Writing the Malaysian Power Plants… The leader in One-eyed Jack?

A recent very large loss (estimated at RM95.5 million) stemming from damages to a transformer over at a Independent Power Producer (IPP)  GB3 explosion damagestation 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:

Malaysia Power Plant Claims

Malaysia Power Plant Claims

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.

blockquoteBut it turns out they are no different from our local “one-eyed Jack”

pumpkin killsWe 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.

blockquoteThis 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.

blockquoteIf you are new to this trade, do not rely on any “one-eyed Jack” simply read the Risk Management & Compliance Policy and run through the Report on implementation…..

 

BOMB!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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10 comments for “Writing the Malaysian Power Plants… The leader in One-eyed Jack?

  1. insurance-junkie
    March 8, 2010 at 00:08

    Any latest losses for us?

  2. Donboh
    November 18, 2009 at 22:52

    Is there anymore information on the latest IPP losses?

    • November 19, 2009 at 15:08

      So far we do not have any in hand… perhaps none since we have not heard from our sources.

  3. Karen Cheong
    November 18, 2009 at 14:43

    Ref your list of Major Power Plant Insurance Claims Filed Between Middle 2006 and Middle 2009 is incorrect.

    Ref to the 4th claim item in year 2007, claim amount 10.5M for Damage to SGT1 transformer(MB) at IPP Plentong, Johor. This plant does not belong to YTL.

    Please check your facts and ensure it’s properly documented.

    • November 19, 2009 at 15:07

      Dear Karen,

      Thank you for bringing this up. In our record we have three IPPs in Johor, perhaps YTL’s Pasir Gudang PP is close by to this Plentong one…. that why we made some assumption. Anyway once we have the details secured we will have the file updated. Thank you once again…….

  4. Bugis
    October 8, 2009 at 01:35

    PP risks not that bad lah! Of course plant and machines are now getting older, so the professional surveyor must be good enough. They must be capable enough because mostly insurer pays something like 2.5% to 3% of gross premium for those technical surveys

    • October 8, 2009 at 12:10

      Yes, as plants and machineries get older, naturally servicing and maintenance become costlier and parts would have to be replaced, which means the company must hold expensive parts as stocks. Replacement of old and worn out parts must be done as soon as possible as experience with delay in any needed parts replacement tell us that it can make or break insurers bottomline. Thus able to go through the important section on plant and machinery management available in the company’s overall Risk management & Compliance manual could possible pinpoint areas of concerns to underwriters….

  5. September 28, 2009 at 00:48

    It looks like the Kapar loss is only about RM25 m and not as reported!

  6. August 30, 2009 at 00:03

    Dear KSC,
    We did emphasise on the annual premium iro only power generation plant / station when we put in the “not more than” RM67 m premium computation. In case of TNB the RM25 m probably include other risks aspects ie. transmission and distributions, including assets relevant to it, ie. sub-stations…step-down transformers…. perhaps also other classes of insurance – GPA, Health, CGL, etc. Other assets excluded from the computation include reserviors / dams / etc. At the end we still think the total annual premium base is not more than RM100 million. Premium rate applicable is just too fine!

  7. KSC
    August 27, 2009 at 23:02

    Think this total premium of RM67 mil looks dubious?? I would have thought likely RM120 mil. TNB would have a total premium of RM25 mil. It is best to outline how you arrive at the premium figure.

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