the standard offshore forum...oct 20, 2011 · current financial influences 5 – chaotic financial...

1

THE STANDARD OFFSHORE FORUMLONDON

THURSDAY 20 OCTOBER 2011

2

WELCOME AND REVIEW OF THE YEAR ALISTAIR GROOM

CHIEF EXECUTIVE, STANDARD CLUB

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CONTENTS

3

– key information

– Standard Offshore

– current issues

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KEY DATA

4

– 2011/12 projected premium income: $281m

– current tonnage insured: 129m gt– free reserves:

as at 20 Feb 2011$317m

– S&P A rated (strong) with stable outlook

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CURRENT FINANCIAL INFLUENCES

5

– chaotic financial markets, small investment gains so far thisyear

– higher solvency requirements through growth in most measures

– P&I claims generally stable but:– several large claims recently– some increases in large claims in prior years– general under-rating– difficult renewal ahead

– one Standard Club Pool claim this year

– Defence claims have not yet reduced

20

40

60

80

100

120

140

2007 2008 2009 2010 Feb-11 Aug-11

GTm

Chartered

Owned

TONNAGEas at year end

6

50

100

150

200

250

300

2007 2008 2009 2010 2011 20 Aug 2011,unaudited

US$m

PREMIUMas at year end

7

50

100

150

200

250

300

350

2007 2008 2009 2010 2011 2012

US$m

FREE RESERVESas at year end

8

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INVESTMENT RETURN

9

-20

-15

-10

-5

0

5

10

15

20

2007 2008 2009 2010 2011 31 Aug 2011,unaudited

%

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ASSET ALLOCATION

10

as at 17 October 2011

Alternative assets – 4.3%

Equities – 17.7%

Bonds – 64.7%

Cash & Forwards – 13.3%

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COUNTRY OF MANAGEMENT

11

OWNED TONNAGE

Italy – 9%

Rest of Asia – 4%

Rest of World– 8%

Rest of Europe – 14%

Singapore – 5%Germany – 9%

USA – 13%

Greece – 11%

Canada – 7%

Switzerland– 3%

Republic of Korea – 4%

Japan – 7%

United Kingdom – 6%

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SHIP TYPES ENTERED

12

OWNED TONNAGE

Other – 2%

Passenger & ferry – 7%

Offshore – 14%

Dry bulk – 21% Container & general cargo – 26%

Tanker – 30%

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OFFSHORE SHIP TYPES ENTERED

13

OWNED TONNAGE

Supply / Support – 9%

Heavy lift / Installation – 18%

FPSO – 41%

Drilling – 11%

FSO – 18%

Accommodation – 3%

100

200

300

400

500

600

2007 2008 2009 2010 2011 estimated

OFFSHORE CONTRACTS REVIEWED

14

10

20

30

40

50

60

70

80

90

2007 2008 2009 2010 2011

NUMBER OF OFFSHORE MEMBERS

15

250

500

750

1000

1250

0

5

10

15

2007 2008 2009 2010 2011

GT M Units

Tonnage

Units

TONNAGE AND UNITS

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STANDARD OFFSHORE

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– high level of specialist expertise - unique breadth of experience

– dedicated syndicate

– contract risk assessment

– standard form and bespoke cover terms

– first class reinsurance programme

– offshore surveys

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OFFSHORE SYNDICATE

18

SYNDICATE DIRECTOR

Robert Dorey

UNDERWRITING

UnderwritersClaire WheelerJohn CroucherEddy Morland

Deputy UnderwritersLaura ReillyJoseph Divis

Underwriting AssistantsMichael RobinsonBrendan PirSian MeadowsHannah Day

CLAIMS

Syndicate Claims DirectorSharmini Murugason

Claims DirectorsFabien LeredeUrsula O’Donnell

Claims ExecutivesRupert BanksRoger Johnson

SUPPORT

Nikki Morton

CREDIT CONTROLLER

Colin Ellis

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CURRENT ISSUES

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– Solvency II

– reorganisation

– piracy

– sanctions

– reinsurance

– rating

– quality management

20



CLARKSON RESEARCH SERVICES LTD

October 2011Martin Stopford

Clarkson Research

The Offshore Market


Agenda

1. What is the offshore market?

2. Is there an Offshore market cycle?

3. Which future energy scenario?

4. How much offshore oil in future?

5. Are we facing fabrication bubble?


“Offshore wells are drilled in water up to 3

kilometres deep”

Spar (SP)Platform600 to 3000 M

Sub-sea (SS)

Systemto 2400 M

Tension LegPlatform(TLP) 500 to2400 M

Floating ProductionSystem(FPS) 500 to2000 M

Compliant Tower(CT) 500 to1000 M

FixedPlatform(FP) 500 M


World Offshore Producing Oilfields:

• There are 3053 producing wells offshore today

• Only 308 production units are mobile, but there is a fleet of over 11,000 vessels supporting them

