Marine Risks

In Deep Water

The deeper we drill in the ocean for oil, the more the risk increases.
By: | September 14, 2015 • 8 min read

On March 31, an explosion and fire on a Petroleos Mexicanos (Pemex) oil production platform in the Gulf of Campeche killed four workers and injured 16. The loss conjured images of the BP Macondo disaster off Louisiana in 2010, but there was no major spill this time.


Drilling rigs are owned by the service companies, but production assets on platforms and on the sea floor are owned by the oil companies. In very deep water, floating production, storage, and offloading vessels (FPSOs), often former oil tankers, are connected to multiple wells by flexible pipes and cables.

Subsea is a classic low-instance, high-loss market, underwriters say. Total claims on one incident can easily reach $1 billion. Nevertheless, it is a soft market, with capacity ample, competition keen, premiums low, and terms and conditions generous. In other markets such conditions usually lead some underwriters to reduce their participation or leave altogether, but that has not happened yet in subsea.

The global marine market overall is $34.2 billion, according to a recent presentation at the American Institute of Marine Underwriters (AIMU) by Dieter Berg, head of marine at Munich Re and president of the International Union of Marine Insurance (IUMI).

Drilling more deeply, global asset premium in the subsea market in 2014 was $5.1 billion, according to IUMI. Others put it closer to $3 billion, and anticipate that number will be about 25 percent less this year.

Underwriters say that reduction is driven by high capacity driving down rates, but also by the steep drop in the price of oil.

Peter Connors, global offshore leader for energy at Allianz

Peter Connors, global offshore leader for energy at Allianz

Energy industry sources confirm that capital budgets for exploration and expanded production have been sharply curtailed. As a result, there are fewer new projects and fewer new assets to be insured.

“There is a growing trend to move the more typical sub-surface activities to the sea floor — this, to potentially offset the costs in developing topside structures,” said Kashe Sambhi, head of energy offshore at Swiss Re Corporate Solutions (SRCS; “Swiss Re” as a stand-alone name is reserved for the reinsurance side of the shop).

“One very well-known mega subsea project is currently pushing the boundaries: The size of the asset would cover a football pitch. We would expect to see more of this in the future.”

He added that SRCS offers “proportional and non-proportional structures, with decent retentions and commensurate rating.”

Richard Palengat, head of energy and production at Lloyd’s syndicate Aegis London, noted that “conditions are as extreme as we have seen in 15 years. There is a certain stickiness. There is a lot of capital looking for a home, and quite a lot of it is new money. The insurance sector, especially property, is considered a good place to invest. That capital has not yet had the intelligence to pull out.

“It is often the case,” he said, “that some capacity has to wait until there is red ink on the carpet, and that may be the next thing.” The new money “may soon be disappointed that it is not getting the scale and the revenue it expected. What could bring an immediate change would be a massive loss. Or it could be death by a thousand cuts when claims exceed premiums.”

The Nature of the Beast

He said that while operators and underwriters work well together in risk management and loss prevention, the nature of the industry and its exposures mean that a series of claims or even a single large loss will consume several years’ worth of premium.


Another characteristic of subsea programs is that there is little layering. These are hugely expensive projects, undertaken by national oil companies, global majors, and consortia of operators and investors. They tend to have very high retentions and deductibles, and tend to go to just one or a select few commercial markets for the remainder.

Oil prices will not stay low forever, said Houston-based Peter Connors, global offshore leader for energy at Allianz.

“An awful lot of new capacity has come in at a down cycle in the energy sector. We hope we are seeing a bottom now because too many competitors are chasing too few insureds. But no one wants to leave the market.”

Connors noted that there have not been any major catastrophes, either rig losses or windstorms, though there have been claims related to repairs.


“We are already into the wind season in the Gulf of Mexico, and people who usually buy wind have been buying less — increasing their retention or just not buying.”

At the same time, Connors said that there is some opportunistic buying. “Some smaller guys are topping up their programs at lower rates. Those may be required to buy insurance from their lenders or investors.”

