|
Insurance Abstract
In the present invention, an insurance product, rating system and
method generally relates to a rating and pricing system for quantifying
the risk that the annual savings will not fall below specified levels
associated with implementing and maintaining economic improvements.
The product, system and method can be applied to various industries,
including, power generation, petrochemical, manufacturing and refining
facilities. The present invention comprises an insurance product
rating and pricing system designed for a relatively small number
of insured annually or over a multi-year term with each insured
having a relatively large exposure. These savings will produce additional
benefits to the client in the form of enhanced creditworthiness
and resulting increased availability of financing and reduced cost
of financing.
Insurance Claims
1. A method for underwriting an insurance policy, the method comprising
the steps of: applying aggregate savings risk distributions to an
improvement plan; assigning a confidence level for risk acceptance;
and determining an acceptable risk acceptance value.
2. The method of claim 1, wherein the acceptable risk acceptance
value is based on the aggregate savings risk distributions and the
confidence level for risk acceptance for an insured.
3. The method of claim 1, wherein the improvement plan includes
various engineering initiatives.
4. The method of claim 3, wherein the improvement plan is agreed
to by an insurer and an insured.
5. The method of claim 1, wherein the improvement plan includes
results of implementing initiatives of the improvement plan.
6. The method of claim 1, further comprising the steps of creating
a surplus account comprised of accumulated savings relative to the
acceptable risk acceptance value.
7. The method of claim 5, wherein the agreed metric or methodology
implementation plan and schedule includes an implementation of capital
projects.
8. The method of claim 1, wherein the confidence level is based
on a probability that an annual savings will exceed an insured floor
value.
9. The method of claim 1, wherein the agreed metric or methodology
implantation plan and schedule is applied to an industry.
10. The method of claim 9, wherein the industry is a power generation
industry.
11. The method of claim 9, wherein the industry is a chemical industry.
12. The method of claim 9, wherein the industry is a refining industry.
13. The method of claim 9, wherein the industry is a manufacturing
industry.
14. The method of claim 1, wherein the step of assigning the confidence
level may differ in a time period.
15. The method of claim 14, wherein the time period is a range
from one to five year period.
16. The method of claim 1, wherein the confidence level is greater
than 90 percent.
17. The method of claim 1, wherein at least one of the steps is
performed with a computer system.
18. A method of determining an overall loss cost component for
pricing an insurance policy, the method comprising the steps of:
calculating a loss cost component; applying a rate-on-line loss
cost requirement; and determining an overall loss cost component
based on the loss cost component and the rate-on-line lost cost
requirement.
19. The method of claim 18, wherein the loss cost component is
developed from an aggregate risk distribution and an acceptable
risk acceptance value.
20. The method of claim 18, wherein the steps of calculating the
loss cost component is based on a stochastic mathematic model.
21. The method of claim 18, further comprising the step of applying
risk modification factors to the overall loss cost component to
the loss cost component based on a client specific factor.
22. The method of claim 21, wherein the client specific factor
is selected from the group consisting of record-keeping, plant cleanliness
and reliability planning.
23. The method of claim 18, wherein the rate-on-line loss cost
requirement is for a power generation facility.
24. The method of claim 18, wherein the rate-on-line loss cost
requirement is for a chemical facility.
25. The method of claim 18, wherein the rate-on-line loss cost
requirement is for a refining facility.
26. The method of claim 18, wherein the rate-on-line loss cost
requirement is for a manufacturing facility.
27. The method of claim 18, wherein at least one of the steps is
performed with a computer system.
28. A method of pricing an insurance policy, the method comprising
the steps of: calculating a loss cost component; applying a rate-on-line
loss cost requirement; determining an overall loss cost component
based on the loss cost component and the company specified rate;
and applying underwriting expenses to the overall loss cost component
of an insured.
29. The method of claim 28, wherein the lost cost component is
developed from an aggregate risk distribution and a risk acceptance
value.
30. The method of claim 29, wherein the premium component is selected
from the group consisting of underwriting expenses, engineering
expenses, administrative expenses, reinsurance costs, taxes, commissions,
and profit.
31. The method of claim 29, wherein the rate-on-line lost cost
requirement is a premium divided by an exposure of the insured.
32. The method of claim 29, wherein the rate-on-line loss cost
requirement is for a power generation facility.
33. The method of claim 29, wherein the rate-on-line loss cost
requirement is for a chemical facility.
34. The method of claim 29, wherein the rate-on-line loss cost
requirement is for a refining facility.
35. The method of claim 29, wherein the rate-on-line loss cost
requirement is for a manufacturing facility.
36. The method of claim 29, wherein one of the steps is performed
with a computer system.
37. The method of claim 26, wherein the aggregate risk distribution
and the risk acceptance values cover a time period.
38. The method of claim 37, wherein the time period ranges from
one to seven years.
39. The method of claim 29, wherein the aggregate risk distribution
and the risk acceptance value are determined at a client level.
40. The method of claim 29, wherein the aggregate risk distribution
and the risk acceptance value are determined at a multi-client level.
41. An insurance product for an insured comprising an insurance
policy, wherein the insurance policy comprises: a declaration, wherein
said declaration comprises: a savings criteria, insuring agreement,
exclusions, conditions, duties of an insurer; duties of an insured;
disposition of a covered location, a limit of liability, definitions,
and endorsements.
42. The insurance product of claim 41, wherein the declaration
further comprises a surplus account.
43. The insurance product of claim 41, wherein the declaration
further comprises a savings measurement and loss adjustment.
44. The insurance product of claim 41, further comprising an agreed
metric plan.
45. The insurance product of claim 44, wherein said limit of liability
comprises risk acceptance values.
46. The insurance product of claim 44, wherein the endorsements
comprise market price indexing and operational base lines.
47. The insurance product of claim 44, wherein the endorsements
comprise a savings execution plan and schedule.
48. The insurance product of claim 44, wherein the endorsements
comprise a savings calculation procedure and base line value.
49. The insurance product of claim 44, wherein the endorsement
comprises agreed debt obligations of the insured.
50. The insurance product of claim 44, wherein the exclusions comprise
modifications to the covered location that affect the agreed metric
plan.
51. The insurance product of claim 44, wherein the exclusions comprise
modifications to the agreed metric plan.
52. The insurance product of claim 44, wherein the exclusions comprise
a failure of the insured to perform its duties.
53. The insurance product of claim 44, wherein the exclusions comprise
shortfalls resulting from deviations in or related to a base line
production.
54. The insurance product of claim 44, wherein the conditions comprise
noncompliance with the agreed metric plan.
55. The insurance product of claim 44, wherein the agreed metric
plan pertains to an industry.
56. The insurance product of claim 55, wherein the industry is
a power industry.
57. The insurance product of claim 55, wherein the industry is
a chemical industry.
58. The insurance product of claim 55, wherein the industry is
a refining industry.
59. The insurance product of claim 55, wherein the industry is
a manufacturing industry.
60. A method for establishing a rating system, comprising the steps
of: collecting engineering data of a performance of the facility;
comparing the engineering data with industry benchmark data; creating
an implementation plan and schedule based on the comparison; and
calculating the reduction in a credit risk for an insured.
