Willis 2012 Latin American Energy Conference

Willis 2012 Latin American Energy Conference Contingent Business Interruption aggregates, Supply Chain Management, all under control? Olivier Perraut, CUO Energy and Natural Resources - SCOR Global P&C October 2012

Contingent Business Interruption aggregates, Supply Chain Management, all under control? Or not? 2

CONTENT Lessons learnt from last year cat events Examples of man-made supply chain disruptions Risk Managers View Underwriters View Let s take a step back Take Away 3

2011: record year for natural catastrophes and supply chain disruptions 2011 Japan Earthquake and Thai Floods (factories around the world affected) Not only automobile and electronics manufacturing Magnitude of disruptions was a surprise Full impact not known yet. Takes time to filter through Probably the worst year ever for CBI insurance What if it happens in China? Not new but increased interdependencies, networked global economy, increased efficiency vs redundancy 4

Lessons learnt Complexity of supply chains (reminder ) Criticality of small or cheap individual components not always detected and/or stress scenario not adequate Supplier name is not enough Coverage adequacy? 5

One illustration in the automotive industry 6

Geological hazard perception 7

Lessons learnt from last year cat events Examples of man-made supply chain disruptions Risk Managers View Underwriters View Let s take a step back Take Away 8

Examples of CBI losses following crude pipe spills 30"crude pipeline 6B was shut-in due to a leak. Approx. Event 20,000 barrels of crude oil spilled into the Kalamazoo river. Final approval to restart by PHMSA on 26 Sept. 2010 subject to pressure restrictions. Company North American pipeline company Date 26 July 2010 Location Marshall, MI Impact Several refineries in Ohio, Pennsylvania and Ontario affected for several months Event Company 40" Crude Pipeline failure generated a spill 4000 m 3 of crude. Authorised to restart in january 2010 subject to pressure restrictions. European pipeline operator Date 7 August 2009 Location Southern France Impact Cressier and Reichstett Petroplus refineries affected for several months *Based on public information 9

Examples of man-made CBI losses Event Explosion following Gas Pipeline leak near gas plant Company Large US E&P company Date 3 June 2008 Location Varanus island, Australia 30% of Western Australia gas supply cut off. Burrup Fertilisers Impact shutdown several months. Other companies affected: Alcoa, mining companies Explosion in CDT (Cyclododecatriene) plant which is key component in manufacturing of PA-12 resin used in Event automobile fuel and break components. Only 2/3 other manufacturers WW. Downtime estimated 9 months. Company German chemical company Date 31 March 2012 Location Marl, Germany Customers of PA12 include GM, Ford, toyota. Downtime Impact estimated 9 months. Arkema is a customer of CDT also to produce PA12. Arkema looking for alternative PA12. *Based on public information 10

Risk Managers View 2011 Japan EQ and Thai floods CBI losses prompted new interest from top management Supply Chain (Risk) Management / Insurance is top of the list of Risk Managers According to the FERMA poll only 14% of the risk managers who responded to the online poll on supply chain risks felt that existing coverage and capacity is adequate, and just half said they are insured against contingent or non-damage business interruption (cf. Iceland Volcano events or political risks). 46% said coverage and capacity were not sufficient. Some 28% of those polled found conditions too restrictive and 26% said the cost is too high. More than half (52%) said they were very concerned about continuity of supply from direct suppliers, and 36% said they were somewhat concerned. 12

Underwriters View CBI accumulations to be taken into account in capacity Lack of information from clients and from insurance surveys Lack of control and difficulty to adjust CBI claims Complexity (interconnectedness) Uncertainty regarding exposures Difficulty to manage aggregations esp. CAT and difficulty to price Tightening of conditions, increased prices 14

CBI Underwriting: how do underwriters deal with uncertainty Exclusions of own property to apply (non damage, epidemic, strike ) Limit coverage ie FLEXA only especially for critical cat areas Limit to Direct Suppliers and Customers (Indirect is impossible to control, number of small claims) Exclude or reduce coverage for Unnamed Suppliers and Customers Reduce Sublimits especially when cat exposed Increasing deductibles Increasing Coverage Gap 15

Let s take a step back 17

The Supply Chains Tree: risk-engineered or inherited and risk-managed? SC-1 SC-9 SC-xx Risk-engineered versus inherited and risk-managed supply chains tree Most supply chains trees result from many evolutions and changes over time and contain many inherited components Purpose-built and risk-engineered supply chains trees would only be possible in the case of absolute green field projects or operations 18

Identifying internal and external risk factors and most critical scenarios in normal and stressed operating conditions Critical parts SC-1 Accident SC-9 Defective parts SC-xx Nat Cat or other external events Key distinctions when performing risk analysis Nature of operating conditions Normal versus stressed Origin of disruptive factors Internal or external 19

A comprehensive ERM framework lead to more chances of adapted, efficient and sustainable insurance solutions Global ERM framework In normal operating conditions In stressed operating conditions for the most critical scenarios Nat cat events Black swan scenarios Business impact analysis : quantification of the financial exposures Business Continuity / Recovery Plans and crisis management Response Drills Internal risk analysis key features External risk analysis key features Insurance Solutions Critical parts / key products Single supplier bottlenecks and dependencies Fully integrated just in time Defective parts Quality Assurance / Control ( Waterfall clauses in the contracts) Audits Products certification Nat cat and other external events Supply x peril x geography accumulations Contingent Business Interruption, as a stand-alone product Intellectual property Cyber & cyber liability 20

Current translation : CBI Information is needed to reduce uncertainty Type of information (incremental) Quality Frequency Names of direct suppliers Very Basic Frequent Critical direct suppliers Basic Frequent Critical direct suppliers per insured location Basic Frequent As above with names of products better than std Frequent As above with Locations of suppliers (cat) better than std fairly rare As above with Flow diagrams with volumes Good fairly rare As above with Flow diagrams with Earnings/Profits Good Rare As above with critical points/alternatives Good Rare CBI studies with critical points * Best practice Rare Full up to date BCP (Business Continuity Plan)** Ideal Very Rare * incl. Critical points, mitigation, alternative sources, scenarios with EMLs ** incl. Evaluation of risks, alternative contracts, mitigation plans, alternative products non damage scenarios, tier 2, extra expenses, time scales 21

Take Away Perception of CBI and supply chain risks has evolved There is currently a gap between coverage supply and demand/perceived needs when it comes to CBI ERM is key in assessing the supply chain associated risks Better risk transfer solutions should be / are available to clients with strong ERM and clearly identified and specific needs supported by appropriate study 23

SCOR holds its course in this testing financial environment HOLDS ITS COURSE Encouraging pricing environment, sustaining reinsurance growth expectations Life portfolio fully focused on mortality risk With close to zero sensitivity on interest rates changes Strongly capitalised Leveraging on high diversification benefit Prudent asset management Low duration, high cash position and high average rating of its asset portfolio Optimally diversified Between Life and P&C, by Line of Business and by Geography Upgraded to A+ by S&P on June 5 th, 2012 History of bestin-class ROE with lowest volatility in the industry 24