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ASIA OFFSHORE ENERGY CONFERENCE30TH SEPT – 2ND OCT 2015
BALI, INDONESIA
The Role and Management of PETRONAS’ Captive Insurance Company
Page 2
PETRONAS GROUP INSURANCE ROADMAP
BRIEF PROFILE OF ENERGAS
FUNDAMENTALS OF CAPTIVE FORMATION
ORGANIZATION STRUCTURE / CORPORATE
GOVERNANCE
RISK CONTROL FRAMEWORK
UNDERWRITING AND REINSURANCE
CONCLUSION
TABLE OF CONTENTS
• Coal Bed Methane,
Australia
• Floating LNG
• Shale Gas, Canada
PETRONAS Group Insurance Roadmap
• Formation of
Insurance Captive
• AM Best – “A
(Excellent)”
• Undertake risk
initiatives with
Brokers and Key
Underwriters
• Developed Group
Domestic
Insurance
Programmes
• Developed
Global Upstream
Insurance
Programme for
International
Operations
1977Property Department
1983Establishment of Insurance Department
1998Addition of Risk Management Unit
2005Formation of Energas
• Established Corporate
Insurance Guideline
• Mutual Hold Harmless
Regime for RAPID
• Inhouse Estimated
Maximum Loss Study
Post 2005 & Beyond
Page 4
BRIEF PROFILE OF ENERGAS
A wholly owned subsidiary of PETROLIAM NASIONAL
BERHAD (PETRONAS)
Incorporation Date : 24th March 2005
Commenced Operation : 1st April 2005
Commenced Underwriting : 1st April 2006
Authorised Paid-Up Capital : USD 10.5 million
Page 5
THE NEED FOR A CAPTIVE COMPANY
PETRONAS spent circa RM 1.3 billion in premiums for period from 1997 to
2004 with claim of RM 460 million i.e. a loss ratio (claim / premium) of only
35%.
Many of PETRONAS’ risks are unique in Malaysia thus
- Creating problems for in equitably rating the risks by Malaysian Market
- Substantial percentage of risk being reinsured abroad
- Outflow of premium overseas
As PETRONAS becomes increasingly international in its operations, hence
- Significant portion of premiums flow into international market
- Little / no prospect of premium being repatriated to the Malaysian
market
Volatility of energy (oil and gas) insurance market will continue
- Impact premium level
- Impact retention level of PETRONAS Group’s insurance programme
Page 6
FUNDAMENTAL PURPOSE OF CAPTIVE FORMATION
The fundamental purpose of the captive formation is as follows :
To limit or reduce the overall cost of risk to PETRONAS by
maintaining control over its corporate risk financing programmes
To reduce reliance on conventional insurance market and control
external premium spend to international insurance markets
To build up reserves for the hard market cycle within an internal
vehicle allowing for greater risk retention
Greater control of risk management and insurance processes
Large cost savings in terms of insurance costs to the Group
Page 7
OTHER SUPPLEMENTARY ROLE / BENEFITS
It provides a mechanism for selective retention of risks where it is
financially advisable to do so
It allows alternative or direct access to the international
reinsurance market with the possibility of financial saving
Development of funds allows for the consideration of other risk
transfer mechanisms
Its own retention would reduce foreign exchange outflow
It enables the parent to buy more competitively as overseas
reinsurers recognize the alternative to their direct market
Making available to the local insurance market some of the oil
and gas expertise of PETRONAS to assist the Malaysian market
in the underwriting of energy related risks
Page 8
PRINCIPLE AND BUSINESS OBJECTIVE
Principles of Energas Operations have been governed by the
following rules :
Operates as a single parent captive
Underwrites a global portfolio of business for PETRONAS
Group of Companies operations in which it has direct or indirect
interest. Its participation is up to the PETRONAS Group of
Companies’ interest
Retains a primary layer risk (limit varies according to risk
categories) above operating company deductibles and protects
its aggregate loss exposure through special reinsurance
protection
Does not underwrite unrelated third party risks, construction and
long tail liability business except on selective basis.
Page 9
BRIEF INTRODUCTION TO CAPTIVE
What is a Captive
A wholly / majority owned (subsidiary) insurance company to
underwrite / insure principally the risks of its parent, subsidiaries
and affiliates
These risks once accepted will either be retained by the captive,
or transferred to reinsurers.
The premium retained by the captive should be more adequate to
cover its residual risk exposure so that the captive’s owner can be
protected against the possibility of a loss
CORPORATE ORGANIZATION & BUSINESS
BOARD
CEO
Insurance / Underwriting
Claims / Risk Mgmt
(Mgt. Service Agreements)
Group Treasury
(Investment)
Group Accounts
(Financial services)
Legal Division(Corp. Secretariat)
Etiqa Offshore
(Labuan captive manager)
Compliance
Company organization utilizes resources from PETRONAS Holding Company
units and external service provider.
RISK GOVERNING BODIES
BANK NEGARA
Labuan FSA
BOARD
ENERGAS
LFSA AUDIT
Group Internal Audit
FINANCIAL AUDIT &
ALM – Ernst Young
Rating Agency (Capital
Adequacy Ratio)
ENERGAS UNDERWRITING
COMMITTEE
GROUP TREASURY (Investment
policy)
Energas activities are governed by external
regulatory bodies as well as established
internal governing entities.
