A long tail business

1. A long tail business Powan Li SVP Energy Syndicate Underwriting Support

2. SKULD today (New York) Bergen Oslo • Six offices • Personnel of 13 nationalities • Members in 64 countries • Vessels of 93 flags Copenhagen Piraeus Hong Kong

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

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

5. Main Product Lines and Classes MUTUAL Poolable Charterers Charterers Combined Offshoreunits Owners P&I P&I P&I P&I Charters liability to hull FD&D FD&D FD&D FD&D Anc. covers Anc. covers Anc. covers Anc. covers

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”

7. Back calls Deficit _ surplus Free Reserves Adjust at next policy year Deficit Expenses Financial income Surplus Financial income Expenses Premiums Claims Premiums Claims

8. Contingency reserves

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

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

11. The relationship – member & Club Long term trust and loyalty ? Compromising Price

12. Long term trust and loyalty Predictable & Correctly assessed ? Price

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)

14. Admin. costs Basic elements of the PREMIUM

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

16. High profile claims Frequency claims Admin. costs Elements of the PREMIUM

17. 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 Claim elements

18. High profile claims Frequency claims Admin. costs Financial income Elements of the PREMIUM

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

20. High profile claims + UW consideration = Annualpremium Frequency claims Admin. costs Financial income Elements of the PREMIUM

21. 12:00 GMT 20/2 - 2004 12:00 GMT 20/2 - 2005 Policy year, premium & claims Premium=? ROI=? Adequate or insufficent Bonanza or disaster Claims

22. Unexpected occurrence • Not necessarily make the associated risks negliable • No systematice pattern • Hit randomly

23. Small risk for high profile claims +ve historical record ≠

24. THEORETICAL risk Risk = Probability x Consequence

25. The risks matrix Consequence CATASTROPHIC Unacceptable SEVERE Apply risk reducing measures SIGNIFICANT Acceptable MINOR Frequency EXTREMELY REASONABLY REMOTE FREQUENT REMOTE PROBABLE

26. 500 accidents with 1 fatality 1 accident with 500 fatalities Risk PERCEPTION

27. Claims development – a long tail perspective • IBNR: Incurred, but not reported • IBNER: Incurred, but not enough reported

28. 1996 1997 1998 Membership implies cover AND ongoing commitment for the mutuality! 1999 2000 Fin yr= Pol Yr Policy year, open year, closed year YEAR POLICY 1995 1996 1997 1998 1999 2000 2001 2002 YEAR 1995 + Changes on Earlier years

29. Claims performance – an example Changes since claims first reported Changes since claims first reported Dev. Yr_ finan yr * * * * *

30. 12:00 GMT 20/2 - 2004 12:00 GMT 20/2 - 2005 Policy year, premium & claims Premium=? ROI=? Adequate or insufficent Bonanza or disaster Claims

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

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

33. The cyclical behaviour Good result Higher premiums More capacity Tougher terms Wider terms Less capacity Lower premiums Poor results

34. Premium Claims Admincosts Invest.income Insurance – the balancing act..