• That’s the business we are interested in

Type of Production Unit

Mobile,

308

Fixed,

7960


107280

493213249218

141103

548164

1240175

45464010070

563

2134871

246

0 200 400 600 800 1000 1200

SeismicHydrographic

ResearchJack Up

Semi SubmersibleDrill Ship

Crane VesselsPipe Layer

Cable layingTransport

AccommodationOther support

FPSOSemi-submersible

Jack UpTLP/Spar

Floating storageShuttle Tankers

SPMsAnchor handling

PSV/SupportRescue & Salvage

Number of Vessels

Mobile Drilling fleet for different depths

Logistics fleet for transporting oil

Production vessel fleet for different water depths

Offshore fleet by type of activity 1st August 2011

Support for Platforms

& development

Total mobile fleet is 11,079 vessels, as listed below

Research and Survey vessel fleet

Construction

Plus 7960 fixed

platforms


Offshore Discoveries Getting Deeper

-

500

1,000

1,500

2,000

2,500

3,000

3,500

1940 1950 1960 1970 1980 1990 2000 2010

Water Depth (M)

Shengli, China 3.8 bn bblsSafaniya,

S.Arabia 3.5 bn bbls

Akal & Cantarell, Mexico 6.7 bn bbls

combined

Deepwater Gulf of Mexico Fields

Brazilian Pre-Salt Discoveries

(So more mobiles)


Offshore Deep Water Oil Production

• Over the last decade deep water production (over 500m) has increased to 5 m bpd

• Meanwhile shallow production has shrunk

0

5

10

15

20

25

30

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Million BPD

Deepwater (>500m)

Shallow Water (<500m)


Offshore Service Vessel Rates – Boom then>

0

10

20

30

40

50

60

70

8019

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

11

AHTS £000/dayBased on AHTS, (large and very large)

Small boom in 1997 cut short by the Asia crisis

Big boom 2007/8 driven by rising oil

prices

Average £28,000/day

Figure 1:: Clarkson Research Offshore Service (COSI) Index

Collapse after credit

crisis

Average £8,400/day


“The cycle is so long it’s sometimes hard to sense direction”


Oil production 1980-2010 – On & Off Shore

• Over the last 30 years oil production has grown by 1% per annum

• Offshore grew at 2.4% pa and onshore by 0.3% pa

• But offshore production peaked out in 1997 and has not grown over the last 13 years 0

10

20

30

40

50

60

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

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2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

10

12

14

16

18

20

22

24

26

28Offshore

Onshore

OnshoreMBPD

10.6 m bpd added 1980-98, 31% in

Europe and 20% in N America

OffshoreMBPD

NO OFFSHORE GROWTH FOR A DECADE


Offshore Investment 1963-2011

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800<=

1960

*

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Year of Build

Num

ber o

f Units

0

0.2

0.4

0.6

0.8

1

1.2Development Production Support

Figure 2: Age profile of mobile offshore fleet (10,965 structures) on 1 April 2011

1970sThis offshore boom followed the 1973 “Oil

Crisis”

2000sThis boom

accompanied the oil price

rise


Investment Correlated With Oil Prices

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800<=

1960

*

1963

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1978

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1999

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2005

2008

2011

2014

2017

2020

Year of Build

Num

ber o

f Units

0

20

40

60

80

100

120Development ProductionSupport Oil Price (2009 $s)

Figure 2: Age profile of mobile offshore fleet (10,965 structures) on 1 April 2011

1970sThis offshore boom followed the 1973 “Oil

Crisis”

2000sThis boom

accompanied the oil price

rise

$ per barrel


Rising Oil Prices Help Support Offshore

0

20

40

60

80

100

120

1861

1866

1871

1876

1881

1886

1891

1896

1901

1906

1911

1916

1921

1926

1931

1936

1941

1946

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

2011

1973 Oil Crisis

Higher prices will unleash offshore

investment

$/Barrel W. Texas Crude

The oil price sets the scene for offshore investment economics


“What is the future for offshore oil?

World Energy Supply (11 billion Tonnes Oil Equivalent)

Offshore is the high cost

supply source

On-

shore

oil

24%

Hydro

7%

Coal

29%Gas

24%

Off-

shore

Oil

11%

Nuclear

5%


IEA World Energy Outlook 2011

• The IEA has three long term energy scenarios:-1. Current Policies

2. New Policies

3. Carbon 450

• They argue that these scenarios will effect both demand and prices


0102030405060708090

100110120130140150

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

Oil price (2009 $)

450 Scenario

New Policies

Current Policies

IEA Oil Price Scenarios –

� current policies scenario: price pushed up to $140/barrel in 2035 (at 2009 constant prices)

� New policies take the price down to $113/barrel

� The Carbon 450 Scenario takes the price down to $90/barrel

$2009/bbl

Figure 3: The IEA Oil price scenarios 2010

450$92/bl

New$118/bl

Current$140/bl

Approximate offshore cost/bbl


Oil Demand Pressures - OECD

3.60

5.30

8.300 1 2 3 4 5 6 7 8 9

10

11

12

Japan

EU

N. America

OECD1.3 billion population

Source: BP & World Bank

Oil Demand Tonnes Per Capita/Year


Oil Demand Pressures Building

3.60

5.30

8.30

1.6

0.8

0 1 2 3 4 5 6 7 8 9

10

11

12

Japan

EU

N. America

China

ROWNon-OECD

6 billion population

OECD1.3 billion population

Source: BP & World Bank

Oil Demand Tonnes Per Capita/Year


• First offshore development in 1894 in California but today production is global

• First fixed platform out of sight of land in 1947. Barge drilling primed the mobile market

Wells drilled off piers on the beach in Santa Barbara Channel 1894

“There is a stop goproduction cycle in

the offshore business, following

oil price”


