On December 20, 2015, a sudden landslide struck the Hengtaiyu Industrial Park of the Eastern Pipeline in Shenzhen, damaging pipeline facilities tasked with supplying gas to Hong Kong. CNPC Captive Insurance Co., Ltd. ("CNPC Captive") immediately contacted the enterprise on its own initiative and made emergency arrangements: it arrived at the site for survey on December 21, and disbursed an advance claim payment of RMB 10 million on December 22 to support the enterprise's rescue and relief work and early resumption of production. Such a rapid claims response and decisive advance payment is rarely seen in the domestic insurance market.
The captive property insurer was established by the group only at the end of 2013. Unlike ordinary commercial insurers, CNPC Captive is a captive insurer that specialises in underwriting insurance and reinsurance for, and providing claims services to, CNPC's parent entity and its affiliated enterprises. It is like the "insurance steward" of CNPC's enterprises, escorting the group for steady and long-term development.
Why was the captive established?
- Driven by risk, the trend of the times and strategic necessity
Although many people are still unfamiliar with "captives", using captive insurers to strengthen insurance risk management and control is already the common practice of large international enterprises - especially a proven special-risk solution mechanism for multinational corporations. International captive insurers have developed rapidly in recent years. By the end of 2015, the number of captive insurers worldwide had reached more than 7,300, with about 500 newly added that year. Among Fortune Global 500 companies (excluding Chinese enterprises), more than 80% have captive insurers. In the United States, where the captive industry is most developed, the captive ownership rate among the top 500 companies is as high as 90%.
The 2010 Gulf of Mexico oil spill pushed BP into the abyss of huge compensation. At the critical moment, BP, through its captive insurer Jupiter, promptly drew on its risk "reservoir" of funds for emergency relief, easing the sudden financial crisis and demonstrating the emergency-hedging role of corporate captives in the face of catastrophe risk.
As Chinese enterprises grow rapidly in scale and accelerate their pace of going global, the types of risks they face are becoming increasingly complex. As a key state-owned enterprise that was among the earliest to internationalise and compete internationally, CNPC was the first large domestic enterprise, out of strategic necessity, to turn its attention to captives as a professional risk management tool.
"Concentrating efforts to build the group's risk management platform and insurance arrangement tool, giving it greater flexibility in risk management, supporting the group in increasing revenue and reducing expenditure, cutting costs and improving efficiency, and supporting intrinsic safety and sustainable development - these are the strategic considerations behind the establishment of the captive," said Pan Guochao, Party Committee Secretary of the captive property insurer.
After two full years of operation, the captive, starting from scratch and exploring actively, saw its insurance business revenue grow from RMB 156 million in 2014 to RMB 556 million in 2015. Its overseas business fully covers 15 countries in the group's five major international oil and gas cooperation regions, including Russia, Iraq, Peru, Sudan and Australia, and it has underwritten the insurance business of 26 projects, including the Yamal LNG project in Russia and the Rumaila oilfield in Iraq. Domestically, it acted as lead underwriter for five lines: drilling equipment insurance, blowout control expense insurance, long-distance pipeline enterprise property insurance, LNG enterprise property insurance and reserve oil depot property insurance. It obtained an A1 insurance financial strength rating from Moody's in its first year of operation, and the strategic positioning of a risk management platform and insurance arrangement tool has begun to take effect.
Where does its unique role lie?
- Turning spending into earning, accumulating a reservoir of hedging funds
As the group's professional captive insurer, CNPC Captive's core advantage is multi-dimensional support for the group in increasing revenue, reducing expenditure, cutting costs and improving efficiency - not merely "taking money from the left pocket and putting it in the right".
A commercial insurer's premium income must cover both the pure cost of risk and commercial market profit. By directly accessing the reinsurance market through the captive, while achieving risk transfer, the premium cash flow not only remains within the group system, improving capital efficiency, but the original cost expenditure also turns into income and profit, accumulating as a reservoir of hedging funds for the group to withstand catastrophe risks.
In addition, as a "link" connecting the group with the reinsurance market, the captive also plays a "leverage role" in stabilising market prices. Once a major claim occurs in the insurance market and rates rise, the captive can step forward and underwrite the project, stabilising market prices and supporting the group in controlling insurance costs. Relying on its unique understanding of the group's own risks and control measures, it gradually enhances its bargaining power in the international insurance market, presents the group's standardised and distinctive safety management system to the insurance market, deepens the insurance market's understanding of CNPC's true risk profile, and wins recognition for its risk management capability - thereby obtaining more appropriate reinsurance prices, increasing reinsurance flexibility and connecting more smoothly with the insurance market.