INTERNALEXTERNAL GOVERNANCE ENVIRONMENT
(INSURANCE ACT 1996) (AMLA 2001)
(LFSA ACT 2010)
Page 13
ENERGAS
BOARD
PETRONASENERGAS
SHAREHOLDERREGULATOR
GROUP
INTERNAL
AUDIT
LABUAN FSA
ENERGAS
CHIEF
EXECUTIVE
OFFICER
INTERNAL AUDIT
MANAGEMENT
COMMITTEE
BOARD AUDIT
COMMITTEE
Audit Report
Business Control
•Compliance
•Operations
•Reporting Audit
Exercise
INTERNAL CONTROL OBJECTIVE• Compliance with applicable
law and requlations• Effectiveness and efficiency
of operations• Reliability of financial
reporting
MONITORING INTERNAL CONTROL SYSTEM
14
BOARD
PETRONASENERGAS
SHAREHOLDERREGULATOR
LABUAN FSA
CHIEF
EXECUTIVE
OFFICER
Business Control
Division of responsibilities
between Chairman and
CEO of Energas
Compliance Operations (Effective and Efficient)
Reporting (Reliability)
• Compliance Officer
• Compliance Checklist
• Audit report and status
• Compliance update every Board sitting
• Audit update quarterly (Chairman) and every Board sitting
• Biannually update on underwriting and operational performance
• Limit of Authority & Summary of Authority
• Underwriting Guidelines,
• Corporate Financial Policy
• Work procedure manual
• Agreement
• Annual Report (Audited)
• Consolidation between Captive Manager and Energas
• Energas Checklist
• Annual Audited Report
• Monthly Management Report (MMR)
• Quarterly Management Report (QMR)
• Relevant Acts
• Policy, Framework and Guideline
• Statutory Reporting
Internal Control Objectives
INTERNAL CONTROL SYSTEM
POLICY
GUIDELINES
REPORTING
METHODOLOGY
PROCEDURES
RISK OVERSIGHT STRUCTURE
• Business policies as set by the Board
• No underwriting of risk by Energas which could prejudice the financial
security of PETRONAS
• Underwriting Guideline document as approved by the Board
• LOA and SOA Manual document
• Guidelines for appointing business counterparties
• Quarterly Progress reports to Board
• Monthly financial / claims reporting to LFSA
• Quarterly update report to GIAD
• External / Internal / LFSA audits
• Annual financial stress test on underwriting structure
• Capital Adequacy Ratio analysis by international rating agency
• Asset Liability Management / IBNR studies by third party actuarist
• Developed Work Procedure Manual document for each line function
• Competent and trained manpower
LIQUIDITY
RISK
INVESTMENT
RISK
AGGREGATION
RISK
MARKET /
PRICING
RISK
ENERGAS RISKS
REINSURERS CREDIT
CLAIMS LOSS RECORD
FOREIGN EXCHANGE
GEOPOLITICAL &
REGULATORY
INTERNAL CONTROL FAILURE
INSURANCE CONTRACT
DISPUTE
REINSURANCE COST
ENERGAS RISK PROFILES
Energas monitors a set of specific
risks on a regular basis.
This enables Energas to assess
the overall risk exposure and to
determine which risks and what
level of risk Energas is prepared to
accept and the adequacy of
existing mitigation plans.
ENERGAS RISK PROFILES - Continued
Definition of risks relevant to Energas operations
• A counterparty risk when reinsurers become insolventReinsurers Credit Risk
• Increasing trend of claims impacting net profitHigh Loss record
• Fluctuation in USD vs. RM exchange rates and conversion lossesForeign Exchange
• Significant increase in reinsurances premium expensesReinsurance Cost
• Non compliance to law and regulation in location where Energas operates (Labuan) and underwritesLegislative and Regulatory Risk
• Non compliance to policy, procedures and guidelinesFailure of Internal Business Control
• Lead Reinsurer disputing policy coverage on claim's liability Energas Reinsurers' Dispute Risk
• Accumulation of the underwritten risks under multiple policies at a single location or event
Aggregation of the Insured Risk
• Invested funds bring negative returnsInvestment Risk
• Adequate cash are not available to meet fund / claim obligations at a given time
Liquidity Risk
• Inability to reinsure underwritten risks to appropriate overseas market Market Risk
Page 20
ENERGAS PARTICIPATION PROGRAMME & STRUCTURE
SPECIAL CONSIDERATION IN DETERMINING PROGRAMME STRUCTURE :
Critical to the success of PETRONAS captive is its choice of underwriting
portfolio and reinsurance programme. Captive should therefore elect to
participate in those risks where it can command the optimal balance of
premium income and risk exposure
Programme structure would also take cognizance of the following
requirements :
- Any captive programme must not reduce the role played by the
domestic Malaysian insurance market
- There should be no assumption of risk by the captive which could
prejudice the financial security of PETRONAS
Page 21
ENERGAS
RISK
MANAGEMENT
GENERATE
PROFIT
CONTROL
COSTS
UNDERWRITING
COMMITTEE
INSURANCE
PROCUREMENT
INTERACTION BETWEEN ENERGAS, INSURANCE
PROCUREMENT AND RISK MANAGEMENT
Page 22
CYCLE MANAGEMENT STRATEGY
As a Captive insurance company which does not accept third party
risks Energas’ customer base is defined by its Parent.
Asset values and cost of insurance move in tandem with Group’s
activities and market cycles.
Cycle management is therefore practiced through variation in
reinsurance arrangements particularly favouring Quota Share
reinsurance at times Energas view original rates as being
insufficient for the risks Energas face and then favouring other
structures such as Excess of Loss reinsurance when premium
levels appear to be sufficient to carry the risks Energas face.
Existing risk governance and control within Energas is well
established and appears to be adequate to ensure the risk
exposures are properly mitigated according to our risk
appetite.
Continuous governance and high level risk oversight are
being assured to Energas operations by various external
and internal entities such as Labuan FSA, Group Internal
Audit, financial rating agency, to name a few.
CONCLUSION