Allianz writes vessels while under construction, through load-out, towing, and commission. “Vessels” include floating rigs and platforms, as well as powered, navigable ships. All are under the jurisdiction of the marine classification societies. Equipment can be on board, fixed to the seabed, or suspended. Underwater assets have long been considered difficult to maintain or salvage, but Connors noted, “technology is getting better, so service and salvage have been improved.”

Technology is also enabling exploration and production in ultra-deep water, and in remote sites, from South America to Africa to New Guinea.

Even closer to established fields, development is stepping into deeper water farther away, and under harsher conditions. One example is the North Sea.

“The U.K. sector is older and in shallower water,” said Connors. “The Norwegian sector is newer, farther north, and in deeper water.”

Costs of equipment, maintenance, and replacement are magnified in deep water, said Frank Costa, president of Berkley Offshore Underwriting Managers, based in New York. He is also a member of the executive committee and former chairman of both AIMU and the IUMI.

“Subsea is a real challenge,” said Costa.

“In 10,000 feet of water, an anchor chain might cost $1 to $2 million, and just the act of inspecting can cost more millions, because it has to be done by remote-controlled submersibles. The anchoring and positioning systems of the floating structures is very complex.”

The emerging risk in this market is the deeper, more remote operations.

“In the North Sea, in the Gulf of Mexico, there is infrastructure and expertise in place,” said Costa.

“There are emergency and repair vessels. In remote areas, you may have to bring in assets from literally half a world away. So the reality is much more first loss. Deepwater repair costs can run ten times repair costs on shore. You get to total insured limits very quickly.”

Changing Exposures

The move to deeper water and more remote locations has been a significant shift in the risk profile, Costa said.


“What has happened to underwriters is that exposures have changed drastically. With fixed platforms a significant portion of the asset value was the concrete gravity base or the steel superstructure. Not much is going to go wrong with those.

For floating assets, they may not be as high value, but they are more vulnerable to loss. They are also more susceptible to wind and wave action.”

“The nightmare scenario is a catastrophic loss of one of these FPSOs off West Africa or in the South China Sea.” — Anonymous industry official.

The Gryphon FPSO, operating in the North Sea 175 miles northeast of Aberdeen, sustained damage in a storm in February 2011 when four anchor chains broke and the vessel moved off station, according to operator Maersk Oil.

That caused considerable damage to the subsea architecture requiring the Gryphon to be towed and dry docked in Rotterdam for repairs and upgrades. The claim was more than a billion dollars, according to underwriter estimates.

“That one claim really caught the eye of the reinsurance market,” said Costa. “It does not take a lot, just a couple of claims like that, seemingly small incidents that become high-profile claims.”

Despite that, multiple sources agreed that the subsea market remains accommodating. There are a few ultra-deep operations in remote locations that represent $8 billion to $10 billion in total asset value, but not all of that has been transferred to commercial markets. Still, a total loss for just one of those would represent a serious challenge to the market.

“The way to go about this is through a continuous dialogue with the insured to better understand their valuation methods,” said Sambhi at SRCS.

“Salvage costs will depend, inter alia, on availability of contractors, type of vessels, weather windows — thus, discussions with salvage companies to better understand their requirements is essential.

“Coordinating with loss adjusters and marine warranty surveyors to better understand risk and mitigation actions is also important. More relevant are the challenges of subsea repairs. These consist of more complex, higher cost equipment installed subsea in deeper and more remote environments.”

The less obvious but perhaps more substantive challenge is the proliferation of deep-water, remote projects of smaller scale. Energy industry sources confirm that most of the majors and national oil companies have ambitious plans for deep water, many of which are likely to move ahead once the price of oil recovers.

“The nightmare scenario is a catastrophic loss of one of these FPSOs off West Africa or in the South China Sea,” said one industry official.

“There would be few if any well-control or emergency-response vessels that could respond in a timely manner.”

SRCS has not noticed much change in loss trends that would move the market, according to Sambhi.