World Oil Producing Regions

3. N. AmericaOffshore: 3.9 m bpd

Growth: -7% pa

5. S&C America

Offshore:2.8 m bpdGrowth: 2% pa

6. EuropeOffshore:2.6 m bpd

Growth: -7% pa

4. Asia Pacific

Offshore: 3.3 m bpd

Growth: -7% pa

8. MedOffshore: .6 m bpd

Growth: -2% pa

7. CaspianOffshore: 1.5 m bpdGrowth: 10% pa

1. M East & India

Offshore: 6.3 m bpdGrowth: 0% pa

2. West Africa

Offshore: 4.3 m bpdGrowth: 4% pa


Offshore oil fields under construction - league table May 2011

Offshore fields under construction - league table May 2011

Rank Country Number Av. Depth Av. Distance

fields of fields from shore

1 United States 20 1,371 178

2 Brazil 33 1,067 134

3 Angola 11 1,444 149

4 Nigeria 13 449 58

5 Norway 15 240 129

6 United Kingdom 13 119 148

7 Canada 4 122 345

8 Malaysia 3 372 144

9 Australia 5 189 174

10 Spain 2 713 43

Other countries 61

Total 180


Offshore Oil Growth Scenario

• Offshore oil production declined 3% in the last five years, but we expected to grow in the next five years.

• Northwest Europe and Asia-Pacific are expected to decline, whilst the big growth areas will be Africa; the Caspian & S America.

Offshore Production Growth & Forecast2005-2010 2010-2015

NW Europe -34% -16%Caspian, Med 47% 66%N America -15% 17%S. America 14% 64%Africa 12% 38%M East -5% 9%Asia Pacific 12% -7%World Total -3% 21%Source: CRSL

SHOWS TOTAL GROWTH OVER THE PERIOD


Offshore Oil Production & Forecast

• Projection based on 180 fields currently under development

• 1079 potential development fields (oil) and 1,006 gas fields 0

5

10

15

20

25

30

35

1980

1985

1990

1995

2000

2005

2010

2015

2020

Million BPD

Caspian Black Sea West Africa

Asia Pacific Sth America

M East & ISC NW Europe

Nth America

Figure 4: Offshore oil production and forecast

forecast

Stagnation

?


“What structures will be needed?”


Investment In Offshore Vessels

1. Between 2000 and 2010 the industry ordered $253 billion of offshore vessels

2. 60% of the orders were placed in 2006/7/8 when prices were at a peak

3. The pace of investment slumped to $26.7 billion in 2009

4. Then increased to $31.9 billion in 2010 0

10

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Bill $

Orders

0

5

10

15

20

25

30

35

40

45

50$000/day

Support VesselsLogisticsProductionConstructionDrillingSurveyEarnings

Source: Clarkson Research Services Ltd

Investment in new offshore structures & newbuilding prices


09

8222

69122161915

13436

42462929

318292

28

16

0 100 200 300 400 500 600

SeismicHydrographic

ResearchJack Up

Semi SubmersibleDrill Ship

Crane VesselsPipe Layer

Cable layingTransport



Jack UpTLP/Spar


SPMsAnchor handling


Number of Vessels

Mobile Drilling fleet for different depths

Logistics fleet for transporting oil

Production vessel fleet for different water depths

Offshore orderbook 1st August 2011

Support for Platforms

& development

Total mobile orderbook is 1187 vessels

Research and Survey vessel fleet

Construction

Plus 118 fixed

platforms


Offshore Orderbook % fleet 1st August 2011

1887

1411

410

641

5

6.5

3.20

5.941

6

5.5

620

219

1214

3

0 10 20 30 40 50 60 70 80

SeismicHydrographic

ResearchJack Up <300'Jack UP >300'

Semi Sub<5000'Semi Sub >5000'

Drill ShipCrane VesselsCable layingHeavy Lift



Jack UpTLP/Spar


SPMsAnchor handling


% Fleet on order (GT)

Mobile Drilling

Oil logistics

Production

Supportvessels

% fleet on order

Survey

Construction

Figure 8: Offshore orderbook by type, % fleet on order 1st April 2011


Offshore Orders & Deliveries

0

100

200

300

400

500

600

700

800

900

1,000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Orders Place

d - numbers

Support OrderbookProduction OrderbookSurvey OrderbookSupportProduction and LogisticsSurvey and DevelopmentOrders

2011 orderbook of 500 units 2012

orderbook

of 250

units

Figure 7:Offshore Orders & Deliveries Source: CRSL

Shipbuilding offshore O/B (% of value):-• 2006 4%• 2007 5%• 2008 8%• 2009 11%• 2010 15%• 2011 22%


Offshore Orderbook in Merchant Yards

1. The offshore orderbook of $138 billion in April 2011 was split between merchant shipyards and offshore yards

2. 62% is in the merchant yards and 38% in the offshore fabricator yards

0

10

20

30

40

50

60

70

80

90

100

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Bill $

Orders Non MerchantYard

Merchant Yard

Source: Clarkson Research Services Ltd

Investment in new offshore structures & newbuilding prices


• Energy is a crucial part of our economy and the demand for oil is expected to grow at .8% per annum over the next 25 years.

• Offshore oil accounts for 11% of world energy supply and one third of total oil supply

• As existing oilfields are depleted, new development will be needed, and offshore remains a major potential source of oil, especially deep water oil

• Offshore oil production is expensive and investment will benefit from an era of higher oil prices which started 5 years ago.