61. The method of claim 60, wherein the facility is a power generation
plant.
62. The method of claim 60, wherein the facility is a chemical
plant.
63. The method of claim 60, wherein the facility is a refining
plant.
64. The method of claim 60, wherein the facility is a manufacturing
plant.
65. The method of claim 60, wherein the engineering data is a yield
improvement.
66. The method of claim 60, wherein the implementation plan and
schedule involves process evaluation and train operators.
67. The method of claim 60, wherein the reduction in credit rating
improves a securitization rating.
68. The method of claim 67, wherein the securitization rating is
a Standard & Poor rating.
69. The method of claim 60, wherein one of the steps is performed
with a computer system.
70. An insurance product comprising: an insurance policy; and an
implementation plan and schedule based on criteria set forth in
an economic improvement program, wherein the insurance policy guarantees
a sum certain to an insured when the implementation plan and schedule
is followed by the insured.
71. The insurance product of claim 70, wherein the insurance policy
is a multi-year policy.
72. The insurance product of claim 70, wherein the improvement
program is an addition of capital projects.
73. The insurance product of claim 70, wherein the economic improvement
program is a reduction of work force.
74. The insurance product of claim 70, wherein the insurance policy
pertains to a certain industry.
75. The insurance product of claim 74, wherein the certain industry
is a power generation industry.
76. The insurance product of claim 74, wherein the certain industry
is a chemical industry.
77. The insurance product of claim 74, wherein the certain industry
is a refining industry.
78. The insurance product of claim 74, where the certain industry
is a manufacturing industry.
79. A method for insuring a sum certain payable to an insured for
an industry, the method comprising the steps of: determining a minimum
insured amount for each time period of a coverage period based on
an execution of an implementation plan and schedule; selecting a
confidence level to ascertain a risk acceptable value; determining
compliance with the implementation plan and schedule; and determining
a disposition of a surplus account.
80. The method of claim 79, wherein the step of selecting a confidence
level occurs every year during the coverage period.
81. The method of claim 79, wherein the coverage period ranges
from one to seven years.
82. The method of claim 79, wherein the industry is a power generation
industry.
83. The method of claim 79, wherein the industry is a chemical
industry.
84. The method of claim 79, wherein the industry is a refining
industry.
85. The method of claim 79, wherein the industry is a manufacturing
industry.
86. The method of claim 79, wherein the confidence level is based
on a probability that annual savings will exceed the minimum insured
amount.
87. An insurance product for an insured comprising a policy, wherein
the policy comprises: means wherein said means comprises: a savings
criteria, insuring agreement, exclusions, conditions, duties of
an insurer; duties of an insured; disposition of a cover location,
a limit of liability, definitions, and endorsements.
88. The insurance product of claim 87, wherein said means further
comprise a surplus account.
89. The insurance product of claim 87, wherein said means further
comprise savings measurement and loss adjustments.
90. The insurance product of claim 87, wherein the policy further
comprises an implementation and schedule means.
91. The insurance product of claim 87, wherein said limit of liability
comprises risk acceptance values.
92. The insurance product of claim 87, wherein the endorsements
comprise market price indexing and operational base lines.
93. The insurance product of claim 87, wherein the endorsements
comprise a savings execution and schedule means.
94. The insurance product of claim 87, wherein the endorsements
comprise a savings calculation procedure and base line value.
95. The insurance product of claim 87, wherein the endorsement
comprises agreed debt obligations of the insured.
96. The insurance product of claim 90, wherein the exclusions comprise
modifications to the covered location that affect the implementation
and schedule means.
97. The insurance product of claim 90, wherein the exclusions comprise
modifications to the implementation and schedule means.
98. The insurance product of claim 87, wherein the exclusions comprise
failure of the insured to perform its duties.
99. The insurance product of claim 87, wherein the exclusions comprise
shortfalls resulting from deviations in or related to a base line
production.
100. The insurance product of claim 90, wherein the conditions
comprise noncompliance with the implementation and schedule means.
101. The insurance product of claim 90, wherein the implementation
and schedule means pertain to an industry.
102. The insurance product of claim 101, wherein the industry is
a power generation industry.
103. The insurance product of claim 101, wherein the industry is
a chemical industry.
104. The insurance product of claim 101, wherein the industry is
a chemical industry.
105. The insurance product of claim 101, wherein the industry is
a refining industry.
106. The insurance product of claim 101, wherein the industry is
a manufacturing industry.
107. An insurance product comprising: an insurance policy; and
means based on criteria set forth in an economic improvement means,
wherein the insurance policy guarantees a sum certain to an insured
when the means is followed by the insured.
108. The insurance product of claim 107, wherein the insurance
policy is a multi-year policy.
109. The insurance product of claim 107, wherein the economic improvement
means include an addition of capital projects.
110. The insurance product of claim 107, wherein the economic improvement
means include a reduction of work force.
111. The insurance product of claim 107, wherein the insurance
policy pertains to a certain industry.
112. The insurance product of claim 111, wherein the certain industry
is a power generation industry.
113. The insurance product of claim 111, where the certain industry
is a chemical industry.
114. The insurance product of claim 111, wherein the certain industry
is a refining industry.
115. The insurance product of claim 111, wherein the certain industry
is a manufacturing industry.
Insurance Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] N/A
STATEMENTS REGARDING FEDERALLY
SPONSORED RESEARCH OR DEVELOPMENT
[0002] N/A
REFERENCE TO A MICROFICHE APPENDIX
[0003] N/A
BACKGROUND OF THE INVENTION
[0004] 1. Field of the Invention
[0005] Pricing and rating methods for property and property-related
asset performance insurance products can be classified into two
categories: Value-based (VB) rating and Frequency-Severity (FS)
rating. In both cases insurance costs are directly related to the
financial loss potentials, but the computational methods reflect
the characteristics of the property or assets being insured.
[0006] VB rating generally is applied to situations where risk
or loss potential can be characterized by a series of variables.
For example, the loss potential and pricing for a new car may be
determined by the car type, the type of loss (e.g., collision, liability,
glass windshield) the amount and type of miles driven, the driving
record of the insured, the geographical location and perhaps other
variables. Given these variables, loss potentials have been analyzed
and tables produced enabling the underwriter to look up the rates,
expressed in dollars of premium/dollar of coverage, in tables. The
underwriter typically multiplies the client-specific variables by
the corresponding rates then adds in company-specific administrative
costs to compute the overall policy premium.
[0007] For property VB insurance, some common underwriting variables
are business type, building activity (e.g., hospitals, office buildings,
laboratories, etc.), square footage or other attributes of size,
construction attributes, fire sprinkler coverage, number of stories,
location, and age. Premium rates expressed are generally categorized
by these variables and together produce a premium rate. This value
multiplied by the building value produces the policy premium. Actual
premium values may vary by historical precedent of pricing, market
demands, policy terms and conditions, contents type and property
replacement values.
