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GCC oil firms opt for captive insurance

27 April 2010
National oil companies (NOC) in the GCC countries account for 25 per cent of the global NOCs having captive insurance, according to the industry sources.

While the NOCs of Saudi Arabia, Qatar and Kuwait have all opted for captive insurance, the ones in Bahrain and the UAE have not adopted it so far, senior officials from insurance firms said.

"The case for captive insurance has been built up by the fact that it brings in a lot of comfort from day one," said Thommy Thomas a Chartered Insurer with Trust International Insurance and Reinsurance Company .

"Captive insurance helps an NOC build up cash reserves. It also helps them provide insurance cover to projects that an external insurance agency may be reluctant to insure," Thomas added. Some of the captive insurance companies of large NOCs are now also insuring projects outside their parent company, thus beefing up cash reserves, he said.

Captive insurance companies participate in underwriting profit enjoyed by insurers, thereby reducing overall costs. Furthermore, they participate in the investment income earned by insurers on the client's premium.

Captives enhance the ability of firms to identify and value business-critical assets as well as to make loss management more effective. They also strengthen risk management capabilities, especially for businesses with global operations, and make the management of insurance relationships with joint venture partners more efficient.

In a recent research, London based insurance broker and risk adviser Marsh found that only 12 per cent of the world's NOCs currently utilise captive insurance. Among the larger NOCs, captive use was higher at 33 per cent.

The Gulf NOCs, all of them large companies, account for a quarter of all captive insurance among the larger NOCs.

Marsh recommended that, where appropriate, NOCs step up their use of captive insurance to manage risks such as property damage and business interruption, liability, marine, aviation, construction, environmental and terrorism risks, as well as control of well. At a corresponding figure of more than 80 per cent, the figure is much higher among International Oil Companies (IOCs).

Oil 'majors' such as BP , Shell , Exxon, Chevron, Conoco, Repsol YPF, ENI , Total and Woodside operate at least one captive insurer.

There is a different argument that asserts that oil companies should not be involved in insurance. "It helps oil companies focus on their core work," a senior official with Abu Dhabi National Insurance Company said.

Requirement of funds to be committed to capitalise the captive at an appropriate level and the possibility of an underwriting loss also works against captive insurance.

By Shashank Shekhar

© Emirates Business 24/7 2010