• Offshore oil is produced in nine main areas (Middle East; West Africa; North America; Asia Pacific; South America;; Northwest Europe; Mediterranean; Caspian; Russia)

• The main growth areas are Caspian; West Africa; Asia Pacific; South America and India

• The offshore fleet is growing at 4 to 5% per annum with a big orderbook for drill ships and deepwater production units.


The information supplied herewith is believed to be correct but the accuracy thereof is not guaranteed and the Company and its employees cannot accept liability for loss suffered in consequence of reliance on the information provided.

Provision of this data does not obviate the need to make further appropriate enquiries and inspections. Forecasts are frequently wrong and the information on which they are based is not always accurate, so they are not a reliable basis for business decisions. Always consult as many sources as possible and check the validity of each to the extent the decision justifies.

The information is for the use of the recipient only and is not to be used in any document for the purposes of raising finance without the written permission of Clarkson Research Services Limited, England, No 1944749. Registered Office at St. Magnus House, 3 Lower Thames Street, London, EC3R 6HE.

Disclaimer

52



2011 Offshore/CasualtyMarket Overview20 OCTOBER 2011

Marcus BakerGlobal Marine Chairman

London (Tower Place)

MARSH 5403 July 2013

Agenda

� Reinsurance

– NatCat Impact

� Upstream

– Loss position

� Casualty

– Lloyds Performance Management

� Conclusions

Reinsurance Market


Reinsurance Market

2011 so far

�NatCat losses have resulted in a reinsured loss of approx USD 70Bn*.

�Rates flat to 10% increase as of July 1st 2011. Some larger increases (up to 50%) in respect of Upstream treaty renewals but small direct impact.

�Widespread hardening in the broader reinsurance market has not materialised as rates in non-cat lines remain flat to down and capacity levels remain high.

Main Issues:

�Use of reserves to maintain share dividends and general figures – not sustainable

� Low investment income, potential global recession

� Increased management pressure

� Sovereign debt crisis in Europe

� Separate XOL towers required for liability coverage

�What effect will this have on capacity at 1st January 2012?

* World catastrophe reinsurance market review- Guy Carpenter


2011 Losses to date

� Insured NatCat Losses approximately USD 70 - 85Bn

� Total economic loss currently USD 270Bn

� Economic losses highest ever on record, even after first half of the year

- Previously was 2005 at USD 220Bn

- In the US alone there has been 12 events over USD1bn in 2011

Date Event Quantum

Feb-10 Chilean Earthquake $8bn

Apr-10 Icelandic Volcano $3bn

Dec-10 Australian Floods $5bn

Jul-10 Pakistani Floods $10bn

Feb-11 New Zealand Earthquakes $9bn

Apr-11 Japanese Earthquake / Tsunami $35bn - $50bn


Significant Catastrophic Losses – 2010 to Q2 2011

Source: Guy Carpenter – world catastrophe reinsurance market review

Upstream Market


Examples of Industry Losses


Upstream Market

�Rates increasing by 5% to 10%

�Gulf of Wind rates are flat – Wind hasn’t blown yet!

�Rates for Reinsurance expected to rise by 20% but this is likely to be mitigated by underwriters taking increased retentions

�Underwriters may try to pass on costs and retentions to direct market

GOM Wind Coverage

�No storms effecting Gulf of Mexico platforms

� 2011 capacity is the same as 2010 – possibly between USD 4Bn – USD 5Bn

� But may well be more capacity in 2012 – Hardy and Brit add circa USD 200m

� 2012 Outlook – more capacity, rates flat


An Upstream Underwriter’s view

�Market in limbo

� Awaiting results of the reinsurance treaty renewals

�Reinsurance costs are likely to rise which should increase front end costs

�However, still excess market capacity therefore limiting rate increases

- Total Global Capacity estimated at over USD3.5bn

�Direct rates up by 5% to 10% subject to good loss record


2011 Major Upstream Energy Losses

Date Cause Description Quantum

Feb Heavy WeatherMooring Damage on North Sea

FPSO $960,000,000

Mar Mechanical Failure Gulf of Mexico FPSO riser $150,000,000

Apr Capsize/SinkingFloating accommodation unit offshore

Mexico $230,000,000

May Blowout Israeli Offshore Oil & Gas well $130,000,000

to date Attritional Losses Various $230,000,000

Total (known) for year $1,700,000,000

Source. Marsh Research

No account taken for self insured retention or deductible


Upstream Market Premium

� The Energy Market wrote gross premiums of circa USD 3.25Bn in 2010

- Split USD 2.75Bn Worldwide & USD 500m GOM

�What proportion of this premium is attributable to liability business?

- Suggestion figure is circa USD 426m, of which only USD 187m is purely Offshore Energy

Casualty Market


Global Casualty Energy Market

�Demand for casualty limits currently exceeding supply

- Lack of historical demand

- Casualty losses within the Energy industry� Deepwater Horizon: Offshore E&P

� San Bruno Explosion: Gas Pipeline

� Michigan Pipeline Loss: Liquid Pipelines

� Sempra: Wild fires in California

�Net loss ratio of energy and power business at Lloyd's on a 10-year basis never below 100 percent

- Escalating reinsurance costs

- Inadequate pricing


Global Casualty Energy Market

�Current Casualty Energy market seeing shrinkage of capacity and increased premiums

� Some syndicates pulling out of Cat Energy liability (i.e.. Hiscox, Catlin)

ISSUES

� Aggregation of limits

– Joint Venture agreements

� Pollution

� Pipeline Integrity

� Emergency Response Procedures


Pressure within Lloyd’sJuly 2011

• Lloyd's performance management director Tom Bolt has warned that he is "intuitively" disposed to reject all syndicate business plans that propose writing offshore energy liability within packages.

