Houston Marine Insurance Seminar A long tail business Powan Li SVP Energy Syndicate Underwriting Support

Houston Marine Insurance Seminar 2004 Powan Li 2 SKULD today Six offices Personnel of 13 nationalities Members in 64 countries Vessels of 93 flags OsloBergen CopenhagenHong KongPiraeus (New York)

Houston Marine Insurance Seminar 2004 Powan Li 3 SKULD From the Norse Mythology 3 Norns - the goddesses of fate They tended the ash Ygdrasil – one of the 3 roots fo the great World Tree Their names: Urd, Verdande and Skuld SKULD represented the future and governed the destinies of gods and mortals

Houston Marine Insurance Seminar 2004 Powan Li 4 SKULD Profile Scandinavian-based P&I club Member of the International Group of P&I Clubs Market focus: Scandinavia, Europe, America and Far East Diversified fleet (size & type) Extensive in-house services ISO 9001:2000 standard

Houston Marine Insurance Seminar 2004 Powan Li 5 Poolable MUTUAL Main Product Lines and Classes Owners Charterers Charterers Combined Offshore units P&I FD&D Anc. covers P&I FD&D Anc. covers P&I FD&D Anc. covers P&I Anc. covers Charters liability to hull FD&D

Houston Marine Insurance Seminar 2004 Powan Li 6 MUTUALITY – the concept Share the risks with others - even competitors Share the costs of large claims, not to be wiped out by one large claim An opening to charge more premium if claims ”go nasty”

Houston Marine Insurance Seminar 2004 Powan Li 7 Deficit _ surplus Claims Expenses Premiums Financial income Surplus Free Reserves Claims Expenses Deficit Back calls Premiums Financial income Adjust at next policy year

Houston Marine Insurance Seminar 2004 Powan Li 8 Contingency reserves

Houston Marine Insurance Seminar 2004 Powan Li 9 MUTUALITY – the concept Share the risks with others - even competitors Share the costs of large claims, not to be wiped out by one large claim An opening to charge more premium if claims ”go nasty” P&I clubs provide insurance at cost No proper profit/loss, but building up funds for a rainy day Mutuality requires; common quality criteria/norms

Houston Marine Insurance Seminar 2004 Powan Li 10 The characteristic factors Loyal members Wide span of risk exposure IBNR – Incurred But Not Reported IBNER – Incurred But Not Enough Reported Long tail claims The longer the tail, the more costly the claims expenses Annual renewal based on L/R

Houston Marine Insurance Seminar 2004 Powan Li 11 Long term trust and loyalty Compromising Price ? The relationship – member & Club

Houston Marine Insurance Seminar 2004 Powan Li 12 Long term trust and loyalty Price ? Predictable & Correctly assessed

Houston Marine Insurance Seminar 2004 Powan Li 13 Skuld’s parameterised pricing tools Comprehensive data from all Skuld Comprehensive data from the past 10 to 15 years at least Claims costs for various categories Actuarial techniques (generalised linear models)

Houston Marine Insurance Seminar 2004 Powan Li 14 Basic elements of the PREMIUM Admin. costs

Houston Marine Insurance Seminar 2004 Powan Li 15 Administration costs The running of P&I Club entails costs; –Acquisition of new tonnage –Policy renewal & maintenance –Opening a new claims file & handling of same –Fund management –Overheads

Houston Marine Insurance Seminar 2004 Powan Li 16 Elements of the PREMIUM Admin. costs Frequency claims High profile claims

Houston Marine Insurance Seminar 2004 Powan Li 17 Claim elements FREQUENCY CLAIMS Low value & cost Defined as upto USD Happen often, represent 99% of all cases Predictable HIGH PROFILE CLAIMS Rare and variable by nature Wide range of values USD billion Represent only 1% of Skulds total case load Represent almost 50% of gross claims cost

Houston Marine Insurance Seminar 2004 Powan Li 18 Elements of the PREMIUM Admin. costs Frequency claims High profile claims Financial income

Houston Marine Insurance Seminar 2004 Powan Li 19 Finance income Not the effect of return on Skuld’s reserves. But, the cash flow effect of taking a new member into our portfolio

Houston Marine Insurance Seminar 2004 Powan Li 20 Elements of the PREMIUM Admin. costs Frequency claims High profile claims + UW consideration = Annual premium Financial income

Houston Marine Insurance Seminar 2004 Powan Li 21 Policy year, premium & claims 12:00 GMT 20/ :00 GMT 20/ Claims ROI=? Premium=? Adequate or insufficent Bonanza or disaster

Houston Marine Insurance Seminar 2004 Powan Li 22 Unexpected occurrence Not necessarily make the associated risks negliable No systematice pattern Hit randomly

Houston Marine Insurance Seminar 2004 Powan Li 23 +ve historical record ≠ Small risk for high profile claims

Houston Marine Insurance Seminar 2004 Powan Li 24 THEORETICAL risk Risk = x Consequence Probability

Houston Marine Insurance Seminar 2004 Powan Li 25 The risks matrix CATASTROPHIC SEVERE SIGNIFICANT MINOR EXTREMELY REMOTE REASONABLY PROBABLE FREQUENT Acceptable Apply risk reducing measures Unacceptable Consequence Frequency

Houston Marine Insurance Seminar 2004 Powan Li 26 Risk PERCEPTION 500 accidents with 1 fatality 1 accident with 500 fatalities

Houston Marine Insurance Seminar 2004 Powan Li 27 Claims development – a long tail perspective IBNR: Incurred, but not reported IBNER: Incurred, but not enough reported

Houston Marine Insurance Seminar 2004 Powan Li 28 Policy year, open year, closed year POLICY YEAR YEAR Membership implies cover AND ongoing commitment for the mutuality! Fin yr= Pol Yr + Changes on Earlier years

Houston Marine Insurance Seminar 2004 Powan Li 29 Claims performance – an example Dev. Yr_ finan yr Changes since claims first reported * * * * *

Houston Marine Insurance Seminar 2004 Powan Li 30 Policy year, premium & claims 12:00 GMT 20/ :00 GMT 20/ Claims ROI=? Premium=? Adequate or insufficent Bonanza or disaster

Houston Marine Insurance Seminar 2004 Powan Li 31 Deficits – how come? High profile claims? ’good fleets’ do not pay adequate premium? Insignificant contribution from sizeable fleets? Or?? Not necessarily a correlation among quality tonnage, sizeable fleet and underwriting profitability

Houston Marine Insurance Seminar 2004 Powan Li 32 The assured wish Insurer having sufficient understanding to: –His operation –His business practice –The related risks –The cultural behaviour –The market behaviour Insurer having: –Sufficient and comfortable security –Tiptop services On less possible if any premium charged

Houston Marine Insurance Seminar 2004 Powan Li 33 The cyclical behaviour Good result More capacity Lower premiums Poor results Less capacity Higher premiums Wider terms Tougher terms

Houston Marine Insurance Seminar 2004 Powan Li 34 Insurance – the balancing act.. Premium Invest. income Admin costs Claims

Houston Marine Insurance Seminar 2004 Powan Li 35