[0008] FS pricing is a rating and pricing method for situations
where there can be large differences between insureds in the same
type of industry and geographical area. In this method the probability
or failure frequency (events/year) of an insurance claim or failure
may be modeled or directly obtained from available data.
[0009] Engineering and underwriting risk modifiers are factors
applied to the loss cost computed premium that adjust for specific
customer attributes present in the current situation. For example,
an engineering risk modification factor to increase the loss cost
10% could be applied for clients who have poor procedures for record-keeping
and plant cleanliness. Engineering inspectors have identified a
high correlation with these behaviors and customers who will have
insurance claims. An underwriting risk modification factor of 10%
could decrease the policy premium if high deductibles and restricted
coverages are negotiated with the client. These engineering and
underwriting risk modification factors make detailed premium changes
based on the specific attributes of the client and the policy terms
and conditions.
[0010] An example of the FS pricing method for a client is applied
to an equipment breakdown premium development for a power generation
station 100 shown in FIG. 1. The station has two (2) simple cycle
GE 7FA turbine generators 102, 104 with two (2) transformers 106,
108 and various types of electrical switchgear and equipment (only
switch 110 is shown). The first part of the premium calculation
contains the frequency and severity calculation which determines
the loss cost component of the premium. There are risk modification
factors that customize the lost cost component for the specific
client being analyzed. These factors can increase or decrease the
credit and debit percentage that allows underwriting to modify the
loss cost to reflect the subjective attributes (e.g., engineering
factors) of the client, for example, housekeeping, recordkeeping,
reliability planning, the number of equipment spares available and
underwriting factors such as the deductible value selected.
[0011] The next part of the premium calculation determines the
client-specific expenses, costs and profit. Another component of
the premium calculation, the Excess Loss Potential refers to a loss
cost premium component that accounts for the very low frequency,
but very high severity loss events that are appropriate for the
client. Examples of such loss events include five hundred (500)
year recurrence period earthquakes, tsunamis and hurricanes. The
loss event severities may be determined by specialized catastrophic
modeling software. A portion of the insurance company's total loss
potential may be allocated to each client as the Excess Loss Potential
component of the premium.
[0012] The client may also be subjected to engineering inspections
associated with jurisdictional requirements of the state or other
governmental bodies. The underwriting process also includes certain
client-specific costs associated with meetings, travel and the like.
[0013] Expenses considered in the underwriting process can also
include costs for re-insurance and are usually added when the underwriter
buys facultative re-insurance--re-insurance on a specific account.
Although other expenses that involve a pro-ration of portfolio,
line of business, department, or division expenses to the account
level may also be added. Other premium costs are typically taxes,
commissions to brokers, profit margin and other specified premium
cost adders in the company's underwriting guidelines.
[0014] The FS pricing for the example above is shown below for
constructing an equipment breakdown insurance price for a simple
cycle gas turbine generation facility: TABLE-US-00001 Annual Failure
Premium Equipment Frequency Severity (Loss Costs) 2 GE 7FA turbines
0.025 $80,000,000 $2,000,000 2 Transformers 0.015 $4,000,000 $60,000
Switchgear + 0.030 $1,000,000 $30,000 Electrical Total Loss Costs:
$2,090,000 Engineering/Underwriting Modifier (+20%-15%) [-10%] 1,881,000
Excess Loss Potential: $100,000 Engineering Expenses $25,000 Underwriting
Expenses $10,000 Allocated Expenses $300,000 Taxes, Commissions
$30,000 Profit (5%) $115,000 Total Policy Premium: $2,461,000
[0015] Policy rating and pricing applied to property-related insurance
pricing generally is a combination of applying the VB and FS methods.
The insured's (client) property often contains a mix of highly specific
equipment and other activities that are common to many similar types
of locations. A client's power generation company may own a small
number of highly specialized power generation locations that are
rated and priced using FS but also has several branch offices where
the premium may be computed by the VB method.
[0016] 2. Brief Summary of the Invention
[0017] The present invention referred to herein as the insurance
product, rating system and method generally relates to a rating
and pricing system for quantifying the risk that the annual savings
will not fall below specified levels associated with implementing
and maintaining economic improvements. The invention typically involves
a unique combination of qualitative and quantitative functions and
factors combined in a novel fashion to develop premium costs for
risk transfer associated with insuring a minimum savings amount
annually or in aggregate over a multi-year policy term.
[0018] Insurance pricing systems where there may be a large amount
of exposure and loss data available use standard statistical and
probabilistic methods. Policies are often standardized in format
and simplified to the point where underwriters construct premiums
from tables where the risk attributes such as insured's age, car
type, location, or building values are the key elements used to
lookup the appropriate rates. Other insurance policies, such as
for property insurance, may include a premium component developed
from catastrophe models which estimate losses from earthquakes,
for example.
[0019] Insurance pricing systems are normally designed for products
which are marketed to a large number of customers usually on an
annual basis, each with a relatively small loss potential. The present
invention comprises an insurance product rating and pricing system
designed for a relatively small number of insureds annually or over
a multi-year term with each insured having a relatively large exposure.
This situation cannot rely on the Law of Large Numbers principle
of statistics but applies as much knowledge and actual performance
data as possible into the development of the risk analysis and subsequently
the premium development.
[0020] The insurance policy rating and pricing system according
to the present invention may generally be based on a risk analysis
where actual performance data, technical uncertainties, and other
factors are combined to form input information for the pricing system.
The input files, called annual aggregate risk distributions, quantify
the net performance risk of all initiatives for achieving the net
annual savings for each year of the policy period. For example,
an improvement program may consist of work force reassignments,
process re-designs, installation of advanced process controls, and
energy efficiency capital projects. However, this invention is not
so limited. As a further example, it also applies to other methods
capable of quantifying the total net annual savings risk of potentially
several hundred initiatives. These risk distributions quantify the
probability of exceeding a given net annual savings value and serve
as the fundamental input files, data, or equations according to
the present invention. The present invention enables underwriters
to apply similar procedures they would perform in standard insurance
situations even though the nature of the insured risk is unique.
[0021] According to the present invention, "Savings"
can be tangible or intangible and include but are not limited to
increased revenue; reduced operational expenses maintenance expenses
and capital expenditures; increased production through-put; reduced
energy consumption; reduced emissions; increased emission credits;
etc. These savings will produce additional benefits to the client
in the form of enhanced creditworthiness and resulting increased
availability of financing and reduced cost of financing. One skilled
in the art will recognize that the present invention can generate
other savings and benefits not articulated in the lists above.
[0022] The aggregate risk distributions are defined for each location
on a similar basis as that applied to develop property insurance.
Underwriting may be first performed at a location level and then
viewed at the client level. One novel part of this invention is
to enable the underwriter to develop pricing at either level. At
the location level, the aggregate risk distributions are formed
for the subset of all initiatives designed to be implemented at
the location. At the client level, the aggregation produces only
one aggregate risk distribution per year or other time periods.
[0023] If location level pricing is desired, then according to
the present invention, aggregate risk distributions are applied
at each location and the client level premium may be equal to the
summation of the location level premiums. Some premium components
may appear only at the client level, such as profit, tax, and commissions,
but the system and method according to the present invention contains
the flexibility to include all pricing elements in either version
of the application of this insurance pricing system.
