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The story of OIL: an example of a successful captive.

Staying afloat despite paying losses in excess of premiums for almost two decades is what makes one petroleum industry captive successful, according to its president.

"The fact that we have paid losses greater than the amount of premium income that we have collected is the strongest evidence that these kinds of facilities are probably the best thing that could happen to the insurance industry," K. Doyle Stephens, president of Oil Insurance Ltd. (OIL) of Hamilton, Bermuda, told CICA members.

OIL was formed in 1971 in response to the property/casualty insurance industry's failure to provide coverage to the petroleum industry, particularly pollution liability. Since then, OIL's capital surplus has jumped from $160,000 to $406 million as its membership roster has increased from 16 to 49 companies. Premiums written since inception equal $1.6 billion, while incurred losses equal $2.1 billion. Offsetting the deficit is $833 million in investment income.

There are several reasons the company has succeeded, according to Mr. Stephens. One is that it requires a five-year commitment from its members. "We don't want companies coming in when times are rough and walking away when markets go soft," he said.

Another main ingredient to success is OIL's broad coverage. "We provide the broadest coverage available in the marketplace for our types of risk," said Mr. Stephens.

Any company involved in oil exploration, production, marketing, refining, transportation, storage or resale of crude or petroleum products and which puts up $10,000 for a share certificate can obtain a variety of coverages from OIL. Coverages include all-risk property damage, control of oil well and, on an optional basis, pollution liability and marine hulls. Written on a worldwide occurrence basis, limits are up to $150 million, but an additional $150 million can be obtained through OIL's excess facility. Deductibles range from $5 million to $100 million. Business interruption and products liability are excluded.

A formula-based rating plan, which punishes those with losses and rewards those without losses, is also responsible for the company's success. "We operate off what we call a standard rate, which is derived from the loss experience of the total group," explained Mr. Stephens. "We then use debit and credit modifiers which give credit for good experience and debits for bad experience. We feel this is one of the keys to the long-term success of the company and probably the fairest way to operate."

More specifically, the company charges a premium of 70 percent of standard rate if a member is loss-free, a standard rate when a member's premiums paid equal losses paid and higher rates as the loss ratio increases. Losses remain in the rating plan for five years. There are also minimum and maximum premiums for each client, and rates can be capped, when necessary, by the board of directors.

Therefore, "a member of OIL can expect to pay back a large percentage of most small losses," said Mr. Stephens. "But if he has a large loss, he does have true catastrophic coverage.

Another reason for OIL's success is its efficiency, evidenced by an extremely low expense ratio which has averaged less than 2 percent since formation. "With a commercial company, you are liable to see an expense factor of about 25 cents [on every dollar in premium] taken off the top," said Mr. Stephens. "And then shareholder return has to come out. You will wind up with about 65 cents to pay losses. At OIL we believe that for every dollar of premium we collect we can pay at least 95 cents in losses." The captive also benefits from strong member involvement, said Mr. Stephens, because its shareholders are also its policyholders. Shareholders elect the board of directors and executive committee, which hires and supervises the staff. The weight of a shareholder's vote is based on the amount of premium paid over time. Any change to OIL's shareholders' agreement or policy requires a shareholder notice. Although the shareholders and board of directors have made operational and policy changes, OIL's purpose has not changed.
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Title Annotation:Oil Insurance Ltd.
Author:Schussel, Mark L.
Publication:Risk Management
Date:May 1, 1990
Previous Article:One company's alternative to the captive alternative.
Next Article:When a foreign company seeks domestic status.

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