ASIA OFFSHORE ENERGY CONFERENCE 2014 Intercontinental Hotel, Jimbaran, Bali, Indonesia 24 26th September 2014 THIRD PARTY LIABILITY Market Forces George Nassaouati of JLT Specialty / LPL
Agenda 1. THIRD PARTY LIABILITY 2. BREAKDOWN OF CASUALTY MARKET MODEL INTO DIFFERENT COMPONENTS 3. MARKET SWOT ANALYSIS 4. Q & A 2
1 Third Party Liability Where Are We in the Cycle?
The Famous Cycle Where are we in the cycle? No barrier to entry Too much capacity Good Loss Record Good rates and discipline Strong markets and experienced resource Capacity up to USD 1bn economically, and tested subject to layering Leadership remains strong and healthy Musical chairs in respect of resourcing What are the brokers doing? How do you build a portfolio macro marketing strategy with focus on all tiers buyers 4
2 BREAKDOWN OF CASUALTY MARKET MODEL
Porters Five Forces The Players Threat Of Substitute Products or Services Captives are starting to take interest in Casualty business Hedge risk under contract which is most common Traditional EPC contract underlying requirements Increase in local capacity for minimum local requirements and Umbrella cover Making Third Party a Firs Party requirement RIVALRY Threat Of New Entrants Who are they? Specialist Casualty Company markets Lloyd Syndicates No barrier to entry which is at international level expected mainly from Asia / Middle East / Australlia These companies are easier developing their existing Casualty portfolio or entering this new class through specialist hires. Bargaining Power Of Suppliers Who are they? AIG LIU Zurich AWAC ACE CV Starr Catlin Other Lloyd s Syndicate to a certain extent Bargaining Power Of Buyers Who are they? Oil & Gas Companies Power Companies Contractors / Subcontractors of all tiers Aviation Re-fuelling Companies Project Managers / Designers Service Companies of all tiers Others.
Porters Five Forces Current Rivalry Threat Of Substitute Products or Services Buyers are always looking at cutting cost (even if prices are at historic lows) Hedge risk through allocation under contract due to bargaining power Third Party to First Party at Nil cost broker creativity Underlying liability under contract always seem more appealing to suppliers Bargaining Power Of Suppliers Large players are struggling to maintain current signings / participation on key accounts Small players are chipping away at participation from larger player Price War is on and based on the airline model will the larger players only survive RIVALRY Threat Of New Entrants Economical rates are still encouraging new entrants Low loss ratio justifies allocation of capital in this class Pro-forma policy wordings maintains discipline in this market Large participation by current players allows entrants to test market with small lines. Bargaining Power Of Buyers Over supply of capacity Higher limits purchase-better awareness Lower deductible available-new entrants Lower premium achievable justified by positive loss ratio but Loss record remain positive but effects of over supply of capacity / lower premium / higher limits / increased activity could tell a different story As If model. 7
Porters Five Forces The Future Threat Of Substitute Products or Services Threat Of New Entrants More switch between Third Party to First Party but will brokers maintain bargaining power? Allocation of risk under contract will increase as an alternative but does the picture remain the same? Underlying liability just a matte of who is Buying and their purchase power Bargaining Power Of Suppliers Oligarchy a question of who controls the capacity hence the pricing Exit means higher pricing and stricter terms and conditions for survivors Large companies can afford the Price War Loss record is a key indicator of the future RIVALRY History will always repeat itself Over supply of capacity = uneconomical pricing = EXIT Entry based on economics without special resourcing and experience will lead to a disaster No mention about loss record so far deterioration so far! Bargaining Power Of Buyers Lock In for 3 years with an option of roll-over is the best option subject to no deterioration of the loss record Market exit due to economics or adverse loss record will push pricing upwards Cutting down on limits or opting for higher retention may not be an option due to contract structure Strategy should be long-term and a balance needs to be maintained. 8
Supplier Rivalry - Comparison Style Large Current Supplier Defend key account Leverage brokers / clients on signings Survive a Price War? Loss of key resource Aggressive with reserves built of time to allow survival Need to restructure product / services / team Penetration into developing markets / clients Concerns over loss record Pressure to continue to grow New Entrant Resource usually from a larger supplier Pose a threat hence allowed entry into key accounts No baggage as new to the class or developing it Forms alliances with key brokers Internal pressure to grow to justify investment hence change in culture and flexibility Will target new markets and existing clients aggressively Flexible and excellence in service
3 MARKET SWOT ANALYSIS
External Factors Internal Factors MARKET SWOT Analysis Positive Negative S O W T
External Factors Internal Factors SWOT Analysis - Strengths Positive Negative S W Strengths Weaknesses Strengths: Healthy market for all players at this point in time Supply exceeds demand hence creating optimum competition. O T Awareness is increasing demand for product hence creating positive rivalry Positive sign as capital and resourcing are still flowing into this market Opportunities Threats
External Factors Internal Factors SWOT Analysis - Weaknesses Positive Negative S W Strengths Weaknesses Weaknesses: Over supply of capacity will eventually erode the market Increasing number of claims hence jeopardizing a current good loss ratio O T Price War is inevitable which will eventually lead to exit of certain players Resourcing is an issue as the pool of talented people is limited Opportunities Threats
External Factors Internal Factors SWOT Analysis - Opportunities Positive Negative S W Strengths Weaknesses Opportunities: Wider coverage and lower retention levels for buyers. Competition will lead new entrants to create new solutions and products O T Opportunities Threats Re-balancing of the market to break any historic large company cartel and increase market capitalisation / creation of wealth Opportunity for talented resource to make a mark and create company and individual wealth
External Factors Internal Factors SWOT Analysis - Threats Positive Negative S W Strengths Weaknesses Threats: Low entry barrier may rapidly erode the market Lack of underwriting discipline may lead to canibalisation O T Opportunities Threats Loss of resource from one geography to another will create demand / supply in certain territories only against a perfect international market model Exit will favor suppliers to the expense of buyers which is not good on the long-term
A Vision of Success or Disaster Buyer Perspective Short term strategy for most to enjoy current soft cycle as long as possible Develop a contingency plan in the background for the hard cycle Build a partnership with a preferred supplier for a natural hedge Supplier Perspective Ride the wave and survive the next 24 months M&A activity to create the right economics A significant loss in a high visibility territory could change the market Broker Perspective Come to Bali and talk about it Make the most of the current market though Buyer Lock-In Chose a preferred Supplier and help them ride the wave Capital Perspective Focus on best return on capital Switch of capital will erode the market What is next/ 16
5 QUESTION & ANSWER