As a result of the global pandemic and subsequent economic crisis, the energy sector has faced two years of major headwinds: accelerating geopolitical risks, combined with oil price volatility and ongoing transitional pressures. The sector may be well accustomed to managing risks in volatile environments, but such challenges are more successfully navigated when organisations have a consistent and group-level approach to risk and insurance.
However, it has become increasingly challenging to insure large energy projects on this basis, and via a ‘traditional’ multinational programme. Projects are rarely 100% owned by a single client, due to the scale of costs involved. Instead, joint ventures, or consortiums, tend to partner on individual projects. Changing interests are common, with frequent investments and divestments as companies focus on a particular stage of the value chain.
When more complex risk transfer structures are introduced, the picture becomes further complicated. In a traditional multinational programme, indemnity layers – which are retained in individual territories – are usually bolstered by the client’s group capital, and captives are generally set up for a client to further participate in their own insurance and risk management. When the local entities are not wholly owned, we therefore need to treat the underlying assets differently to take into consideration the respective owned interests.
Traditionally (and simplistically), a multinational programme provides insurance coverage for a parent company domiciled in the country where the master programme is produced, in addition to a network of local policies issued to subsidiaries located in different territories around the world. Any gaps between the parent level of cover and local cover (such as differences in limits or conditions) are dealt with under the master policy.
Within this context, wording localisation has long been a complex part of traditional multinational energy programmes. This is further complicated by grouping together a variety of technologies and assets, traditionally placed in markets that have been shaped by different terms, governing bodies and priorities. Local wordings will continue to be restricted by local regulation, particularly as insured technologies in the renewable energy space develop rapidly. As a result, local compliance requirements may lag behind the sophistication of coverage provided by the global market or such placements.
Taken together, these nuances inevitably present significant challenges for insureds within the energy sector and, as a result, projects within an energy company’s portfolio have tended to be placed on a standalone, piecemeal basis. Unfortunately, such an approach does not necessarily result in optimal coverage for the insured due to the restrictive nature of local wordings, or offer a programme that can adapt to an organisation’s changing needs and asset base.
Designing innovative and flexible solutions
Partnering with a global insurance carrier that understands the organisation’s business needs, and can provide innovative and flexible insurance solutions, is crucial. A balance must be struck between tailoring a programme to the insured while achieving consistency and maintaining compliance under local regulation. An innovative insurance carrier will utilise its programme design expertise to appropriately structure and facilitate the placement, making use of available capacity.
As a market leader, AIG is at the forefront of these discussions and is setting out to rebuild the blueprint of a multinational programme, to better tailor our approach to risk managers’ and lenders’ requirements. We have been working closely with some of our energy clients to structure a series of more bespoke, fully compliant and innovative programmes that look to provide flexibility to the insured’s owned interests and asset base, while optimising local coverage through a global lens.
An organisation with both owned and non-owned interests may place risks under a ‘facility’ with both captive and commercial panel participation. In such an arrangement, there is no ‘master’ but the insured benefits from the standardisation of pre-agreed wordings and adaptions where permissible by local regulation, centralised servicing, engagement and escalation points, and a fixed reinsurance panel. The goal is to provide consistency of coverage while giving flexibility and centralised control within the programme structure.
Where an investment fund is the main multinational client, the primary relationship is with the fund, while the underlying assets, and therefore the policies, change often. In this type of structure, the fund manager’s captive may be utilised for assets in which it has a financial interest, with tight controls around insurance placement responsibilities.
Meanwhile, the transition to greener energy solutions also requires collaborative thinking as companies expand their portfolios to include renewable assets such as solar photovoltaic technology, wind turbines, battery energy storage systems, and hydrogen-generation facilities. As well as being a separate underwriting class, the growth in this area requires significant investment in construction. Construction insurance is generally placed over a multi-year period and is non-renewable (until completion). Structuring a programme to capture the construction phase, first-year operations and eventually form part of a more mature programme, requires thoughtful consideration.
Successfully achieving a new breed of energy multinational programmes requires close collaboration between the carrier, broker, principal insured and captive. All parties must understand the structure and be mindful that minor changes in the underlying interests can cause shifts in the client’s risk and insurance requirements. Clear parameters must be defined in terms of underwriting information, risk standards, localisation management, claims management and service-level agreement.
The way forward is to form long-term partnerships and maintain open, proactive and frequent communication. These are just some of the reasons why it is important for risk managers in the energy sector to work with an insurance partner that has multinational capabilities, longstanding experience in both multinational and specialty classes of business, and expertise not only as a fronting insurer but also within the energy sector, to ensure captive and multinational programmes remain aligned.
In the past, only the largest players in the energy industry generated sufficient underlying interests to meet the critical mass for an integrated multinational programme structure. AIG has worked with many of these long-term partners for decades and supported their captives’ retention of their underlying business, customising our approach and creating bespoke solutions as their needs evolve.
However, even the largest players rarely develop opportunities alone, instead working in conjunction with equity funds or structured partnerships between both large and mid-sized companies, due to the extensive financing requirements and specialist expertise required. This opens the scope of a multinational framework to smaller companies that may not have previously experienced such efficiencies, but have a focal point for decentralised negotiation, operational control and risk management.
Contributed by Niamh Carty, multinational energy underwriting specialist, renewables and global fronting underwriter at AIG Multinational Energy, and Michael Lister, head of multinational, Canada for AIG