Beyond hedging and efficiency gains, "tailor-made" insurance lines are another feature of the captive. Turning the "uninsurable" into the insurable and striving to build a risk protection system that the commercial insurance market cannot provide is exactly the goal of "tailor-making". "Petroleum and petrochemicals are high-risk industries, and expanding into international markets brings entirely new risks in different regions. For lines with high claim risks and complex circumstances that commercial insurance is unwilling to underwrite, we develop them and we do them," said Zhang Jianping, General Manager of the Underwriting and Operations Department.
In addition, the ability to break the chronic problems of "difficult and slow claims settlement" and provide fast, proactive claims services is another marked difference between this "insurance steward" and commercial insurers.
The long-distance pipeline property insurance for which the captive acts as lead underwriter is characterised by numerous claims, large losses and difficult data collection; implementing fast "advance payment" and controlling the settlement cycle is the focus - and the difficulty - of claims handling. By strengthening historical data analysis and going deep into the field to proactively collect claims materials, the captive strives to analyse and resolve risk control issues at the source. In 2015, the settlement cycle for pipeline cases was 168 days, with a settlement rate of 38.8% - markedly better than the previous commercial insurers' settlement cycle of 524 days and settlement rate of 4.87% for such lines. Since its establishment, the captive has produced reports on relevant high-risk areas and fed them back to the enterprises, helping to achieve intrinsic safety.
How will it develop in the future?
- A heavy responsibility and a glorious mission: the captive's people are full of confidence
The establishment of the captive is both a response to the state's call to accelerate the development of a modern insurance service industry and adapt to the needs of rapid national economic and social development, and a strategic necessity for the group's building of a world-class integrated international energy company, shouldering the dual expectations of the national insurance industry and the group.
As the first captive insurer established in mainland China, CNPC Captive is a pilot exploration of innovation in China's insurance industry, undertakes the important task of leading the way, and is of great significance for standardising corporate self-insurance and enriching the forms of insurance organisations. As the group's "professional risk management platform and insurance arrangement tool", the captive's establishment is also an important measure for the group to deepen reform, increase revenue and reduce expenditure, and cut costs and improve efficiency. According to the group's positioning requirements, the captive must fully participate in the group's risk management and insurance business and build a globally integrated insurance protection system covering the group's upstream and downstream, domestic and overseas business.
At present, the captive industry is still new in China, but in the international energy sector captive insurers already have mature operating models and play an important role in supporting their parent companies' risk management and insurance arrangements. In recent years, BP Group's average annual premiums have approached US$2 billion, all underwritten by its captive insurer, whose total assets at the end of 2015 were US$261.8 billion; the portion of the underwriting limit for a single risk unit exceeding US$1.5 billion is reinsured to the commercial insurance market. Royal Dutch Shell implements a similar captive policy: in recent years its captive insurer's annual premium income has been around US$2 billion, with total assets of US$340.2 billion at the end of 2015.
"Although the work is very busy and the pressure is great, the development prospects of the group's captive business and CNPC's big platform are what we young employees value most," said Zhong Qing of the Underwriting and Operations Department.
Based on the responsibilities entrusted by the group, the captive put forward in its 13th Five-Year Plan the development goal of "building a first-class domestic, internationally advanced risk management platform for energy enterprises". According to the overall development concept, the captive focuses on building core capabilities, takes innovation as its central task - innovating business models, insurance products and service concepts - and scientifically leverages insurance's risk protection role. It is striving to build an overseas platform and, through coordinated domestic and overseas insurance arrangements, fully supports the optimisation of the group's oil and gas value chain and helps the group advance its overseas business in an orderly manner and recover its investment interests. With the support of the group and industry regulators, the approval of the captive's overseas subsidiary has entered the final stage. The company's operations are gradually getting on track, the prototype of CNPC's insurance risk management platform has taken shape, and the staying power of its unique role is becoming apparent.
"We have only made a good start so far. The group had the foresight to establish a captive insurer, and mature overseas operating experience tells us that a captive is an excellent professional tool. With the group's policy support, we are confident that we can build a model for the captive industry," General Manager Wei Guoliang told reporters with a smile.