“We’ll see probably rises in specific loss-making accounts, though. Loss record for [construction all risk] has been decent, but there is still a fair amount of long-tail projects to be completed, thus there’s potential for deterioration in prior underwriting years notified later.”

On the risk-mitigation side, Sambhi added that underwriters and insureds are starting  to work together mainly through industry associations and international bodies, such as IUMI and others.


“Marine warranty surveys help add some independent risk monitoring and improvement on some risks, but it’s not applied universally or in a consistent manner. The degree of open sharing, and dissemination of lessons learned across the industry, of incidents and near-misses between oil companies and contractors is quite low compared to the aviation or the downstream industries.

“Typically,” Sambhi said, “only lessons from high-profile, large losses are widely shared. There are also a few surveys produced and shared with underwriters. So, lots of room for improvement there.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at
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Project Cargo

Moving the Big Stuff

With capacity ample, project cargo insurers emphasize project management.
By: | August 31, 2015 • 8 min read
The nearly 400-foot long monster crane, "Left Coast Lifter," nicknamed "I Lift NY,"  makes its way along the Hudson River  on its way to port Thursday, Jan. 30, 2014, in Jersey City, N.J. I Lift NY is one of world's largest floating cranes and will be used in the construction of the New NY Bridge to replace the Tappan Zee. I Lift NY will be docking at a private facility in Jersey City, where it will be berthed until it is moved to the New NY Bridge project site in the spring. (AP Photo/The Jersey Journal, Reena Rose Sibayan)

Big changes in global energy markets and the infrastructure needs of developing nations are driving large-scale construction projects globally. The building blocks for many of those projects must move by sea, a perilous passageway with the potential for massive losses.

Soft insurance rates and plenty of capacity erase any notion of project cargo insurance as a commodity. It’s in the engineering and project management that carriers win the business.


Steve Weiss, SVP, marine, Aspen

“In many insurance lines, loss control and risk management are reactive but in project cargo, it is very proactive, especially for us,” said Steve Weiss, now senior vice president, marine, for Aspen who spoke to Risk & Insurance® when he was a senior vice president for Liberty International Underwriters.

“Engineering is the life cycle of project cargo, from the time of submission through underwriting, post binding and execution.

“You don’t make money in project cargo on rates or terms and conditions, you make money on project management,” Weiss said.

Not that anyone is making a great deal of money in project cargo at present.

“The project cargo market is still very active globally,” said Kevin Wolfe, global head of project cargo for Allianz Global Corporate & Specialty.


“There is more than ample capacity overall, but there are still a limited number of major players that prefer to lead the largest projects. Rates are more competitive than they were several years ago, but still are at a viable level where profitability can be maintained.

“Terms and conditions are always being tested by the marketplace. Some can be adjusted, but some are very specific to project cargo, such as survey warranties.

Without those in place, coverage becomes so broad that we just won’t entertain the specific risk.”

Weiss concurred: “There is plenty of capacity to build any tower you need, up to $1.5 billion or so. But there are only a handful of lead underwriters.”

Global Infrastructure Needs

By definition, project cargo varies practically with every shipment. Wolfe said that Allianz is seeing activity in all regions. In Asia-Pacific and Africa there are quite a few projects related to quality of living, water filtration, power generation and transmission. In South America and Australia, there has been a lot of bridge and tunnel construction, while the Middle East is seeing more rail building.

“In the last year, we have seen a lot more activity in plant upgrades and expansions,” said Wolfe, “whereas a few years before, we saw more greenfield projects. We continue to see jumbo projects, like the natural-gas liquefaction projects, but have seen much more activity in small to mid-sized ones.”
The project cargo market is notable for the high-profile moves of huge, expensive, heavy, fragile and unusual items.

John Michel, marine underwriting manager for Global Special Risks (GSR) Group, a subsidiary of RSG Underwriting Managers, said those moves tend to go well because there is often just one shipment, and every one is paying close attention.

That was not always the case, he said.