[0024] While the invention is generally discussed from the perspective
of either pricing a single location or pricing at a single client
level, a multi-client pricing system is also within the scope of
the present invention. Multi-client as used herein includes but
is not limited to an investor(s) in one or more facilities, for
example power, refining, chemical, manufacturing facilities, etc.
in any permutation or combination of ownership and/or geography.
3. BRIEF DESCRIPTION OF THE DRAWINGS
[0025] A better understanding of the present invention can be obtained
when the following detailed description of the preferred embodiment
is considered in conjunction with the following drawings, in which:
[0026] FIG. 1 is a block diagram of a power generation station.
[0027] FIG. 2 is a flowchart of an embodiment of the claimed product,
system and method.
[0028] FIG. 3 is a flowchart of an embodiment of the claimed product,
system and method.
[0029] FIG. 4 is a flowchart of an embodiment of the claimed product,
system and method.
[0030] FIG. 5A is a flowchart of an embodiment of the claimed product,
system and method.
[0031] FIG. 5B is a flowchart of an embodiment of the claimed product,
system and method.
[0032] FIG. 6A is a flowchart of an embodiment of the claimed product,
system and method.
[0033] FIG. 6B is a flowchart of an embodiment of the claimed product,
system and method.
[0034] FIG. 7A is a spreadsheet of an embodiment of the claimed
product, system and method.
[0035] FIG. 7B is a spreadsheet of an embodiment of the claimed
product, system and method.
[0036] FIG. 8 is a flowchart of an embodiment of the claimed product,
system and method.
[0037] FIG. 8A is a table of an embodiment of the claimed product,
system and method.
[0038] FIG. 8B is a chart of an embodiment of the claimed product,
system and method.
[0039] FIG. 8C is a chart of an embodiment of the claimed product,
system and method.
[0040] FIG. 9 is a chart of an embodiment of the claimed product,
system and method.
[0041] FIG. 10 is a system block diagram of one embodiment of the
claimed product, system and method.
[0042] FIG. 11 is a block diagram of an insurance policy according
to the claimed product, system and method.
[0043] FIGS. 12A-12D are tables of an embodiment of the claimed
product, system and method.
4. DETAILED DESCRIPTION OF PREFERRED EMBODIMENTS
[0044] The underwriter first determines the insured floor dollar
values for each year as shown in step 200 in FIG. 2. This may be
performed by specifying a confidence level that is used to return
the indicated or computed minimum insured savings values for all
years or confidence levels and can be applied on a year by year
basis. Selecting insured floors by first specifying an explicit
confidence level is one unique characteristic of this invention.
For this invention, "confidence level" is defined as the
probability that the annual savings will exceed the insured floor
value. Performing this function is called risk acceptance. For each
policy year, the underwriters select the risk acceptance level they
believe represent insurable positions under the terms and conditions
of the policy at step 202. The insured floors are also called risk
acceptance thresholds in that if the insured's annual Savings results
are below these values and the insured is in compliance with the
terms and conditions of the policy, the insurer would pay the insured
the difference between the actual achieved results and the insured
floor value at steps 204 and 206, respectively. Under the insurance
policy, the insurer is accepting the risk of paying up to the risk
acceptance threshold dollar amount each year.
[0045] These risk acceptance values are also related to claim frequency
as depicted in FIG. 3. The method starts at step 300 where a confidence
level percentage is determined at step 302. The difference between
100 percent and the confidence level percentage constitutes the
probability that the Savings may be less than the risk acceptance
value at step 304. For example, a 90% confidence level indicates
that 10% of the time, the Savings is expected to be less than the
indicated acceptance value. While additional claim frequency mitigation
elements are applied in this invention, the 100 minus confidence
level may be an upper limit on the expected annual claim frequency.
[0046] Another unique characteristic of this invention is to use
the confidence level approach to enable underwriters to apply different
risk acceptance judgments for different policy years. This may be
but one major advantage of setting deductibles by confidence level
rather than directly in terms of absolute dollar values. However,
underwriters can choose a risk acceptance value directly and apply
the input annual aggregate risk distributions to determine the corresponding
risk acceptance confidence level. Both methods are included in this
invention. Also the application of input annual aggregate risk distributions
to help specify multi-year deductibles is a unique part of this
invention.
[0047] The flexibility of specifying yearly or overall confidence
values enable underwriters to set risk acceptance values higher
for years they believe there is higher risk and lower amounts when
the risk is within normal tolerances. This can occur if the underwriters
believe that the insured's implementation and scheduling plan will
not either meet the expected Savings targets or that the project
schedule is too aggressive implying that the insured's Savings will
be achieved but not in the policy year indicated in the implementation
and scheduling plan. This feature gives underwriters the flexibility
to adapt their risk acceptance analysis to consider in addition
to the insured's engineering performance, the available personnel,
project management, and several other key factors.
[0048] As an example of how this process can be performed, suppose
a potential insured's cumulative Savings engineering project plan
forecasts $20 M in year 1, $30 M in year 2, and $35 M in year 3
as depicted in step 400 of FIG. 4. After a detailed review of the
implementation and scheduling plan by underwriting, the completion
schedule for the year 1 is judged to be too optimistic. Underwriters
believe that the Savings as forecast by year 1 will be obtained
but some of the initiatives will extend into year 2. For the remaining
initiatives, it is further concluded that the Savings targets will
be achieved on the time schedule indicated in the implementation
and scheduling plan for years 2 and 3.
[0049] For this situation underwriters may apply a higher confidence
level for year 1 than for years 2 and 3 at step 402. A 95% confidence
level could be applied to year 1 with a 90% confidence applied to
years 2 and 3. The resulting risk acceptance values may be $10 M
for year 1, $22 M for year 2, and $25 M for year 3. It may be expected
that the risk acceptance values will be less than the stated engineering
forecasts as a matter of proper underwriting, for example, to reduce
the potential for moral hazard.
[0050] With the risk acceptance values selected, the next underwriting
decision is to choose the confidence level associated with the loss
cost analysis at step 404. For example if an underwriter chooses
a 95% confidence level, the corresponding loss costs actually experienced
should be less than this value 95% of the time. A unique characteristic
of this invention is the capability of the underwriter to select
a loss cost confidence level by year or, by default, use the same
value for all years.
[0051] Another unique characteristic of this invention is the ability
to apply different savings measurement criteria as claim triggers.
One embodiment of the invention contains two types of savings measurement
criteria although a combination or other methods could be applied.
[0052] The underwriter selects the measurement method and for this
example of the invention, the methods are Escrow or No Escrow. The
Escrow approach accumulates the excess above the risk acceptance
values, if any, in the Savings over the policy years. If there is
a shortfall in a policy year, the Escrow account may be debited
first. A claim occurs when the Escrow account is zero and a yearly
savings target is not achieved. The No Escrow method simple compares
the actually achieved value, A, to insured Savings value, B, and
a claim for the dollar difference $B-A occurs if A<B.
