During 2017, Oil Insurance Limited (OIL) performed well across several fronts. Its top line written and earned premium was US$396 million for the year – the lowest level of premium it has charged since 2002. Unlike commercial insurers, who attempt to maximize premiums written, OIL’s premium levels ebb and peak with the level of losses in the mutual – when losses are low, so are its premiums and vice versa.
From an underwriting perspective, the company incurred US$384 million in case reserves & loss expenses and a further US$83 million in IBNR, producing an underwriting loss of US$71 million for the year. Based upon these numbers and how OIL’s Rating & Premium Plan works, the company expects its written and earned premium for 2018 to decline by about 12%.
It is important to note that despite the severe windstorm season in the Gulf of Mexico, Florida and the Caribbean produced by hurricanes Harvey, Irma and Maria (HIM), OIL’s losses from those same storms were modest in comparison to its windstorm losses in 2005 of US$2 billIon and 2008 of US$750 million. While final adjuster reports are not in, OIL is expecting its total exposure across all three storms to be less than US$150 million. The significant difference is a direct result of changes the company made in 2010 to its windstorm product when limits were reduced and mutualization amongst windstorm members was increased. These changes inspired the members to self-insure and/ or purchase coverage elsewhere and in the process deleverage OIL’s windstorm exposure. This will be further improved in 2018 when OIL’s elimination of Offshore Gulf of Mexico windstorm coverage kicks in.
Perhaps the most important point to make about OIL’s performance is its robust net investment earnings of US$679 million, which roughly equates to a 10% annual return across its portfolio. These returns were made possible by the company’s strategy to invest approximately 50% of its portfolio in equities and fund of funds in the hedge fund space. Since 2013, OIL has distributed US$1.45 billion in dividends and premium credits to its members because of this strategy. Overall, OIL made US$588 million of Net Income during 2017, which in comparison to traditional insurers in the Energy sector was quite good.
Looking forward into 2018, OIL has several initiatives on the go. Commencing in 2018, the company hired Alan Brooks (a recently retired Marsh energy broker) as a consultant. Mr. Brooks will help OIL position itself with medium to large energy companies who use the London market as a core component of their property insurance programs. The company has also kicked off a targeted marketing approach to power companies in North America and UK/Europe as part of their effort to re-attract large institutionally owned power and utility companies to become members of OIL. In addition, OIL is focused on the significant level of decommissioning that is planned in the North Sea given that its coverage is seamless relative to the stages of an asset’s life. Literally, OIL can insure every single stage from exploration, development & construction, production/ operation, decommissioning and beyond for Property, Control of Well and Third Party Pollution.
OIL is a Bermuda based energy mutual that offers its members up to US$400 million in net Property, Control of Well and Sudden & Accidental Third Party Pollution coverage. Should your company have an interest in learning more about OIL, please contact your local WTW representative or Joe Seeger, EVP & MD on Joe.Seeger@ WillisTowersWatson.com.
George Hutchings is Senior Vice President & Chief Operating Officer of Oil Insurance Limited.