• Speaking at The Insurance Insider's inaugural Global Energy and Power Forum, Bolt made wide-ranging criticisms of the way that offshore energy business has been underwritten in the Lloyd's market in recent years.

• In the hope of heading off this eventuality, the Lloyd's director asked his audience to "tell me a new and better way to run the liability side" ahead of the business planning process in September.

• He illustrated his point by showing that the ultimate net loss ratio of energy and power business at Lloyd's on a rolling 10-year basis had almost never ducked down below 100 percent.


Pressure within Lloyd’s Continued

� Bolt implied again that the market was not adequately pricing this business. "If I gave you some anecdotes about pricing you'd probably weep alongside me," he said. Later he urged underwriters to calculate pricing correctly.

� In addition to pricing of energy liability business, Bolt was concerned about the possible aggregation of losses when multiple insureds file claims attaching to the same event. "There is enough of a risk of aggregation of liabilities business to threaten the Central Fund," he argued.

�He said that he had been told by more than one major reinsurer that there would be material increases in reinsurance retentions at 1 January - with some in the region of 40 percent.


Bolt Letter

29 July 2011

Energy Liability: Plan Approval Requirement and Best Practice 2012

‘ It is therefore a requirement for 2012 plan approval that all Energy Liabilities

written at Lloyd’s are underwritten in stand alone policies; compliance with

this requirement is a precondition of Lloyd’s approval of Syndicate

Business Plans for Energy Liability.’


Further Bolt Update

6th October:

�However, during an analyst Q&A last month Lloyd's CEO Richard Ward seemed to signal that this hard-line stance was being relaxed.

� "That [the need for standalone policies] has generated a lot of interest in the market and we've had some interesting discussions with brokers and underwriters around that," he said.

� "[If] people want to continue writing package policies then they need to come to us to explain why they think that is a good idea and in the absence of that we'd expect them to split out the two.

� "But we're not saying to the market 'we're withdrawing'. Far from it, we're very active in that market, but we just want to make sure the risks are priced at the appropriate level and, very importantly, at a sustainable level."

Source: Insurance Insider

Conclusions


Conclusions

� High combined ratios, dwindling reserves and probable increase in capital requirements BUT the feared flight of capacity has yet to materialise.

� Wholesale hardening will remain elusive, unless the spate of losses and any end-of-season windstorm incidents trigger a withdrawal in capacity.

� There is a danger of “throwing the baby out with the bath water”.

- What about mono line writers? Is the Aggregation issue a real issue here? What about those that already adopt many of the best practices suggested?

� Differentiation amongst purchasers is fundamental

� The London Market in all its’ facets must maintain its competitive platform

- There is clearly almost a “glut” of capacity globally which could influence decision making – Global upstream capacity over USD3.5bn

� Many direct writers now have the capability of underwriting outside of Lloyds

- What value does the performance management directorate actually have?

- Global rating and a strong franchise

Registered in England Number: 1507274, Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU

Marsh Ltd is authorised and regulated by the Financial Services Authority for insurance mediation activities only.

Marsh Ltd conducts its general insurance activities on terms that are set out in the document "Our Business Principles and Practices".

This may be viewed on our website http://www.marsh.co.uk/aboutMarsh/principles.html

75



CONSEQUENTIAL LOSS

Presentation to the Standard Offshore Forum 2011

Nigel ChapmanPartner - Clyde & Co LLPThursday 20 October 2011

This talk will coverThis talk will cover

1. What is “Consequential Loss”?

2. When can you claim damages for consequential loss?

- In tort?

- under contract?

3. How can you exclude liability for consequential loss under your contract?

A few terms to defineA few terms to define

� Direct loss.

� Indirect loss.

� Economic loss.

� Remoteness of loss.

“Consequential loss” could fall into any one of these categories, and how it does so fall

determines whether the loss is recoverable.

NB. (1) All loss is a consequence of something. Generally “consequential loss” is understood as the financial consequence of a physical damage of some kind. How directly connected that financial loss is to the physical damage will determine its recoverability.

(2) The English Courts have chosen to equate the term “consequential loss” where it appears in contracts with “indirect loss”

The Contract RuleThe Contract Rule

The Hadley v. Baxendale principle

Losses recoverable for breach of contract fall into two categories:

1. Direct losses: those arising naturally from the breach as per thereasonable contemplation of the parties at the time of contract.

2. Indirect losses: those which derive from special circumstances outsidethe ordinary course of events not within reasonable contemplation of theparties and recoverable only if specifically made known to the parties atthe time of contract.

The Tortious RuleThe Tortious Rule

1. The “Wagon Mound” principle

� Recoverability is determined by assessing extent of duty owed byinjuring party and foreseeability of loss to injured party resulting frombreach of that duty.

� Loss which was not foreseeable or which falls outside scope of dutyis too remote to be recoverable.

2. Economic loss

� If as a direct consequence of foreseeable (and recoverable)physical damage, it is recoverable.