[0053] While the underwriter selects the measurement method in
the system, it is not necessarily an input that is determined by
the underwriting function. The claim measurement method may be identified
as part of the policy and may be agreed to by the insured, insurer,
and other interested parties such as investment firms, banks, or
rating agencies (e.g., Standards & Poor).
[0054] At this point, FIGS. 5A and 5B illustrate the system for
computing loss costs using a stochastic model that utilized the
input annual aggregate risk distributions, risk acceptance values,
the claims measurement method, and the required loss cost confidence
level shown at steps 500 and 502. This is a dynamic system where
at any one of these inputs change, the stochastic model is re-run
at step 504. This combination of these policy-specific attributes
and risk data to produce loss costs is a unique characteristic of
this invention.
[0055] At the completion of the stochastic analysis which may require
several thousands of different samples to accumulate the sufficient
loss cost distributions, the loss costs at the underwriter specified
levels is automatically placed into the pricing worksheet at step
506. The values are summed over the years of the policy term (e.g.,
over a range of one to seven years) at step 508 and compared with
a company-specific requirement of a minimum rate-on-line at step
510. Rate-on-line is defined as the loss costs (or premium) divided
by the total dollar exposure to the insurer. For example, a 5% rate-on-line
requirement for a $1 M total exposure produced a premium result
of $50,000. The maximum of these two numbers: the sum of the loss
cost values from the stochastic model and the rate-on-line estimated
premium, is entered as the loss cost component of the multi-year
policy premium at step 512.
[0056] With the loss costs determined, the underwriter adds premium
charges that are due to the engineering and underwriting fees that
will be required to administrate the policy over the policy term
at step 514. These expenses include for example, on-site engineering
review of work practices, initiative implementation progress, and
the Savings measurement and verification procedures. These activities
will generally vary according to the type of industry, facility
location, policy term, policy conditions, and with several other
factors. It is noted that the premium reflects the true costs of
policy administration as well as the potential costs involved with
actual losses. These costs are entered individually for each policy
year, inflated using a supplied annual inflation rate, and summed
to produce the overall engineering and underwriting (insurance)
components at step 516. These costs are mostly well defined expenses
and are not typically risk-based nor do they possess a significant
stochastic component. At this point in the premium development,
these charges are placed into the year and category (Underwriting
or Engineering). Additional analysis of factors that influence the
loss cost premium component is generally required before the expense
items can be used further.
[0057] Along with the quantitative aspects of underwriting and
premium development, there are subjective factors that are designed
to utilize the underwriter's intuition and experience to modify,
if desired, the computed loss cost premium at step 518. These factors
can increase or decrease the loss cost component within prescribed
percentage ranges. To facilitate the underwriter's use of these
subjective factors, they are divided into engineering and underwriting
categories. The actual list of risk modification factors and ranges
will vary between industries and clients but they may include some
of the items listed below.
[0058] A credit is interpreted as enhancing risk quality which
then translates into a decrease the loss costs. A debit is configured
as a decrease in risk quality which increases the loss cost component
of the policy premium.
Engineering Quality Underwriting: [Debits, Credits]
[0059] 1) Organization/Culture: [+15%, -10%] Risk exposures, hazards,
and human behaviors are inter-connected. A company's safety, environmental,
reliability policies and basic cultural risk acceptance attitudes
are important attributes for inferring how the corporation and its
employees will routinely mitigate risk and also respond to accidents
[0060] 2) New Technology Applications: [+10%, -10%] Depending on
the robustness of the new technology design, the operational and
short term financial advantages can be offset by a decrease on reliability
and availability in the long term. These factors need to be considered
by the underwriter in this multiyear type of insurance policy which
is intended to insure a minimum performance or Savings level.
[0061] 3) Management Motivation: [+15%, -10%]. The underwriter
needs to understand how the company's management intends to leverage
the financial applications of the overall implementation and scheduling
plan. The multi-year program will require the long term commitment
of management and the financial applications of the program will
provide the underwriter valuable insights to judge the Savings sustainability.
[0062] 4) Supervisor Motivation: [+15%, -10%] The underwriting
risk assessment for facility supervisors may be similar to what
may be required for management. At the employee-level, supervisors
need to be committed to the implementation and scheduling plan's
success and to its sustainability over the multi-year policy term.
One way for the underwriter to assess supervisor (and management)
commitment may be to determine how the execution of the Savings
implementation and scheduling plan is connected to the employee
bonus program.
[0063] 5) Complexity: [+10%, -10%] Complexity refers to the difficulty
of program execution. Some of the issues to be considered in this
evaluation are initiative technical difficulty, volumetric inter-dependence,
and schedule inter-dependence.
[0064] 6) Housekeeping and Recordkeeping: [+5, -5%] The cleanliness,
arrangement, and organization of the insured's assets are valuable,
observable indicators to infer employee reliability and safety awareness.
Many studies have shown a strong productivity and reliability correlations
to facility and asset cleanliness and organization. This characteristic
may be easy to observe and inference to improved reliability may
be a factor in the engineering aspects of policy underwriting. Also
the level and accuracy of production and operational recordkeeping
may be another visible indication of employees' and management's
commitment to procedure compliance and attention to detail that
also reflects the engineering risk quality of the insured's facilities.
[0065] Overall the summation of the debits and credits of one embodiment
is generally limited to a total of a 20% credit (premium decrease)
or a 25% debit (premium increase.)
[0066] Underwriting quality refers to the terms and conditions
of the insurance policy that are negotiated given the operational
and engineering conditions of the implementation and scheduling
plan. These risk modification factors measure risk quality from
a written contractual, rather than technical, perspective.
[0067] The credit and debit assignments follow the same convention
as with the engineering risk modification factors. A credit is interpreted
as enhancing risk quality which then translates into a loss cost
reduction. A debit is configured as a decrease in risk quality which
is expressed as an increase the loss cost component of the policy
premium.
Underwriting Quality Underwriting: [Debits, Credits]
[0068] 1) Exclusions: [+10%, -10%] These policy terms refer to
events for which the insurance policy would not respond to Savings
achievement levels below the insured minimum. These events include,
war, worker strikes, weather events, events covered under other
insurances, failure of the insured to comply with policy conditions,
and contractor performance errors.
[0069] 2) Self insured retention/Deductibles: [+10%, -10%] The
self insured retention or deductibles determine the insured's total
financial risk exposure. If the insured is willing to assume higher
annual Savings levels, then the risk quality from an underwriting
perspective can be increased since the insured accepts a larger
annual Savings shortfall before the insurance policy would respond.
[0070] 3) Savings Measurement & Verification: [+15%, -10%]
The type of Savings and the procedures for measurement verification
are fundamental to insurance underwriting. These factors are essential
to determine initiative implementation quality both in time and
volumetric savings achievement. There are, however, different ways
these functions can be accomplished. For example, the measurement
and verification can be performed by the insured and audited by
the insurer, or a third party can be charged with these tasks. Involving
the insured in these actions can be problematic and provide a moral
hazard if insufficient oversight is not maintained. Savings measurement
and verification can also provide a proactive indication of initiatives
which are behind implementation targets. The underwriter needs to
assess the type of measurements being taken to measure the Savings,
the frequency of measurement, the ability to access this data trending,
and the propensity to obfuscate actual initiative performance.
