Self-insurance and the impact of the petroleum contract
There are a number of centralised services which the large integrated oil companies retain and manage internally; insurance is one of these. Legislation in many countries allows these services to be internalised as long as the cost structure is transparent.
- Insurance centralised management provides not only a cost-saving mechanism, but also a profit that covers the entire insurance process including running costs and final claims process. This is due to a number of factors including the inherent nature of the risks themselves, the structure of petroleum contracts, and time-lag between premiums and claims.
- Many oil companies utilise insurance captives as a residual instrument, because they have internalised these services within a captive insurer, and the profit generation associated with them.
- The top management in these oil companies is normally well aware of the cost and profitability drivers in their companies. This paper highlights the interesting phenomenon by which a cost driver becomes a profit driver.
- Insurance market players should recognise the increasing role of captives and design new tailor-made specialist solutions if they intend continuing servicing this business niche. They should be aware of this trend and fully understand the implications on reinsurance pricing, choice of market leaders, captives involvement, and rating considerations.
In this paper, Mr Michele Cibrario describes this unique arrangement and explains why insurance market players should recognise the increasing role of captives and design new tailor-made specialist services that could work within this business niche.