John Michel, marine underwriting manager, Global Special Risks (GSR) Group,

Richard Neylon, partner, Holman Fenwick and Willan

“A few years ago we had a project shipment of a complete factory being moved from North America across the Atlantic. It was thousands of parts in many shipments. We just knew there were going to be some loss(es) because of the numerous shipments.”

Michel added that GSR was able to implement a program, and handle any claims.

The highly variable nature of the project cargo market also means that any given move can be expensive to cover.

“We just bound a contract for a big generating plant,” said Kevan Gielty, president and CEO of Coast Underwriters.

“The overall market is soft, but in many projects such as this one there is heavy exposure in lag time if anything went wrong. So the pricing for that policy was firmer than we have seen recently. In cases where premiums are more competitive, there is an even greater emphasis on loss control.”

Gielty noted a continuing trend in project cargo is manufacturers offering coverage. This is not new, but in a soft market every competitor is a factor. Some very large utilities and energy companies will simply self-insure to a point and only go to the market for excess.

“We typically get involved in the delay-in-start-up [DSU] component,” he said.

“When the U.S. was slow, Latin America was busy, especially expanding power sectors, most notably in Brazil. Now we are anticipating an uptick in Mexico as the energy sector is liberalized.”
— Steven Weiss, senior vice president, marine, Aspen


“That is not written alone because we need to be involved in the whole process.”
Weiss said that “North American rates have declined the last five to six years. The high was in 2007-08, and they are down 15 to 20 percent since then, although relatively flat so far this year. The U.S. and Canada have seen a decent uptick in project cargo because of power generation and natural gas.”

Different regions can often be countercyclical, he said. “When the U.S. was slow, Latin America was busy, especially expanding power sectors, most notably in Brazil. Now we are anticipating an uptick in Mexico as the energy sector is liberalized.”

Growth Areas

Even as underwriters track geographic and sector changes, they are also seeking new types of business.

09012015_03_ProjectCargo_sidebar_400pxGSR has recently begun to write stock throughputs. “We cover every aspect from procurement through delivery,” said Michel.

“It is a bit more of a challenge for the underwriter, but it simplifies things for the insured. This is definitely a growth area for us.

“Another extension of the project cargo market is contractor’s equipment. The energy markets in London can be expensive, and they are focused on windstorm.

“Covering that through the cargo market gets away from restrictions of geography and storm. It also moves to a market where there is ample capacity and moderate rates.”

Despite the current conditions where terms and conditions are broad and rates are trending down, Michel is sanguine.

“These trends will catch up with the industry at some point, it cannot go on forever.”

One of the interesting — and challenging — aspects of project cargo is that it can be counterintuitive.

For example, globalization of green energy might seem to be a boon, but Wolfe noted that more and more solar arrays and wind-turbine components are being made in each region, so the coverage of those moves tends to be within the engineering and construction policies, rather than in the deep-sea marine realm as it used to be when only a few places had industry capable of making such components.

“Mining is still active in North and South America, as well as sub-Saharan Africa,” Wolfe said, but again there can be an overlap with construction.

“In many regions, the biggest challenge of a mining or manufacturing project can be the adequacy of roads and bridges necessary to get components and then raw materials in, or production out.”

The variable nature and size of some coverage also makes project cargo unusual in that lead underwriters have to adapt their organizations to a large project.

“We have to consider deployment of our own resources even before we bind,” said Wolfe.

“By the time we have a contract, we have already had multiple conversations with our loss-control team. They are an integral part of the underwriting process. They might identify 40 critical items in the project that could require 100 or more surveys in total.”

Given the size and scope of Allianz, the company naturally prefers to use its own people whenever possible. But that still requires adaptation by the underwriters and marine loss control.

“As a result, we move our people around globally as needed,” said Wolfe.

“That varies with the size and type and number of projects. There can be hundreds of surveys required on different projects in different parts of the world at similar times.”

“Managing a project is a very fluid environment, modes of transit and shipping schedules change, the people change, even the risk managers. We constantly have to match people to risks and risks to people.”
— Kevin Wolfe, global head of project cargo, Allianz Global Corporate & Specialty

Adding a fourth dimension, “nothing ever stays the same over the course of a multiyear project,” said Wolfe.