� Otherwise, economic loss is too remote to be recoverable, unless there exists a special relationship/duty of care (relates mainly to professional advisers). See eg: Henderson v Merrett Syndicates 1995

Consequential LossConsequential Loss

� No overarching definition.

� McGregor on Damages distinguishes between:-

(1) “Normal loss”: that which every injured party may be expected to suffer as a

result of the breach.

(2) “Consequential loss”: that special to the circumstances of the injured party.

� If Category 2 is a direct and foreseeable consequence of the damage,

despite being special to the circumstances, it falls within limb 1 of Hadley &

Baxendale and Wagon Mound.

� If the relationship is indirect it falls within limb 2 or may be too remote.

� This limit on the extent of the consequences is often referred to as the

“floodgates” principle – where otherwise would it stop?

ExamplesExamples

A. If you burn down a factory it is natural to foresee that as well as the cost of repair the owner will lose earnings as a direct consequence of the damage.

B. If you damage someone’s car it is natural to foresee that as well as the cost of repair the owner may need to hire another car during the period of repair.

(N.B: The consequential item may be a “loss” or an “additional expense”)

C. The suppliers to the factory in example A may also suffer loss as a consequence of the shutdown but that loss is too remote to be recoverable even if foreseeable.

D. The owner of the car in example B had just agreed to sell it for twice its market value due to a special need of the buyer. This loss of additional expected profit is not foreseeable without special knowledge.

Why is this relevant to offshore activity?Why is this relevant to offshore activity?

Because:-

1. Consequential loss following an event but arising from special circumstances of the insured party may be too “indirect” or “remote” to be recoverable;

and

2. Direct consequential loss following an event might be recoverable notwithstanding an exclusion in your contract for “consequential loss”. The English courts read exclusion clauses of this kind very restrictively.

Illustrations of these principlesIllustrations of these principles

1. Recovering for ‘Consequential Loss’

� HADLEY V BAXENDALE 1854

Mill owner fails to recover damages in contract for delay indelivery of replacement shaft – no knowledge bymanufacturer that restart of production depended uponspeed of delivery.

� WAGON MOUND 1 1961

Fire damage to wharf consequent upon negligent releaseof bunkers too remote to be recoverable. No evidence offoreseeable risk.

� WAGON MOUND 2 1967

Ships damaged at wharf by same fire can recoverbecause they adduced evidence to show that there was a“real risk which would occur to the mind of a reasonableman and(not(far-fetched”.

� HÉLICE 1911

D’s sank ship under tow. Not liable to tug owner for lossof profit on towage contract.

� MINERAL TRANSPORTER 1985

Time charterer of vessel could not recover from other ship loss of profitduring period of repair of chartered vessel following collision due to fault ofother ship because no interest in the physical damage caused (NBContributions made in GA recoverable on other principles).

� SCM V WHITTALL 1971

Contractor damaged mains cable causing factory shut down. Moltenmaterial solidified causing loss of day’s production to repair. Loss of timerecoverable as direct consequence of necessary repair of physical damage.

� SPARTAN STEEL 1972

Contractor damaged mains cable causing steel works shut down. “Melt” infurnace was lost because it had to be poured away to prevent damage bysolidification. Loss of that melt recoverable but not the other loss ofproduction because not connected to repair of physical damage but toperiod of no electrical supply.

Illustrations of these principlesIllustrations of these principles 2. Contractual Recovering for ‘Consequential Loss’

� CROUDACE CONSTRUCTION V CAWOODS CONCRETE 1978

Exclusion: “not under any circumstances liable for any consequential loss or

damage caused to or arising by reason of late supply(”

Loss: indemnity to sub-contractor by reason of late supply not caught byexclusion because that loss was a direct and natural result of the late supply.

� BRITISH SUGAR V NEI POWER PROJECTS 1997

Exclusion: “Seller’s liability for consequential loss is limited to value of

contract”

Loss: Losses due to breakdown as a result of poor design and installation notcaught by exclusion because the losses were natural and direct result of thesuppliers breach of contract.

� See also:

DEEPAK FERTILISERS 1998

HILTON HOTELS 2000

WATFORD ELECTRONICS 2001

All to similar effect

NB. The use of the words “consequential loss” in an exclusion can also cutdown the scope and effect of specific reference to “loss of profit” or “loss ofproduction” - viz:

BHP BILLITON V BRITISH STEEL 2000

Rix J interpreted exclusion for

“loss of production, loss of profit, loss of business or an other loss orconsequential damage”

to be equivalent to

“loss of production(or indirect losses or consequential damages of anyother kind(”

ie: direct loss of profits etc not excluded by the clause despite express mention.

ConclusionConclusion

If you want to exclude liabilities under contract for loss of profit,production etc, then say so and make no mention of consequential lossbecause the Court will equate this to an exclusion only for indirect loss.Viz:-

“not liable for loss of profits, loss of production, loss of business orother financial loss, howsoever caused, whether directly orindirectly.”

Practical application of this principlePractical application of this principle

TOWCON V TOWCON 2008

1. EASE FAITH V LEONIS 2006 – C1. 18.3 of Towcon (old style)exclusion for “loss or profit or any other indirect or consequentialdamage” did not cover direct loss of profit of hirer as a result of latedelivery.

2. Towcon 2008 makes amendments to the provisions as follows:

Neither the Tug owner nor the Hirer shall be liable to the other partyfor [instead of previous wording - loss of profit, loss of use, loss ofproduction or any other indirect or consequential damage for anyreason whatsoever.]

