Hyderabad March 13,2006
28
Example.. Flood risk topography
IRDA Seminar, Hyderabad March 13,2006
29
Basics of Cat risk assessment. a reinsurers
approach
  • Basic approach quantification of (1) hazard, (2)
    insured value distribution, (3) damageability,
    and (4) effects of cover conditions
  • India-specific approach above four model
    components can be quantified for India (e.g.
    Indian EQ activity, Indian EQ-insured value
    distribution, damageability by EQ of Indian
    risks, EQ cover conditions applied in India)

Hazard
Vulnerability
Value Distribution
InsuranceConditions
IRDA Seminar, Hyderabad March 13,2006
30
Example Vulnerability, Storm
IRDA Seminar, Hyderabad March 13,2006
31
Example Damageability
-gt for differentoccupancies
IRDA Seminar, Hyderabad March 13,2006
32
Cat perils models needed
  • Low frequency, many years with low losses or even
    no losses, but one year with very big, disastrous
    loss
  • Burning costs analysis (as applied for e.g. fire
    peril or mortality) is not applicable
  • Cat models simulate the EQ or W/F loss history
    over a very long time period (e.g. 10000 years).
  • By summing up all the losses at the end of this
    time period, and dividing this sum by 10000
    years, the average yearly loss for EQ or W/F can
    be derived. Likewise, event losses are sorted
    according to their size and the 500-, 100-year,
    etc loss levels can be defined.
  • annual expected loss can be drilled down to
    single risk level
  • gt move from a zonal (EQ) or country (cyclone)
    rate to location specific rates for natural
    perils exposures.

IRDA Seminar, Hyderabad March 13,2006
33
sample
IRDA Seminar, Hyderabad March 13,2006
34
How about Engineering Risks?
  • Engg-specific features for project risks
  • -gt TSI exposed towards the end of the project .
    for eg. assume an avg exposure of 50 of TSI?
  • -gt lower vulnerability as compared to property
    risks . the more vulnerable fittings and
    installations are added towards the end of the
    project
  • For Annual Engg risks. - depends on
    coverage - assume lower exposure say 80 if
    adequate info is available

IRDA Seminar, Hyderabad March 13,2006
35
Underwriting natural catastrophe perils a
dynamic scenario
  • Structural changes which affect cat exposure
  • ? growth of world population
  • ? more concentration of people / values in
    exposed areas
  • ? increasing use of exposed areas (coasts,
    flood plains)
  • ? increasing standard of living
  • ? introduction of complex and fragile
    technology
  • ? changing building standards (enforcement)
  • ? broadening scope of cover and deteriorating
    conditions
  • ? global warming?

IRDA Seminar, Hyderabad March 13,2006
36
Underwriting natural catastrophe perils future
uncertain?
  • Global Warming? signs of trouble
  • ? global surface temperature increased by
    ?0.6C during 20th century
  • ? another increase of ?1.4 - 5.8 C projected
    for 1990 - 2100
  • ? probably without precedent for the last
    10,000 years
  • ? evidence that most warming during the last 50
    years is attributable to human activities
  • ? man-made climate change will persist for
    centuries
  • source Summary for policy makers (www.ipcc.ch)

IRDA Seminar, Hyderabad March 13,2006
37
Underwriting natural catastrophe perils future
uncertain? (2)
  • Global Warming? potential consequences for
    property (re-)insurers
  • ? more extreme precipitation events (flash
    floods) likely
  • ? more heat waves likely
  • ? increase in tropical storms in some areas
    likely
  • ? possible increase in storm severity and
    frequency
  • ? potential increase in loss figures also
    affected by demographic and socio-economic
    change, as well as by technological advances
  • ? in spite of the uncertainty involved, climate
    issues must be taken seriously!

IRDA Seminar, Hyderabad March 13,2006
38
Underwriting natural catastrophe perils future
uncertain? (3)
  • Natcat Pool ?

IRDA Seminar, Hyderabad March 13,2006
39
  • Setting the risk rate

IRDA Seminar, Hyderabad March 13,2006
40
Premium
  • must pay ? claims
  • ? loss adjusting costs
  • ? reserves (for losses with
    low frequency and the unforeseen)
  • ? a contribution to the Insurers overheads
    and capital costs
  • ? reasonable profit (hopefully)
  • adjustments fluctuation, data quality
    inflation underlying changes portfolio,
    law, etc
  • Developing appropriate rating starts with
    detailed loss statistics.