[0071] Overall the summation of the debits and credits are limited
to a total of a 20% credit (premium decrease) or a 25% debit (premium
increase.)
[0072] The aforementioned factors are routinely applied in policy
underwriting and premium development depending on the type of insurance,
life, casualty, property, etc. and also on the nature of the insured's
business. The actual number and type of Engineering and Underwriting
risk modification factors will vary depending on the type and nature
of asset performance under policy consideration.
[0073] The "Adjusted Premium" is now computed at step
520. This term is defined as the aggregate policy term loss costs
multiplied by the Engineering and Underwriting risk modification
factors. If E=the aggregate engineering risk modification factor,
U=the aggregate underwriting risk modification factor, and L the
loss costs, then the adjusted premium, P.sub.adj is determined by
P.sub.adj=(1+E+U)*L
[0074] The final stage of the premium development is to add premium
components associated with insurance pricing elements at step 522.
These items typically include engineering & administrative expenses,
profit, reinsurance costs, taxes and commissions.
[0075] There are several variations and combinations of these factors
that can be applied to the insurance product, rating system and
method. The most notable variation may be the decision on how to
account for the engineering expenses. Some insurance policies of
the present invention may include all engineering fees in the policy
premium and some may exclude the charges from the policy premium
and charge these fees as consulting expenses independent of the
insurance policy.
[0076] As an example of how the insurance policy pricing according
to the present invention is performed, the following example shows
premium development according to the present invention for a three
year policy where engineering fees are incorporated into the premium
calculation and is used to develop the loss costs.
[0077] An embodiment of the overall claimed subject matter follows
in FIGS. 6A and 6B.
[0078] 600 Input Basic Client data into system. At step 600, the
user enters: Insured Name, Lending Institution, Country & Region,
Addresses of Covered Locations, Occupancy, Location Size in Production
Output Metrics, and Application of Insured Savings. This basic data
can be integrated with a client database so that other key variables
required by the system can be automatically identified from this
basic data.
[0079] 610 Develop the numerical or analytical distributions of
Savings by year. At this step an overall annual probability distributions
are compiled and placed in a format so they can be accessed dynamically.
The distributions describe the probability of exceeding annual Savings
vs. the savings values. The distributions can be taken by analytical
methods designed to compute aggregate Savings exceedance probabilities.
There is a separate distribution for each location, plant, unit,
or other segment under analysis for each year. These distributions
are composed of Savings values and the corresponding probability
of exceeding these values.
[0080] 620 Enter Market and Company Pricing Criteria Data. At this
step, the inflation rate that is representative for the policy period
and the minimum and maximum rate-on-line company-specified criteria
are entered into the system.
[0081] 630 Choose the probability of exceedance thresholds to be
used to set the insured floors: the insured savings levels by year,
by location, or by other groupings. At this step the amount of risk
that the insurer is willing to accept is determined by setting the
exceedance probability threshold for coverage. There are two ways
this can be done, the user can choose a probability of exceedance
for all years or a different value for each year depending on the
underwriting information. The probabilities are matched in the probability
distributions compiled on step 610 and the corresponding Savings
values are identified. For example, suppose the insurer is willing
to accept an exceedance probability (measured in percentage) of
90% for a given location for a given year. This value is matched
to the appropriate probability distribution discussed in step 610
and the corresponding Savings value is found to be $15 M. This means
there is a 90% chance that the location's annual savings that year
will be greater than $15 M. An insurance claim may be triggered
if the annual savings achieved is less than the $15 M value.
[0082] 640 Record the Savings levels by year, location, or other
grouping in the loss cost component of the pricing development system.
At this step, the resulting Savings values that are calculated or
accessed from the probability distributions compiled in step 610,
are entered into the loss cost component of the pricing system.
These values are the resulting insured levels that correspond to
the probability of exceedance values entered into the system in
step 630.
[0083] 650 Develop logic to test annual Savings results selected
from the annual probability distributions compiled in step 610 to
measure loss and excess event frequency and severity. At this step
for each year or other grouping, the logic is developed to compare
a sampled distribution Savings value from the probability distributions
compiled in step 610 to the recorded values savings floor Savings
values. If the sampled Savings value is greater than the inured
floor, then an excess is produced for that year. If the value is
less than the insured level as given in step 640, then a loss event
is produced for that year.
[0084] 660 Develop escrow account and claim trigger logic. At this
step, the comparison logic developed to accumulate the total or
a fraction of the Savings results that are in excess of the insured
savings values. For example, in one year if the computed Savings
is $50 and the insured floor is $40, $10 would be credited to the
escrow account. On the other hand, if the computed Savings was $35,
then first the Escrow account would be debited $5 to obtain the
insured level. If the escrow account contained insufficient funds
then an insurance claim would be triggered for the difference between
the insured level and the sum of the actual Savings results and
any funds able to be drawn from the escrow account.
[0085] 670 Develop claim count, claim amount and claim risk distribution
logic. At this step, logic is developed to accumulate the number
and financial amount of claims for both the escrow and no escrow
accounting methods. The financial amount of the claims is called
the loss costs. This information is used to compute numerical distributions
for the cumulative probability of loss as a function of the loss
amount. These distributions are called claim risk distributions.
[0086] 680 Run stochastic model to develop claim risk distributions.
At the step, a numerical procedure is applied using commercial software
or specialized programming that applies steps 640, 650, and 660
to accumulate sufficient loss data to develop a numerical distribution
of the probability of loss as a function of the loss amount for
both the escrow and no escrow accounting approaches.
[0087] 690 Determine Rate-on-Line premium. At this step, the prescribed
rate-on-line criteria selected in step 620 is applied to each annual
exceedance threshold selected in step 640. The rate-on-line premium
calculation may be performed by multiplying the exceedance threshold,
the insured Savings minimum, or floor by the decimal value of the
rate-on-line. For example, if the insured floor is $10,000 and the
rate-on-line is 10%, then the premium requirement is $10,000*0.10
or $1,000. These calculations are applied to each insured annual
savings floor as computed in step 640. The results are summed and
placed in a Term of Loss Cost Summary Section of the system.
[0088] 700 Determine loss cost confidence level and loss cost values.
At this step the underwriter enters the likelihood requirement,
in percent, that the loss costs obtained from the system will be
actually less than the identified values. These percentages are
then applied to the claim risk cumulative distributions for each
year to determine corresponding value for the yearly loss costs
contribution to the total multi-year premium. The resultant values
are placed in the yearly loss cost fields. This is performed for
the claim risk distributions with and without escrow accounting.
[0089] 710 Compute Loss Cost Policy Premium Component. At this
step, the rate-on-line premium values for each year are summed to
compute the total policy premium via the rate-on-line method. Next,
the annual loss costs determined in step 680 are summed over the
policy years for the Escrow and No Escrow pricing methods. The system
user then selects which Escrow pricing method may be required for
the client. The system subsequently computes the policy loss cost
premium component as the maximum of (1) prescribed rate-on-line,
and (2) the summed loss costs via the Escrow method selected.