(i) any loss of profit, loss of use or loss of production whatsoeverand whether arising directly or indirectly from the performance or nonperformance of this Agreement, and whether or not the same is dueto negligence or any other fault on the part of either party, theirservants or agents, or

(ii) any consequential loss or damage for any reason whatsoever,whether or not the same is due to any breach of contract, negligenceor any other fault on the part of either party, their servants or agents.

3. And the explanatory notes give the following explanation:

Sub-clause (c) deals with liability for other types of financial loss.This provision has been substantially re-written from the old 18.3 thatappears in TOWCON. The purpose of Sub-clause (c) is to excludeboth parties from liability for consequential loss or damage whetherdirect or indirect. The wording specifies particular types of financialloss to be excluded – loss of profit, loss of use and loss ofproduction.

SummarySummary1. Mistrust the term “Consequential Loss”

2. Think of “financial loss” instead and ask:-

� Is it a direct or indirect result of breach of contract?

� Is it the direct result of physical damage caused by negligence or other tortious breach of duty?

3. Use of the term “consequential loss” in exclusion clauses risks that clause being cut down in scope by the English

Courts.

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94

SPECIALIST OPERATIONS

JOHN CROUCHER

UNDERWRITER, STANDARD CLUB

WHAT IS A SPECIALIST OPERATION?

– newly developed operations / technology not contemplated when concept was first introduced

– risk of uninsured exposures OR unnecessary insurance spend?

THE CLUB’S VIEW

– we encourage access to poolable cover

– balanced against obligation to support concept of mutuality

– should entire International Group be asked to pay / support claims such as:

1991 CHICAGO PILE DRIVING INCIDENT

– pile-driving ship workingin Chicago River punched through river

– penetrated the underground transport system causing sever flooding

– $195 million+ in claimsasserted in admiralty

– led to the introduction ofSpecialist Operationsexclusion

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SHOULD THE DEFINITION BE REVISED?

98

– can current definition of be improved, expanded or reduced?

– would more exhaustive list be more restrictive and limit club’s discretion?

– consider the following operations:

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SPECIALIST OPERATIONS?

99

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CONCLUSION

100

– non – exhaustive definition is necessary

– requires a club to be able to exercise discretion

– clarity and consistency is key – from club and within International Group

101



102

OFFSHORE CLAIMS

SHARMINI MURUGASON

SYNDICATE CLAIMS DIRECTOR, STANDARD CLUB

Page

OFFSHORE SHIP TYPES ENTERED

103

OWNED TONNAGE

Supply / Support – 9%404

Heavy lift / Installation – 18%89

FPSO – 41%73

Drilling – 11%63

FSO – 18%17

Accommodation – 3%21

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OFFSHORE – NUMBER OF CLAIMS

104

2006-2011

FFO – 7%

Fines – 4% Misc – less than 1%

Wreck – 1%

Pollution – 3%

Cargo – 3%

Collision – 6%

Offshore survey – 8%

Personal injury – 68%

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OFFSHORE – VALUE OF CLAIMS

105

2006-2011

FFO – 12%

Fines – 18%

Misc – 1%

Offshore Survey – less than 1%

Wreck – 4%

Pollution – 9%

Cargo – 2%

Collision – 20%


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OFFSHORE CLAIMS PROFILES

106

– FPSO

– drilling units

– construction and installation

– support / supply boats

Page

FPSO – NUMBER OF CLAIMS

107

2006-2011

FFO – 2%

Fines – 11%

Pollution – 11%

Collision – 1%



Page

FPSO – VALUE OF CLAIMS

108

2006-2011

FFO – 2%

Fines – 71%

Pollution – 2%

Collision – less than 1%Offshore Survey – less than 1%


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DRILLING UNITS– NUMBER OF CLAIMS

109

2006-2011

FFO – 6%

Personal Injury – 93%

Collision – 1%Offshore survey – less than 1%

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DRILLING UNITS– VALUE OF CLAIMS

110

2006-2011

FFO – 3%


Collision – 2%Offshore survey – 6%

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CONSTRUCTION / INSTALLATION NUMBER OF CLAIMS

111

2006-2011

Fines – 5%

Personal Injury – 74%Offshore survey – 3%

FFO – 8%

Collision – 2%

Cargo – 4%

Wreck – 1%

Misc – 1%

Pollution– 2%

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CONSTRUCTION / INSTALLATION VALUE OF CLAIMS

112

2006-2011


Wreck – 10%

Cargo – 2%

Fines – 4% Misc – 3%

Collision – 1%

FFO – 5%


Pollution– 24%

Page

SUPPLY / SUPPORTNUMBER OF CLAIMS

113

2006-2011



Cargo – 2%

FFO – 11%

Wreck – 1%

Collision – 15%

Misc – 1%Fines – 3%

Pollution – 2%

Page

SUPPLY/SUPPORTVALUE OF CLAIMS

114

2006-2011

Collision – 53%

Cargo – 3%FFO – 27%

Wreck – 1%

Personal Injury – 14%Misc – less than 1%

Pollution – less than 1%


Fines – 1%

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CONCLUSION

115

– personal injury

– aggregation of attritional claims

– management of claims

116



117

MANAGING MAJOR OFFSHORE POLLUTION CLAIMS FABIEN LEREDE

CLAIMS DIRECTOR, STANDARD CLUB

Page

GANNET OIL LEAK - 13 AUGUST 2011

118

Page

GANNET OIL LEAK - 13 AUGUST 2011

119

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PENG LAI OIL SPILL – 4 JUNE 2011

