OIL1 – Coverage and Blending with Market

Programmes

Balint Pinter & Mike Parry

Aon’s 11th Energy Insurance Training Seminar

OIL – Oil Insurance Limited

• OIL insures physical damage to property, well control and 3rd party pollution liability

– 52 member companies (as at July 2011)

• One of the broadest policy forms currently available

• OIL’s policyholders are also shareholders, who have energy operations.

• The Company commenced operations on January 1, 1971 with 16 shareholders– at a time when the Commercial Market Ceased to Provide

adequate coverages and big enough limits

• Low-cost provider as rates based on pure loss cost– Critical mass to achieve spread of risk and financial strength/stability.

• Provides hedge against a frequently volatile commercial insurance market– Generates long-term benefits for shareholders– Unique loss recovery mechanism

Advantages

Mutual – “owned” by its members

Global cover in all terrritories - no OFAC problems

Profit not main driving force e.g. lower cost of capital

Dividends may be returned to policyholders directly or as rate subsidies

Ability to provided “non – standard” covers e.g. pollution, terrorism

No sub-limits for Natural Catastrophe (Earthquake)

No differential for members with a bad loss record

Disadvantages

No differential for members with a good loss record

Long term pool share obligation including exposure to GOM Wind

Cost of withdrawal dependent on historic pool performance

Total Withdrawal premium system

OIL – Advantages and Disadvantages

OIL - Risks Insured vs. Excluded

Risks Insured

Physical Damage• Replacement Cost Value

• Actual Cash Value

Well control, including restoration and redrilling

Construction

Terrorism

Pollution Liability• Non gradual (sudden & acc.)

• 40/120 days

Cargo

Risks Excluded

Land, War, Nuclear

Business Interruption

Tanker Pollution Liability (except Charterer’s Liability)

Products Liability

Commercial Waste Disposal

Transmission & Distribution(above ground)

OIL’s Mutual Structure

• Basic structure similar to any other corporations:

– Shareholders, Board of Directors, Executive Committee, Officers & Staff

• Major differences:

– Shareholders are the customers (Insureds)

– Directors are elected from shareholder body

• Investment companies directed by a separate board, which includes senior financial officers from major shareholder companies.

• No underwriting per se - each policyholder treated equitably.

• All shareholders pay same rate.

• One standard policy form for all shareholders.

Claims Advised

Claims Filed

Gross For Interest

Net to OIL Net to OIL

Scaled

Andrew(1992)

3 3 $127M $108M $108M

Lili(2002)

7 6 $147M $96M $96M

Ivan(2004)

10 8 $815M $585M $585M

Katrina(2005)

25 18 $4,822M $2,165M $1,000M

Rita(2005)

27 20 $2,877M $1,491M $1,000M

Ike(2008)

12 11 $1,925M $895M $750M

Total: 84 66 $10,713M $5,340M $3,539M

Historical Hurricane Losses

Hurricanes - Past Payout Patterns

   Years Hurricane Andrew (1992)

Hurricane Lili

(2002)

Hurricane Ivan (2004)

Hurricane Katrina (2005)*

Hurricane Rita (2005)*

< 1 Year 18% 0% 9% 5% 2%

< 2 Years 79% 81% 78% 42% 20%

< 3 Years 100% 97% 79% 56% 35%

> 3 Years 100% 99% 90% 69% 52%

Total $108M $96M $585M $1,000M $1,000M

Members 3 6 8 18 20

*Payments Scaled for Aggregation Limit

How do I join OIL? - Eligibility Criteria

• Energy Company must have at least 50% of either (1) Gross Assets or (2) Annual Gross Revenues derived from “Energy Operations¹”.

• A minimum of $1 Billion of Gross Assets (PP&E and book value of Inventories).

• A minimum credit rating of either “BBB-” (S&P) or “Baa3” (Moody’s).

