Construction

							                                  Introduction
Offshore Construction - Is there an answer?


Moderator
Jim Guild, Senior Vice President - Willis Risk Solutions


Panel
 Chris Sprague, Deputy Chairman, Energy Team - Inc & Co.

 David Sharp ACII, Managing Director, Marine & Energy Division - Marsh LTD.

 Mel Causer CPCU, Vice President & Regional Manager - AIG Oil Rig

 William J. Siebenaler, Insurance Manager Americas – BP plc



     1
                The Need



    High Volume of Capital Construction


    Pressure to Deliver Oil/Gas to Market


    Large, High Value Projects Worldwide


    Technical & Location Challenges




2
     The Problem


     Lack of Capacity



    Increased Premiums



    Reduced Coverage



    New Requirements



3
                 Total Capacity lost US$1.26billion

Companies                 Capacity US$   Syndicates      Capacity US$
   Copenhagen Re               20m      Coffey          75m
   HIH                         70m      Cox             100m
   Odessey                     85m      DeRougement     6m
   ONIC                        40m      Devereese       32m
   REAC                        15m      Hart            85m
   Reliance                    50m      Howell          30m
   AGF                         75m      Jones           15m
   Frankona                    35m      Kershaw         37.5m
   Gard (Temporarily)          100m     MMO             15m
   Zurich Temporarily)         110m     New Market      50m
   CRH (Temporarily)           30m      Cotesworth      100m
   ACE Global (Until 2002)     30m      Hope            56m
                                         Total           1.26 billion


    4                           Capacity that remains?
                            Increased Premiums

                 Guesstimated                                         Guesstimated
                    Annual                                            Annual
                  Premium At                                          Premium At
    $m           Today's Rates                                        Historic Rates
    700
    600

    500
    400
    300

    200

    100
     0
          '90   '91   '92   '93   '94   '95   '96   '97   '98   '99   2000 2001




5
                     Increased Cost of Coverage

            2 Yrs. Ago                               Today

   GULF of MEXICO PROJECT                 GULF of MEXICO PROJECT

 Normal Size, Location, Technology      Normal Size, Location, Technology

 Limits – Full Value                 Limits – Limited Capacity

 Deductibles – Low $100-250k         Deductibles – High $1-5m

 Coverage – Very Broad               Coverage – Limited

 Typical Rate – 0.5 to 1.0 %         Typical Rate – 3.0 to 3.5 %




       6
                     Reduced Coverage

Faulty Part                      Limited Escalation Costs

Faulty Welds                     Additional Insured

Standby/ Cancellation Costs       Waiver Subrogation

Deductible                       Damage Definition

Additional Work Clause           Sub-Limits

Disclosure Issues


    7
                 New Requirements



     Quality Assurance



     Quality Control



     Surveys




8
        How Did We Get Here?



     Historical Losses/Premium

     New Technology

     Water Depth

     Lack of experienced personnel

     Location / Weather

     Warranty Coverage


9
                Offshore CAR Claims - Excess US$1M (Indexed)

                                   1990 - 2001 Claims
                $m                                                         Total : U.S$ 3.5 Bil
                                                                           Average : U.S.$ 7.3 Mil
          700
          600
          500
          400
          300
          200
          100
           0
                     '90   '91   '92   '93   '94   '95   '96   '97   '98   '99   2000   2001


 Nos. of
Incidents:           20     33    33    29    30   39    53    64    86     68    40    14

     10
                                       Can It Be Fixed?
                                             Premium
                                             How much is enough?
                $m
          700
          600                                                                        Guesstimated
                                                                                     Annual
          500
                                                                                     Premium Volume
          400                                                                        Historic Rates

          300

          200

          100
           0
                     '90   '91   '92   '93     '94    '95   '96    '97   '98   '99    2000   2001
 Nos. of
Incidents:           20    33    33    29      30    39     53     64    86    68     40     14

     11
                        Has the market over-reacted?


           $m
                                                                            Guesstimated
          700                                                               Annual
          600                                                               Premium At
                                                                            Today's Rates
          500
          400
          300
          200

          100
           0
                '90   '91   '92   '93   '94   '95   '96   '97   '98   '99    2000   2001
 Nos. of
Incidents:      20    33    33    29    30    39    53    64    86    68     40     14
     12
                  Cost of Claims
           (Ground Up Before Deductible)


 Industry Average Project Loss / Total Capex


                          2.5 to 3.5 %

 Portion of Total Loss Attributable to Warranty Type Items


                         30 to 50 % ?




13
     Offshore CAR Claims - Excess US$1M (Indexed)

                         1990 - 1998 Claims
     $m

     700
     600
     500
     400
     300
     200
     100
      0
           '90    '91     '92       '93   '94   '95   '96   '97   '98

                         Faulty/Design/ Workmanship Incidents:
             11     13          9     7   11    20    27     36    32
                            All Others Incidents:
            20      33          33 29 30         39    53    64    86
14
             Aggregated 10 Years of
     Offshore Construction Losses by Cause




                                  Faulty Design 49%
                                  Mechanical Failure 7%
                                  Piling Operations 13%
                                  Pipelays 6%
                                  All Other 25%




15
                        Potential Ramifications
 Large Energy Companies

    Purchase less/no coverage where possible

    Assume risk of loss from Contractors

 Small Energy Companies

    Potentially not participate in offshore projects

    Difficulty in obtaining financing

 Contractors

    Forced to assume greater exposure

 Insurers

    Lower overall premium volume available to make up for prior poor experience



    16
                    Can It Be Fixed?

     Capacity

     Will the previous markets return?

     Coverage

     Alternative Markets

     Revised Risk Transfer

     Quality Assurance/Quality Control

     The Effect of the World Trade Center Loss

17
     Questions/Summary




18