[0090] 720 Determine Underwriting Expenses. At this step, the company
expenses, required to perform the underwriting analysis and risk
surveillance are entered. These costs are incurred in reviewing
monthly, quarterly, and yearly Savings reports and periodically
meeting with client management at the client sites. The underwriters'
responsibility is to ensure the client is meeting their contractual
responsibilities and the Savings targets. If the client is in compliance
then coverage continues as defined in the policy. If the client
is not in compliance, then it is the underwriters' responsibility
to notify company engineering and notify client management, in writing.
If compliance with engineering recommendations and other policy
conditions are not met in the time constraints as specified in the
policy, then the underwriters have the responsibility and the authority
to terminate insurance coverage. The expenses incurred performing
these activities are entered into the system for each policy year.
[0091] 730 Determine Engineering Expenses. At this step the technical
engineering, project management, and Savings oversight activities
are reviewed for compiling their associated policy expense costs.
Engineering activities provides technical data to support underwriting
activities, provides periodic loss prevention and Savings reporting,
provides technical directions for initiative implementation, and
serves as the on-site liaison between the insurer and the insured.
The expenses incurred performing these activities are entered into
the system for each policy year.
[0092] 740 Determine Engineering Related Underwriting Credits and
Debits. At this step, pricing modification factors are determined
that increase or decrease the premium based on engineering related
attributes of the Savings implementation insured values as selected
in step 620. These factors include, but are not limited to, the
insured's organization and business culture, new technology applications,
management motivation to achieve the Savings targets, supervisor
motivation, and plant complexity. The range of the modifiers will
vary with application but generally are 10% for each factor with
an aggregate factor of no less than -20% and no greater than +25%.
The engineering risk modification factors are entered into the system
for each policy year and an aggregate modification factor is computed.
[0093] 750 Determine Underwriting related Credits and Debits. At
this step, the pricing modification factors are determined that
increase or decrease the premium based on the underwriting related
attributes of the Savings insured values as selected in step 620.
These risk modification factors include, but are not limited to,
policy exclusions that are in place, the insured self insured retention,
deductibles, limits, and the Savings measurement and verification
program quality. The range of the modifiers will vary with application
but generally are 10% for each factor with an aggregate factor of
no less than -20% and no greater than +25%. The underwriting premium
modification factors are entered into the system for each policy
year and an aggregate modification factor is computed.
[0094] 760 Compute Adjusted Policy Premium. At this step, the numerical
results determined in previous steps are combined to produce the
basic policy premium. There are several versions or combinations
of the steps outlined in this procedure that are claims. An example
of one such embodiment is: Adjusted Policy Premium=Step 710(Loss
Cost Policy Premium)*[1+Step 740 Engineering Modification Factors)+Step
750 Underwriting Modification Factors)]. This result is stored in
the Premium: Insurance Adjusted Premium Section of the system.
[0095] 770 Compute Policy Underwriting and Engineering Expenses.
At this step the underwriting expenses determined in step 720 and
the engineering expenses determined in step 730 are inflated using
the inflation rate entered into the system in step 620 over the
policy term and summed to compute the total policy level underwriting
and engineering expenses. These results are stored in the Premium:
Insurance and Engineering Expense Sections of the system.
[0096] 780 Compute Engineering and Underwriting Profit. At this
step, company-specific guidelines are applied to compute insurance
and engineering profit based on the expenses computed in steps 760
and 770. These results are stored in the Premium: Profit--Insurance
and Engineering Sections.
[0097] 790 Compute Allocated Reinsurance Costs. At this step, reinsurance
costs, whether facultative or treaty related, are entered into the
Reinsurance section of the system.
[0098] 800 Compute Taxes. At this step, taxes are computed on the
pertinent sections of the Premium Section of the system and entered
in the system in the Premium--Insurance and Premium and Engineering:
Taxes Section.
[0099] 810 Compute Commissions. At this step insurance related
commissions are computed on the pertinent sections of the Premium
Section of the system and entered in the system in the Premium--Insurance:
Commissions Section.
[0100] 820 Compute Total Policy Engineering Costs. At this step,
all premium costs entered into the Premium--Engineering related
sections are summed to compute the total policy engineering costs.
[0101] 830 Compute Total Policy Premium. At this step, all premium
costs entered into the Premium--Insurance related sections are summed
to compute the total policy premium. Also, based on the policy requirements
and the pertinent accounting procedures, the total policy premium
can also include the total engineering costs. In this scenario,
all risk transfer and direct engineering costs required to support
the policy are included in the total policy premium which is divided
by the policy term to determine the annual premium. Depending on
the insurance conditions, the insured may pay the whole premium
at the beginning of the policy term or pay on an annualized basis.
[0102] FIGS. 7A and 7B depicts a spreadsheet encompassing the steps
disclosed in FIG. 6.
[0103] The methods disclosed above can be used to ascertain a securitization
rating VB and FS ratings can be based on benchmark data for a particular
asset, e.g. the power generation station of FIG. 1.
[0104] For example, FIG. 8 illustrates such method. Engineering
data such as improving yields 940 or other initiatives 950, both
depicted in FIG. 8A is collected for each required asset at step
900. The engineering data is compared with benchmark data to create
an action plan and financial goals at steps 910 and 920. FIG. 8B
illustrates an exemplary action plan while FIG. 8C illustrates the
financial goals.
[0105] For example, FIG. 8B includes various actions to be initiated
by employees 960, such as detailed process evaluation 970 and train
operators 980. FIG. 8C shows how the risk curves can be used to
select annual insurance levels and also provide information to select
financial goals for the improvement program overall. For example,
following general insurance company guidelines, a company chooses
the 90% exceedance probability and moves horizontally over until
we cross the Year #1 risk curve at 990 where at 90% risk acceptance
value for insurance purposes is $20 M at 995. This typically means
there is a 90% chance that the actual result will be greater than
$20 M. The company can also use these risk curves to set their internal
financial goals at more aggressive risk acceptance values. For example,
company management may target the 60 or 70% levels for the business
unit targets which for year #1 would be a goal between approximately
$22-$25 M. The same procedure is applied for Year #2. The insurance
risk acceptance percentile intersects the risk acceptance curve
at 1000 which corresponds to $26.7 M NCM annual savings at 1005.
This amount would be selected as the insured floor. For the company's
internal financial goals, using the 60-70% guidelines as in Year
#1, Year #2 company financial goals would be between $28-29 $M.
A securitization rating can be ascertained based on the action plan
and financial goals at step 930 (FIG. 8).
