A long tail business

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A long tail business

• Powan Li
• SVP Energy Syndicate
• Underwriting Support

2
SKULD today
Oslo
Bergen
(New York)

• Six offices
• Personnel of 13 nationalities
• Members in 64 countries
• Vessels of 93 flags

Copenhagen
Hong Kong
Piraeus
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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

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SKULD Profile

• Scandinavian-based PI club
• Member of the International Group of PI Clubs
• Market focus Scandinavia, Europe, America and
  Far East
• Diversified fleet (size type)
• Extensive in-house services
• ISO 90012000 standard

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Main Product Lines and Classes
MUTUAL
Poolable
Charterers
Charterers Combined
Offshoreunits
Owners
PI
PI
PI
PI
Charters liability to hull
FDD
FDD
FDD
FDD
Anc. covers
Anc. covers
Anc. covers
Anc. covers
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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

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Deficit _ surplus
Back calls
Free Reserves
Adjust at next policy year
Expenses
Deficit
Surplus
Financial income
Financial income
Expenses
Premiums
Claims
Premiums
Claims
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Contingency reserves
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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
• PI clubs provide insurance at cost
• No proper profit/loss, but building up funds for
  a rainy day
• Mutuality requires common quality criteria/norms

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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

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The relationship member Club
Long term trust and loyalty
?
Compromising
Price
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Long term trust and loyalty
Predictable Correctly assessed
?
Price
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Skulds 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)

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Basic elements of the PREMIUM
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Administration costs

• The running of PI Club entails costs
• Acquisition of new tonnage
• Policy renewal maintenance
• Opening a new claims file handling of same
• Fund management
• Overheads

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Elements of the PREMIUM
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Claim elements

• FREQUENCY CLAIMS
• Low value cost
• Defined as upto USD 250.000
• Happen often, represent 99 of all cases
• Predictable

• HIGH PROFILE CLAIMS
• Rare and variable by nature
• Wide range of valuesUSD 250.000 - 4.25 billion
• Represent only 1 of Skulds total case load
• Represent almost 50 of gross claims cost

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Elements of the PREMIUM
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Finance income

• Not the effect of return on Skulds reserves.
• But, the cash flow effect of taking a new member
  into our portfolio

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Elements of the PREMIUM
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Policy year, premium claims
Premium?
ROI?
Adequate or insufficent
Bonanza or disaster
Claims
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Unexpected occurrence

• Not necessarily make the associated risks
  negliable
• No systematice pattern
• Hit randomly

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Small risk for high profile claims
ve historical record
?
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THEORETICAL risk
Risk
Probability
x Consequence
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The risks matrix
Consequence
CATASTROPHIC
Unacceptable
SEVERE
Apply risk reducing measures
SIGNIFICANT
Acceptable
MINOR
Frequency
EXTREMELY
REASONABLY
REMOTE
FREQUENT
REMOTE
PROBABLE
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Risk PERCEPTION
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Claims development a long tail perspective

• IBNR Incurred, but not reported
• IBNER Incurred, but not enough reported

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Policy year, open year, closed year
YEAR
POLICY
1995
1996
1997
1998
1999
2000
2001
2002
YEAR
1995
Changes on Earlier years
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Claims performance an example
Changes since claims first reported
Changes since claims first reported
Dev. Yr_ finan yr





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Policy year, premium claims
Premium?
ROI?
Adequate or insufficent
Bonanza or disaster
Claims
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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

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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

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The cyclical behaviour

Good result
Higher premiums
More capacity
Tougher terms
Wider terms
Less capacity
Lower premiums
Poor results
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Insurance the balancing act..
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