A recent very large loss (estimated at RM95.5 million) stemming from damages to a transformer over at a Independent Power Producer (IPP) GB3 station at Pantai Remis, Perak did raise some eyebrows…. In just about half the calender year of 2009, two major losses were reported giving a total claims amounting to RM110.9 million. Comparing the previous years, we have RM29.9 million for 2008, a whooping RM97.38 million for 2007 and RM30.31 million for 2006, and the details can be viewed from the enclosed file:
Kindly note that the claims listed in this pdf file excludes those smaller claims and losses falling within policy deductible(s).
Wait….before we forget, in July there was a claim reported – The Kapar IPP (or Sultan Salahuddin Abdul Aziz Shah Power Station) suffered an MB and LOP claims estimated at RM70 million. This is also a coal-fired plant and rumours have it that this is a co-sharing biz between Allianz and Syarikat Takaful. Wonder why this Takaful company is so engrossed with IPP risks. If this is true then the total claims under major category has ballooned to RM RM180.9 million; and 2009 is still a long way to the finishing line.
With around 66 power generation plants or stations nationwide, the total estimated annual gross premiums fed into the industry were estimated not more than RM67 million for Industrial All Risks (IAR), Machinery Breakdown (MB) & Loss of Profits and Fire class of business combined in 2008. Out of these 66 plants, 21 is in respect of hydro-powered, 22 gas-fired, 6 coal-fired, 5 oil-fired, 9 of biomass typed, and 3 hybrid of either wind, solar or solar (source: wikipedia). The total premium looked sizeable but they are actually not when expenses are being incurred on basis of 15% brokerage + 5% fac ri commission + 2.5% (technical survey) + 15% insurer’s management expenses + experience refund (ranging from 10% to 15% of net premium). Rates are also running low….low and away – 0.05% to 0.075%.
While the statistics show 2008 and 2006 losses were reasonable, but over the last three years or so, the simple loss ratio (inclusive of small claims) is nothing less than 220% after expenses. But if the Kapar claims is factored in, this simple ratio should ballooned past 280%.
Analysis done by some industry experts; claims are expected to mount in the coming 3 years as the plants, machinery and equipments aged, required extensive maintenance and even replacement. The youngest plants are already more than 6 years old. While technical surveys are being conducted but these are not normally done on an annual basis as was required, and even if they are, most underwriters are not sure what the reports are all about! Out come some one-eyed Jacks claiming this risk is the better risk because it is new, no loss experience, well maintain and have the best risk management implementation…..and so on. Or he may have another theory, if a huge loss had occurred, surely all the old parts would have been replaced…. you should get a risk as good as new! Alas…. we have seen it too often – in Sabah, over the many years we had witnessed that when a huge loss occurs, more is certain to come even after the repairs and replacement. We found out that those damaged parts were not replaced but repaired or replaced with old fabricated parts in order to offset the huge deductibles, which probably run in millions.
From the various claims development over the last few years, all plants and stations are susceptible to large accident, it is just a matter of time for such event to take place. Main problem todate with PP is losses stemming from Machinery breakdown….. and thereafter loss of profits.
So what is the better strategy in underwriting of such category of risk? There is really nothing wrong with the existing method, it is just that most local underwriters are not too knwoledgeable about this subject, thus they just wanted to take a small following share, relying on the leader who are international boys, supposedly have those expertise with their global assistance.
We still think an effective risk management policy and the implementation strategy report are the most important part in power plant underwriting (simply because underwriters are more abled to feel the pulse of the risk), beside those risk surveys, risk improvements, availability of OEM parts and adequate deductibles are applied.
This is because underwriters can easily digest the contents of the risk management policy and procedures. They are also expected to be familiar with the implementation reporting and so on…. So doing simple things like this helps underwriters in risk avoidance.
Underwriters must request for the client’s risk management and compliance policy and procedures, including the methodology of implementing them on a yearly basis. A detailed study is required including comparing and identifying the important changes in between previous years. Are they adopting any industry best practices? Implementation reporting should be checked against the technical survey reports to identify any hiccups or small accidents that may had occurred within any relevant period understudy. Since MB / MBLOP are main item in the LSR for PP, always understanding the major components used in the Power generation…. no difference from how we look at main parts in Extended Warranty underwriting.
It is necessary you get to see some aspects of their Business Recovery & Continuity programmes undertaken…. Ultimately if you cannot avoid a large scale accident about-to-happen, you can still expect the client to be efficient and effective with their loss Mitigation!
Happy hunting…. but not hunted!
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