ExpectedLoss Cost
IRDA Seminar, Hyderabad March 13,2006
41
Expected loss costscomponents
  • The expected loss cost must encompass the annual
    average of ALL losses (frequent and infrequent)
    that may incur as a result of the contractual
    obligations.
  • Types of losses to be considered
  • Small and frequent losses basic loss ratio
  • Large and infrequent individual losses large
    loss loading
  • Large and infrequent event losses affecting many
    risks Cat loading
  • All components together form the expected loss
    costs

IRDA Seminar, Hyderabad March 13,2006
42
Assessment methods for estimating expected loss
costs
  • Two main assessment methods
  • Experience rating calculation of expected loss
    based on the loss experience of the past and its
    projection in the future.
  • Exposure rating calculation of expected loss
    based on risk exposure (e.g. sums insured, number
    of risks, risk size distribution)

IRDA Seminar, Hyderabad March 13,2006
43
Portfolio analysis
  • Portfolio / Rating Analysis
  • (whole property portfolio, material
    damage/business interruption, occupancy/etc)
  • A companys analysis of its own figures will give
    the most relevant information. Some national
    market associations provide members with market
    (or tariff) info.

IRDA Seminar, Hyderabad March 13,2006
44
A credibility approach to rating
  • A credibility coefficient would account for-gt
    premium volumes-gt heteogeneity of portfolio-gt
    fluctuation of loss ratios from year to year

Example Metals Risk Category, Fire Credibility
Rates
IRDA Seminar, Hyderabad March 13,2006
45
Deductibles
  • Purpose ? encourage prudence by the
    insured (in addition to the duty of due
    precaution) ? reduce insurers claims
    burden ? reduce insurers administrative
    costs
  • Discounting for deductibles
  • ? may not be justified at all on a poor
    account ? should be based on a companys own
    statistics ? a company should be able to
    calculate (by occupancy, protection) what
    portion of its loss burden would be
    removed by which deductibles and discount
    its rates accordingly ? only makes sense if
    the original gross rates are
    adequate!!

IRDA Seminar, Hyderabad March 13,2006
46
Setting natural catastrophe deductibles
  • ? adequate loss statistics may not be
    available
  • ? rating/deductibles based on theoretical
    models
  • ? information on historical return periods
    may be thin
  • ? will depend on the size of the portfolio
  • ? is often subject to undue market pressure,
    especially during a period without
    catastrophic losses (memory is
    short)

IRDA Seminar, Hyderabad March 13,2006
47
Individual risk adjustments (/-) for
QualityConstructionProtectionFire LoadRisk
Mgt.
ConditionsMPLDeductibleLoss Limit
NatCatQuality,AgeConditions
CoverageFLEXAPolitical risksMisc.
risksEndorsementsMach. b/d
BIFixed CostsNet ProfitDeductibleCBI
IRDA Seminar, Hyderabad March 13,2006
48
Contingent Business Interruption
  • A challenge to underwriting management because of
  • expanded BI exposure
  • underwriting is once removed from the risk
  • potential lack of transparency
  • insufficient information
  • possible concerns of the insured about
    confidentiality
  • another type of contingency planning analysis
  • potential accumulation exposures with other
    business
  • pricing difficulties

IRDA Seminar, Hyderabad March 13,2006
49
Contingent Business Interruption - continued
CBI is by nature a non-transparent product!
IRDA Seminar, Hyderabad March 13,2006
50
Contingent Business Interruption - continued
Interdependencies aviation industry
Steel and aluminium industry
Transport
Foundries
Chemicals
Fuselage
Engine
Wings
Gearing
Coatings
Electronics

Assembly
Components
IRDA Seminar, Hyderabad March 13,2006
Engineering industry
Textile industry
Ceramics (breaks)
51
  • Risk Rate Loadings

IRDA Seminar, Hyderabad March 13,2006
52
From the Risk rate to the Gross Rate
Short-term profit
Long-termProfit
Technical Premium
CapitalCosts
Production Cost
RealisedPremium
InternalCosts
Underwriting Cost
ExternalCosts
Risk Premium
ExpectedLoss
IRDA Seminar, Hyderabad March 13,2006
Internal Target
Agreed withclient
53
Do we chase the price cycle?or, attempt to
manage it?
  • long-term target
  • pre-defined profit to be achieved over the cycle
    in order to achieve a long-term return on equity
    target
  • short-term target
  • profit to be achieved according to current years
    business plan

Short-term price level
Long-term price level
IRDA Seminar, Hyderabad March 13,2006
Short-term price level
54
Capital CostsThe Investors perspective
  • When assessing the profitability of the companys
    activities, the cost of holding capital to
    support the business must be considered
  • The capital necessary to support insurance
    business is the frictional capital and is in
    excess of the base capital which is needed to
    support the investment portfolio
  • But how much capital is needed to support the
    insurance business (capital adequacy) ?
  • gtrisk-specific capital cost helps in assessing
    line profitability as well as performance
    measurement