[0106] Implementation of the present invention may also improve
an insured's bond rating. FIG. 9 illustrates cost savings as a result
of a reduction of credit risk. For example, suppose improving the
operations utilizing the present method can increase the Savings
by $700 million of an insured over a ten (10) year period. In the
course of developing this company's credit risk for the purpose
of developing a bond issue, the lending institution and or credit
agency involved may give the company credit for the enhanced operational
and financial status by applying the margin benefit to the reduction
of the principal at risk. This may be a subjective decision. However,
the method applied to this situation offers a risk transfer of principal
from the client to the insurer thereby securitizing at least a portion
of the principal. Suppose the client has a credit rating of BB-
by S & P. A policy utilizing the present invention for this
client can have effect to reduce the principal at risk thereby also
reducing the transaction's credit risk. Through the risk transfer
of this principal to the insurance company, the initial transaction
(now at effectively a lower principal) can have an equivalent credit
risk of the full bond amount at a higher quality credit rating.
[0107] For example, if a client has an $600 M policy according
to the present invention for over the ten (10) years of a $800 M
bond, the reduced effective principal at risk ($200) make the transaction
appears, from a credit risk perspective as slightly above investment
grade, BBB-. This means mathematically the credit risk of a $200
BB- bond may be roughly equivalent to the credit risk of an $800
M bond rated at BBB-. This situation illustrated at 1010 in FIG.
9. This example assumes the insurance company's credit rating is
at least BBB-.
[0108] Referring to FIG. 10, a computer system used to implement
some or all of the method and system is illustrated. The computer
system consists of a microprocessor-based system 1100 that contains
system memory 1110 to perform the numerical computations. Video
and storage controllers 1120 enable the operation of the display
1130, floppy disk units 1140, internal/external disk drives 1150,
internal CD/DVDs 1160, tape units 1170, and other types of electronic
storage media 1180. These storage media 1180 are used to enter the
risk distributions to the system, store the numerical risk results,
store the calculation reports, and store the system-produced pricing
worksheets. The risk distributions can be entered in spreadsheet
formats using, e.g., Microsoft Excel. The risk calculations are
generally performed using Monte Carlo simulations either by custom-made
programs designed for company-specific system implementations or
using commercially available software that is compatible with Excel.
The system can also interface with proprietary external storage
media 1210 to link with other insurance databases to automatically
enter specified fields to the pricing worksheet, such as client
name, location address, location size, location occupancy, and risk
quality attributes applied in the "Credits and Debits"
section. The output devices include telecommunication devices 1190
(e.g., a modem) to transmit pricing worksheets and other system
produced reports via an intranet or the Internet to management or
other underwriting personnel, printers 1200, and electronic storage
media similar to those mentioned as input device 1180 which can
be used to store pricing results on proprietary insurance databases
or other files and formats.
[0109] FIG. 11 is a block diagram that depicts the terms and conditions
of an insurance policy 1300 according to the present invention.
The insurance policy 1300 includes insured information 1310 such
as a name of the insured, geographic or physical location(s) of
the insured to be covered by the policy. Also included in the policy
1300 is a policy period 1320. The policy period 1320 can be over
a single year, multi-year or some other defined period of time.
Policy terms 1330, such savings criteria is included. The savings
criteria are generally crafted by a third party company (e.g., HSB
Solomon Associates) that uses benchmark information in creating
the savings criteria based on the particulars of the insured's business.
The savings criteria include processes that if implemented by the
insured establishes a sum certain savings to the insured. The third
party company can serve as a facilitator in process execution enabling
the insured to improve operating performance (resulting in a savings).
If the process is implemented and the sum certain savings is not
realized by the insured over the policy term (with certain exceptions
outlined in the policy), the insurer will pay the insured the difference
(referred to as a shortfall). The certain exceptions include, but
are not limited to, hostile or warlike action, insurrection, rebellion,
civil war, nuclear reaction or radiation, default or insolvency
of the insured, vandalism, riot, failure of contractors to implement
the processes, modification or alteration to the processes that
were not approved by the insurer or other terms outlined in the
policy. Other policy terms 1330 include duties of the insurer and
duties of the insured such as execution of the processes in a timely
manner, cooperation with the third party company, preparation of
status reports, permission by others to audit the insured's accounts,
performance records and data logs and other matters. Furthermore,
if the savings are determined on a yearly basis and the policy is
a multi-year policy, and as a result of the insured implantation
of the processes, a shortfall occurs, such shortfall could be kept
in an escrow account (herein referred to as a surplus account).
The escrow could increase or decrease over the multi-year policy.
Any surplus at the end of the policy term can be paid to the insured.
Other terms can include cancellation terms, representations and
warranty, assignment obligations and effects due to the sale or
transfer of a covered location.
[0110] The policy 1300 also includes monetary policy limits (i.e.,
limit of liability) 1340 over the time period 1320 and premiums
1350 to be paid by the insured and endorsements 1360. Such endorsements
can include market price indexing and operational baselines unique
to the insured's industry, the implementation plan and schedule,
agreed metric plan, savings calculation procedures and baseline
values, debt obligations and additional exclusions, definitions
and conditions.
[0111] FIGS. 12A-12D illustrate an agreed metric plan. The agreed
metric plan provides top level task lists of an implementation plan
and schedule. For illustrative purposes, the plan is divided into
four sections, namely, initiative 1400, benefits and measurements
1402, implementation 1404, and savings 1406.
[0112] For example, in FIGS. 12A, 12B, 12C and 12D, the agreed
metric plan pertains to a chemical industry policy. From the implementation
plan and schedule, various top level initiatives 1400 are listed
in FIG. 12A. For example, some of the initiatives from a chemical
industry policy may include movement of an analyzer to trays and
modification of regulatory controls on final product columns 1408
for a particular plant 1410 (Initiative #1). The column titled "area"
refers to geographical or functional location the initiative, e.g.,
Plant 1. Another initiative for an insured's site may include the
reduction of pressure in a stripper to save energy 1412 (Initiative
#2). Furthermore, another initiative for another plant may include
the reduction of time to dry catalyst after regeneration 1414 (Initiative
#3). Documents or other deliverables 1418 are provided to document
the results of the implantation of the initiatives. An example of
such a document 1420 may include a report describing the savings
achievement as a result of the implantation of initiative # 3.
[0113] One embodiment of the benefits and measurement section of
the agreed metric plan is provided in FIG. 12B. Implementation of
the initiative may result in certain benefits that are described
in this section. For example, for initiative #1, one benefit 1422
may be a production efficiency improvement. The plan includes various
measurement values and methodologies that are directed to the results
of the initiative. The values and methodologies may relate to engineering
units (e.g., t/h) and time periods (e.g., measurements are done
daily and then averaged over a period). Furthermore, the plan includes
dates (target and actual) for the commencement of the initiatives
and completion dates of the initiatives. The agreed metric plan
typically requires the agreement and sign off (e.g., initials of
the insured and insurer) 1424 of each initiative and initiative
results (i.e., the agreement section).
[0114] The plan also includes target and actual dates as shown
in FIG. 12C. Each initiative may have a target date of completion
1426, actual date of completion 1428 and the number of days for
completion 1430.
[0115] The plan also include information regarding the economic
Savings 1432 as a result of the implantation of the initiatives.
Such information may include target Savings 1434 and actual Savings
1436 achieved as a result of the initiative.
[0116] The foregoing disclosure and description of the invention
are illustrative and explanatory thereof, and various changes in
the details of the illustrated method may be made without departing
from the spirit of the invention.
|