Growing Interest in Mutual Insurers

There’s growing interest in the use of mutual insurers, as commercial insurance markets continue to increase rates and withdraw capacity, particularly in the thermal power and downstream sectors.

The interest in mutual insurers is driven by the fact that they offer large blocks of capacity and stable rates, despite fluctuations in commercial markets. There are a few primary features that differentiate mutual and commercial insurers. 

• Independence. Rates do not usually track traditional market rate cycles, but are driven by the mutual members’ losses.
• No profit basis. Typically, mutual insurers have a low cost base with no built-in profit margin.
• Value added services. While membership benefits may vary between insurers, they may include focused loss control initiatives, specialized claims professionals, captive management support service, and direct access to industry data and analysis.

Mutual insurers can be a valuable risk transfer option for energy and power companies, particularly during hard market conditions, or as a long-term hedge against commercial market cycles.

Oil Insurance Limited (OIL): An energy industry mutual

Membership of the Bermuda based energy mutual, OIL, has grown by over 20% since January 2018. In the same period, the mutual has issued over 100 premium indications to prospective members across a broad range of energy sectors and domiciles.^[1]

In a recent survey 85% of OIL members expected commercial insurance markets to continue reducing coverage and capacity.

On the other hand, from January 2022, OIL's members will be offered up to USD 450 million (currently USD 400 million) of physical damage, control of well/redrilling costs, and pollution coverage “at cost.” This is a key initiative within OIL’s five-year strategic plan to offer choice to energy companies striving to obtain the insurance protections they need for their current operations.

OIL’s approach for members:

1. OIL's premiums do not track traditional market cycles and are driven exclusively by their members’ losses. OIL premiums are calculated to equal losses plus operating costs, which are typically below 5%.
2. To avoid premium volatility in a higher than expected loss year, OIL uses a premium allocation model that smooths the payback of premium over a five year period.
3. OIL offers flexibility on whether capacity is used as primary (corner stone) or excess or quota share

OIL membership eligibility requirements:

• At least 50% of either (1) gross assets, or (2) annual gross revenues derived from energy operations.
• A minimum of USD 1 billion of gross assets.
• Investment grade credit rating of at least BBB (S&P) or BAA3 (Moody’s).^[2]
• Business operations that represent an appropriate spread of risk.
• A willingness and ability to absorb moderate premium volatility.
• A long-term, strategic risk management approach.
• A strong risk management record (acceptable 10 year loss record).

While OIL is a valuable risk transfer tool for many energy companies, its unique coverage needs careful dovetailing with the commercial market policies.

For more information please contact your Marsh Specialty team.

OIL may not be a suitable or the most cost effective solution for all eligible energy and power companies. Marsh Specialty recommends that any option obtained from OIL is fully evaluated against traditional commercial market solutions and the unique needs of your business.

[1] Source: OIL

[2] Companies without a credit rating can obtain a “shadow rating”; or be subject to financial analysis by OIL, and may be required to post acceptable security.