“Managing a project is a very fluid environment: modes of transit and shipping schedules change, the people change, even the risk managers.


“We constantly have to match people to risks and risks to people. We do have a short list of outside vendors that have been vetted by our head of marine loss control, but even then the internal dialogue stays lively throughout the life of each project.”

Insureds can deploy risk management as well. There are several service providers that aggregate and analyze exposures and losses.

“Data is often spread across many losses, claims, exposures, policies, programs and different companies with different platforms,” said Bob Petrie, CEO of Origami Risk.

“We use analytics to look for patterns and events that cause losses. Insureds can use those to identify sources of exposure. Then, if there is a loss, the software can be used to report a claim, and it will get the loss reports and supporting documents to the underwriters.”

One of the new targets in project cargo risk management is tracking near misses, said Phil Wiedower of Origami.

Near-miss data is often held within an owner’s records, but tends to get overlooked because there is no claim, he said.

“Owners are looking to understand what risks to retain and what to transfer. Knowing the near misses as well as the loss history is important in the transfer cost-benefit analysis,” Wiedower said.

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at
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Sponsored: State of Vermont

7 Questions to Answer before Choosing a Captive Insurance Domicile

Ask the right questions and choose a domicile for your immediate and long-term needs.
By: | February 5, 2016 • 7 min read

Risk managers: Do your due diligence!

It seems as if every state in America, as well as many offshore locations, believes that they can pass captive legislation and declare, “We are open for business!”

In fact, nearly 40 states and dozens of offshore locations have enabling captive insurance legislation to do just that.

With so many choices how do you decide who is experienced enough to support the myriad of fiscal and regulatory requirements needed to ensure the long term success of your captive insurance company?

“There are certainly a lot of choices,” said Mike Meehan, a consultant with Milliman, an actuarial firm based out of Boston, Massachusetts, “but not all domiciles are created equal.”

Among the crowd, there are several long-standing domiciles that offer the legislative, regulatory and infrastructure support that makes captive ownership not only a successful risk management tool but also an efficient entity to manage and operate.

Selecting a domicile depends on many factors, but answering these seven questions will help focus your selection process on the domiciles that best fit your needs.


1. Is the domicile stable, proven and committed to the industry for the long term?

ThinkstockPhotos-139679578_700The more economic impact that the captive industry has on the domicile, the more likely it is that captives will receive ongoing regulatory and legislative support. The insurance industry moves very quickly and a domicile needs to be constantly adapting to stay up to date. How long has the domicile been operating and have they been consistent in their activity over the long term?

The number of active captive licenses, amount of gross premium written in a domicile and the tax revenue and fees collected can indicate how important the industry is to the jurisdiction’s bottom line. The strength of the infrastructure and the number of jobs created by the captive industry are also very relevant to a domicile’s commitment.

“It needs to be a win – win situation between the captives and the jurisdiction because if not, the domicile is often not committed for the long term,” said Dan Kusalia, Partner with Crowe Hortwath LLP focused on insurance company tax.

Vermont, for example, has been licensing captives since 1981 and had 589 active captives at the end of 2015, making it the largest domestic domicile and third largest in the world. Its captive insurance companies wrote over $25 billion in gross written premiums. The Vermont State Legislature actively supports an industry that creates significant tax revenue, jobs and tourist activity.


2. Are the domicile’s captives made up of your peer group?

The demographics of a domicile’s captive companies also indicate how well-suited the location may be for a business in a particular industry sector. Making sure that the jurisdiction has experience in the type and form of captive you are looking to establish is critical.

“Be among your peer group. Look around and ask, ‘Who else is like me?’” said Meehan. “Does the jurisdiction have experience licensing and regulating the lines of coverage for other businesses in your industry sector?”


3. Are the regulators experienced and consistent?

Vermont_SponsoredContentIt takes captive-specific expertise and broad experience to be an effective regulator.

A domicile with a stable and long-term, top-tier regulator is able to create a regulatory environment that is consistent and predictable. Simply put, quality regulation and longevity matter a lot.