• Companies without external credit ratings can obtain a “shadow rating” or will be subject to financial analysis by OIL staff and may be required to post acceptable security.

• 1) As defined in the OIL Shareholders’ Agreement.

Eligibility Criteria (Cont’d)• Acceptable 10-year loss history.

• Business operations that represent an appropriate spread of risk

and “fit” within a mutual framework.

• Demonstrated track record of maintaining world-class health,

environment and safety standards.

• All applications must be approved by OIL Management.

• Members whose credit rating falls below established minimum

criteria must post security.

OIL Members – as at July 2011

EUROPE UNITED STATES UNITED STATES (cont.)Arkema Inc Amerada Hess Corporation Motiva Enterprises LLCLyondellBasell NV Apache Corporation Murphy Oil CorporationBASF Chevron Phillips Chemical Company LLC Noble Energy IncBG Group plc Chevron Corporation Occidental Petroleum CorporationYara CITGO Petroleum Corporation PREPACEPSA ConocoPhillips Petroleum Company Sempra EnergyDONG Drummond Company Inc. Sinclair Oil CorporationEdF DTE Energy Southern Union CompanyE.N.I. S.p.A. El Paso Corporation Sunoco, Inc.Galp Energia S.A. Forest Oil Corporation Tesoro Petroleum CorporationMOL Reinsurance Company Limited LOOP LLC Valero Energy CorporationOMV Aktiengesellschaft Lyondell Chemical Company Westlake-Titan GroupRepsol YPF, S.A. Marathon Oil Company XTO IncRoyal Vopak Mariner Energy Inc.Statoil ASA BuckeyeTOTALFINAELF Williams Companies

OIL Membership byHeadquarter Location

Caribbean2%

Far East/Australasia

5%

Europe30%

Canada14%

USA49%

Number of Shareholders @ 01 July 11 = 52

Membership “Count” by Industry Segment

0 2 4 6 8 10 12 14 16

Electric Utility

Integrated Oil

R&M

E&P

Chemicals

Pipelines

Other

Mining

Standard Premium

-$150MM

Limit

Retroor

Flat Premium

-$100MM

Limit

Policyholder Deductible

100% coverage from OIL

Programme option - Limit Structures

Standard Premium

-$150MM

Limit

Self Insuredor

Com’l MktPlacement

Policyholder Deductible

60% coverage from OIL

Limit Structures

Standard Premium

-$150MM

Limit

Retroor

FlatPremium

-$100MM

Limit

Commercialor

Self Insured-

$500MMLimit

Policyholder Deductible

$250MM Part of $750MM

Limit Structures

  

Net Incurred Losses since 1972 by Geographic Region of Physical Loss

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Expressed in millions of U.S. dollars* untrended

  

OIL Historical Losses since 1972by Industry Sector

Other10%Petrochemicals

10%

Refining & Marketing

27%

Offshore E&P47%

Onshore E&P6%

Unmodified Gross Assets by Business Sector

ANWS Onshore7%

Pipelines6%

Utilites14%

Onshore E&P21%

Other2%

Mining 2%

ANWS Offshore3%

R&M/Chemicals

21%

Offshore E&P23%

Total Unmodified Gross Assets @ 01-Jan 2011 = >$2BN*

* Pharmaceutical assets represent .01%

Other 3%

Weighted Gross Assets by Business Sector

R&M Chemical23%

E&P Offshore21%

ANWS Offshore

32%

ANWS Onshore

5%

E&P Onshore8%

Pipelines1%

Mining3%

Utilities5%

Other2%

Other2%

Utilities6%

Mining4%

Pipelines1%

E&P Onshore10%

ANWS Onshore

10%

ANWS Offshore

20%

E&P Offshore19%

R&M Chemical28%

WGA by Industry SegmentWGA by Industry Segment

*Total WGA $1,082B *Total WGA $1,308B

OIL

QUESTIONS ?

Aon’s 11th Energy Insurance Training Seminar