In a volatile industry sector, many large oil and gas companies establish their own insurance subsidiary. These entities, called captive insurance companies, help manage the overall group risk. Due to the way in which they manage reserves, the captive can typically afford to retain higher risks than individual operating companies or business units. Alesco Risk Management Services Limited (Alesco), an independent energy insurance broker and risk management consultant,works with oil and gas companies to determine how much risk they should retain in their business unit, how much should reside with their captive(s), and at what point they should transfer the excess or catastrophe risk to local and international reinsurance markets.
To help its clients develop an informed risk management strategy, Alesco uses @RISK to design models that forecast future insurance losses. This enables alternative insurance structures to be tested to see how different balances of business unit retention (usually a simple deductible or excess on the policy that will be applied before any insurance claim is made), captive retention, and, beyond that, commercial insurance, affect premium levels and capital requirements. The objective is to find the optimal structure that balances an acceptable premium cost with the client’s financial ability to retain risk, and its appetite to do so.
“Palisade’s @RISK makes it quick and simple to run Monte Carlo simulations directly in Excel, thereby avoiding the need to build complex models with thousands of rows of data and code,” explains Derek Thrumble, Partner at Alesco. ” As a result we can undertake complex forecasting for our clients within a realistic time-frame to influence decisions that meets their corporate, financial and legal requirements and determine the insurance strategy that is the best fit for them at that time.”
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