120

Page


121

Page


122

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CHALLENGES PRESENTED TO MEMBER

123

– deal with the emergency

– activate response procedure and deploy equipment and personnel for the containment and clean-up

– establish your legal rights and responsibilities

– manage the media

– continue to trade

Page

CLUB’S IMMEDIATE ACTIONS

124

– take control on behalf of the member– activate Casualty Management Team

– fact find – how major is the spill?– appoint experts, lawyer, media consultant, salvors– liaise with other insurers

– website– claims office– mobilise CTC resources

The burden of responsibilityfor managing the spill

stays with us.

126



Standard Offshore Forum, Trinity House, London, 20th October2011

The Role of ITOPF Offshore

Dr Michael O’Brien

ITOPF Technical Team Manager

• Established in 1968, in London UK

• Advice on all aspects of marine spills of oil & chemicals

• Emergency response methods/ equipment

• Damage minimisation

• Damage/ claims assessment

• Monitoring/ restoration...

• Service provided by shipping industry & P&I insurers

• Non-profit, technical organisation

INTRODUCTION TO ITOPF

ITOPF MEMBERS

• 5,980 tanker owners & bareboat charterers

• 10,500 tankers, barges & combination carriers (301 million GT)

• Virtually all the world’s bulk oil, chemical & gas carrier tonnage

Globally, the number of large spills

each year is quite variable,

Yet there is a clear downward trend

0

5

10

15

20

25

30

35

40

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

20

15

20

18

20

21

20

24

20

27

20

30

Annual spill frequency

Large Tanker Spills by Year> 700MT or 5,000 BBL

0

5

10

15

20

25

30

35

40

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

20

15

20

18

20

21

20

24

20

27

20

30


Ave freq by decades

0

5

10

15

20

25

30

35

40

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

20

15

20

18

20

21

20

24

20

27

20

30


Ave freq by decades

A log estimate

ITOPF ASSOCIATES

• Owners of other types of ships given “associate” status since 1999

• 495 million GT of non-tanker shipping (e.g. bulk carriers, container vessels, cruise ships, tugs, supply vessels, FPSOs...)

INCIDENTS ATTENDED

New Dimensions

with Response

to Oil Spills

from Non-

Tankers?

Photo: NOAA Photo: BP Photo: Internet

Non-Tanker Vessel Accidents(Bunker spills from bulkers, Cont. vessels,...)

• Persistent fuel oils• Large spills tend to be HFO (diesel in sm. tanks)

• HFO always requires response if oil strands

• HFO evaporates less, produces more waste...

• Multiple small tanks, piping, internal structures

• Smaller bulk quantities to target in recovery ops

• Overall F.O. capacity much lower than with tankers

• BUT, tanker might loose only one tank...

• Oil release at depth often slow & continual

• Smaller worst case release scenarios

Rig/well releases

• More complicated surface response activity

• Oil release at depth under pressure!

• Much larger worst-case release scenarios

• Fixed location and known oil type

New horizons offshore?

Dr. Michael O’Brien,

International Tanker Owners Pollution Federation, Ltd.

137



MARINE & ENGINEERING CONSULTANTS

Technical Claims Handling

Presented by

Peter Baggaley

Standard Offshore Forum

20 October 2011

In the beginning

• Phone rings

• Who?

• Where?

• What?

Mobilization

• Access

• Practicalities

• Who

• How

• Visas

• Timescale

• Safety

• Instruction

On Site

• Protect Owner’s Interests

• Assist Master

• Stabilize & Improve

• Collect Evidence

Back in the office

• Analysis and Reporting

• VDR

• AIS

• Stability / Loading Analysis

• Mooring Analysis

Further Roles

• Expert Witness

• Project Manager

• Reporting

• Cost Control

• Local Politics

MARINE & ENGINEERING CONSULTANTS

Technical Claims Handling

loc-group.com

145



146

THE HUMAN ELEMENT OFFSHOREWE HAVE TO LEARN THE LESSONSCAPTAIN CHRIS SPENCER

DIRECTOR OF LOSS PREVENTION, STANDARD CLUB

PIPER ALPHA OUTCOME

147

– 167 fatalities

– est cost $4-5 billion

– safety case regime

– single regulatory body - HSE

– Cullen report

PETROBAS P36

148

– 175 people evacuated

– 11 fatalities

– rig insured for $500 million

– 2007– Brazil National Petroleum

Agency (ANP) created formal safety management systems

BOMBAY HIGH

149

– 12 fatalities

– reported insured value $750 million

– Oil Industry Safety Directorate (OISD) given enhanced mandate for offshore safety

MONTARA

150

– pollution removal costs, estimated $2 billion

– single regulatorybody NOPSA powers enhanced

DEEPWATER HORIZON

151

– 11 fatalities

– $40 billion

– single regulatory body –Bureau of Ocean EnergyManagement, Regulation and Enforcement (BOEMRE)

Page

OFFSHORE – WIND FARM IS IT A SHIP OR A……..?

153

154



the standard offshore forum...oct 20, 2011 · current financial influences 5 – chaotic financial...

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