IRDA Seminar, Hyderabad March 13,2006
55
Capital adequacyrisk-adjusted capital
1st key question is the available capital
sufficient to absorb an adverse year and continue
business afterwards ? 2nd key question what is
an adverse year ?
IRDA Seminar, Hyderabad March 13,2006
56
Definition of an adverse year shortfall as a
risk measure
  • Shortfall is a down-side risk measure (other
    down-side risk measures are EML, MPL, PML,
    500-year loss, etc.)
  • The 100-year shortfall represents the difference
    between the expected result and the average
    adverse result with a frequency of less than once
    in one hundred years
  • Shortfall can be taken as a risk measure to
    define the loss potential in an adverse year

IRDA Seminar, Hyderabad March 13,2006
57
Capital adequacyrisk-adjusted capital
  • The shortfall for the companys underwriting risk
    can be determined using an integrated risk model
  • It is then a management decision how much capital
    is additionally put aside to support the UW
    business
  • This total capital then defines the risk-adjusted
    capital (RAC)

integrated loss distributions
individual loss distributions
IRDA Seminar, Hyderabad March 13,2006
58
Capital adequacyexternal views from a global
perspective
  • Regulators view required capital is defined
    through solvency and statutory capital
    regulations
  • Rating agencys view required capital is defined
    through own rating-agency-specific risk models

IRDA Seminar, Hyderabad March 13,2006
59
Exposure Rating
  • Used for excess of loss rating, may be
    increasingly relevant under detariff as clients
    seek loss limit covers
  • this is only a tool to determine layer premiums
    or deductible credits but does not substitute
    underwriting

IRDA Seminar, Hyderabad March 13,2006
60
  • Project Insurance, briefly

IRDA Seminar, Hyderabad March 13,2006
61
Challenges in underwriting a single project risk
(1)
  • Multiyear period (2-10 years, sometimes more)
  • Many insured parties contractors/subcontractors,
    designers, manufacturers (often unknown) owner
  • Multiline cover MD ( DSU), TPL, (marine)
  • All risk, tailor-made wordings
  • Insured perils construction/erection, testing,
    manufacturers risk incl. guarantee, natural
    perils, FLEXA, SRCC/malicious, etc.

IRDA Seminar, Hyderabad March 13,2006
62
Challenges in underwriting a single project risk
(2)
  • Plant/construction existing only on plans
  • Exposures are difficult to assess in advance
  • construction phases (permanent change)
  • temporary stages and conditions high exposures
    (fire, flood, etc.) construction method may be
    new
  • management and workforce quality, change
  • environment often not well known
  • first running of machines (new technology?)
  • No loss history available

IRDA Seminar, Hyderabad March 13,2006
63
Challenges in underwriting a project insurance
portfolio (3)
  • High capacity required (cost of capital)
  • Large risks are very heterogeneous (type,
    composition, characteristics, location)
    portfolio is unbalanced
  • Risk and claims to be managed during all years
    until insurance periods expire
  • No cancellation or change of conditions
  • Portfolio subject to economic fluctuations
  • New risks to be added every year to replace those
    expiring and provide minimum balance
  • High acquisition and management costs
  • Bad performance world-wide during last years

IRDA Seminar, Hyderabad March 13,2006
64
Possible perils of a project
  • Faulty design
  • Faulty material
  • Faulty workmanship
  • Moral hazard
  • Suppliers performance
  • Off takers performance
  • Contractors performance
  • Contractors insolvency
  • Natural perils
  • Fire explosion
  • Handling/Operation
  • Construction
  • Nuclear disaster
  • Transport (marine) failure
  • Riot, strike, civil commotion
  • War
  • Terrorism
  • Defects
  • Force majeure (environment)
  • Breach of conditions
  • Alterations/betterments
  • Reliability of feasibility study
  • Projects performance
  • Price Fluctuations (commodity price)
  • Expropriation
  • Change in law
  • Foreign law legal system
  • Political instability violence
  • Currency interest rate fluctuation
  • Inconvertibility of currency
  • Disabled currency transfer

IRDA Seminar, Hyderabad March 13,2006
65
Typical progress of a project
Project Phases
Pre-project Development Construction
Testing Operation
Time Period
Variable 2-3 years 1-5 years 6 months
upto 20 yrs or more
Activities
Initial Develop. Feasibility study Site
work Startup, testing Commercial
Operations Identify a project Partner
Search Fabrication Provisional Punch list
acceptance Request for Form
project co. Errection Final authorisation
acceptance Go ahead approval Financing Mai
ntenance negotiations Design Transfer
(BOT) Bid, Liquidation procurement
Pre-development Development Constructions Commiss
ioning Operating exp.costs costs
expenses costs adjustments expenses Financing
costs Fuel Maintenance
IRDA Seminar, Hyderabad March 13,2006
Revenues
None Recoup from partner Develop. Fees Operating
Revenue Operating revenue Equity sell
down
66
the project buildup -------?
IRDA Seminar, Hyderabad March 13,2006
67
  • Thank you for your attention !

IRDA Seminar, Hyderabad March 13,2006
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