The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

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For nearly the first three-and-a-half decades of its existence the OIL Group - which comprises energy mutual Oil Insurance Ltd (OIL) and excess liability writer Oil Casualty Insurance Ltd (OCIL - see box-out) - enjoyed a placid outlook.

A steady growth in OIL's membership had been punctuated by manageable loss experience, as its Rating and Premium Plan (RPP) acted efficiently to spread the impact of claims across the mutual, adjusting in subsequent years to keep the structure on an even keel.

But the double shock of hurricanes Katrina and Rita in 2005 brought members their first premium calls in the mutual's history, which was followed by Ike in 2008. This led to a period of significant upheaval as OIL sought to address the issue of windstorm aggregation in its structure and better manage its windstorm exposure.

In the post-Macondo world, OIL has continued to respond to the needs of its membership as the commercial market has tightened for coverage affected by last April's Deepwater Horizon/Macondo disaster and a series of other significant offshore losses.

This time, however, the response has been from a position of strength, largely as a result of measures approved by OIL members in late 2009 to change the RPP and windstorm coverage.

The mutual's capital base has recovered to near record levels, with shareholders' equity of $3.4bn as at 30 June 2011 - more than twice the $1.5bn reported at the end of 2008 - as it avoided the worst of the high-profile losses that have hit the sector in the past two years.

And in September this year, OIL's board was able to put a raft of resolutions to its members to increase limits and further restructure the pooling of windstorm exposure - all of which were approved.

The headline change is the policy limit for non-windstorm events increasing from $250mn to a maximum $300mn per member from 1 January 2012, excess of a minimum $10mn retention.

At the same time, the overall aggregation limit for all OIL members combined for non-windstorm losses increases from $750mn to $900mn.

Click to enlarge The aggregation limit is now only $100mn shy of its pre-Katrina level after being slashed to $500mn in 2006 before a partial increase to $750mn in 2007.

OIL Group president and CEO Robert Stauffer explains: "We made a commitment to bring the coverage back up to where it was before we restrained it. We have rebuilt capital, and with the way we've restructured windstorm coverage we believe we've isolated it enough so it's not going to have any dramatic effects on future capital needs," he says.

Restructuring the windstorm coverage included differentiating between members according to windstorm exposure. The first $300mn of annual windstorm losses were mutualised across all members, with losses in excess of that level shared only among members of one of two pools - an offshore and an onshore pool.

Despite the increased capital strength, OIL has not yet entertained increasing the limits for designated named windstorm (DNW) losses, leaving the aggregate limit at $750mn and the per occurrence limit at $150mn quota share part of $250mn.

"While we were ready to reinstate coverage and limits to the general membership, we weren't ready to make significant changes to windstorm coverage because that truly is a different pool with a different set of assets," Stauffer explains.

But with members looking for increased windstorm coverage, the executive says that the structure continues to be a work in progress. "There's still some fine tuning to be done to get the right balance between windstorm and non-windstorm exposed assets. We've told members we're going to continue to monitor this and get it right," says Stauffer.

This fine-tuning includes other measures voted in at September's special general meeting. Members authorised the OIL board to set a quota share percentage to potentially cede some of the $300mn DNW exposure currently fully mutualised by members to the two excess windstorm pools.

Although for 2012 the percentage is set at zero, under the new authority it can be increased to as high as 25 percent. OIL can also now require a member to post collateral for contingent liabilities if their share of a pool exceeds 30 percent.

Stauffer also highlights a fundamental change OIL introduced after Katrina that was very important to the mutual.

"Following the hurricane losses members were saying they wanted to put premium calls behind them. Since 2008 OIL has received capital credit from Standard & Poor's and statutory capital credit from the Bermuda Monetary Authority for our future premium receivables, thereby significantly reducing the probability of premium calls to members," he says. And after a lengthy period of internal restructuring and realignment, OIL has now puts itself in a position to look forward - and outward.

"We're back in growth mode and a key part of that has been changing people's mindset about us. There's a lot of misinformation out there that we're subject to premium calls. It can theoretically still happen but it's a very unlikely event going forward," he states.

For Stauffer, the key draw is what differentiates OIL from the commercial market at a time when volatile prices after heavy offshore loss events have driven away many commercial insurance buyers. "We don't treat insurance as a commodity," he says. "For OIL it's a long-term play and once you're a member you're part of a mutual group and there are a lot of benefits to that."