“If domicile regulators are inexperienced, turnaround time will be slower with more hurdles. More experience means it is much easier operating your business, especially as your captive grows over time,” said Kusalia.

For example, over the past 35 years, only three leaders have helmed Vermont’s captive regulatory team. Current Deputy Commissioner David Provost is one of the longest tenured chief regulators and is a 25-year veteran in the captive insurance industry. That experienced and consistent leadership enables the domicile to not only attract quality companies, but also to provide expert guidance on the formation process and keep the daily operations running smoothly.


4. Are there world-class support services available to help manage your captive?

Vermont_SponsoredContentThe quality of advisors and managers available to assist you will have a large impact on the success of your captive as well as the ease of managing the ongoing operations.

“Most companies don’t have the expertise to operate an insurance company when you form a captive, so you need to help build them a team,” Jeffrey Kenneson, a Senior Vice President with R&Q Quest Management Services Limited.

Vermont boasts arguably the most stable and experienced captive infrastructure in the world. Many of the leading captive management companies have their headquarters for their Global, North America and U.S. operations based in Vermont. Experienced options for captive managers, accountants, auditors, actuaries, bankers, lawyers, and investment professionals are abundant in Vermont.


5. Can the domicile both efficiently license and provide on-going support to your captive as it grows to cover new lines of coverage and risks?

Vermont_SponsoredContentLicensing a new captive is just the beginning. Find out how long it takes for the application to get approved and how long it takes for an approval of a plan change of your captive’s operations.

A company’s risks will inevitably change over time. The captive will need to make plan changes which can include adding new lines of business. The speed with which your domicile’s regulatory branch reviews and approves these plan changes can make a critical difference in your captive’s growth and success.

The size of a captive division’s staff plays a big role in its speed and efficiency. Complex feasibility studies and actuarial analyses required for an application can take a lot of expertise and resources. A larger regulatory team will handle those examinations more efficiently. A 35-person staff like Vermont’s, for example, typically licenses a completed application within 30 days and reviews plan changes in a matter of days.


6. What are the real costs to establishing and managing your captive?

Vermont_SponsoredContentIt is important to factor in travel costs, the local costs of service providers, operating fees, and examination fees. Some states that do not impose a premium tax make up for it in high exam fees, which captives must be prepared for. Though Vermont does charge a premium tax, its examination fees are considered some of the least expensive options in the marketplace.

It is also important to consider the ease and professionalism of doing business with a domicile in the ongoing operations of your captive insurance company.

“The cost of doing business in a domicile goes far beyond simply the fixed cost required. If you can’t efficiently operate due to slow turn-around time or added obstacles, chances are you have made the wrong choice,” said Kenneson.


7. What is the domicile’s reputation?

Vermont_SponsoredContentMake sure to ask around and see what industry experts with experience in multiple domiciles have to say about the jurisdiction. Make sure the domicile isn’t known for only licensing certain types of captives that don’t fit your profile. Will it matter to your board of directors if your local newspaper decides to print a story announcing your new insurance subsidiary licensed in some far away location?

Are companies leaving the jurisdiction in high numbers and if so, why? Is the domicile actively licensing redomestications — when an existing captive moves from one domicile to another? This type of movement can often be a positive indicator to trends in a domicile. If companies of a particular size or sector are consistently moving to one state, it may indicate that the domicile has expertise particularly suited to that sector.

Redomestications made up 11 of the 33 new captives in Vermont in 2015. This trend is a positive one as it speaks to the strength of Vermont. It reinforces why Vermont is known throughout the world as the ‘Gold Standard’ of domiciles.

Asking the right questions and choosing a domicile that meets your needs both today and for the long term is vital to your overall success. As a risk manager you do not want surprises or headaches because you did not ask the right questions. Do the due diligence today so that you can ensure your peace of mind by choosing the right domicile to meet your needs.

For more information about the State of Vermont’s Captive Insurance, visit their website:




This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with the State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,000 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.
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