Gently down the stream: How international insurance programmes can help manage large and evolving energy risks

Oil refinery Credit: iStock/VanderWolf-Images

From natural catastrophe to cyber, the downstream energy sector grapples with some large and evolving risks. Todd Wilhelm, regional product leader for energy, property and construction for Asia-Pacific at AXA XL, explains how these risks can be managed and transferred through international insurance programmes.

What trends are you seeing in the management and transfer of downstream energy risk?

While it varies from client to client and across different geographies, loss history over the past several years has had an impact across the downstream energy market. Some capacity has retracted, resulting in a firming insurance market.

This has underlined to clients the importance of working with insurers that have a long-term commitment to the sector.

It also reaffirms the need for clients to be able to demonstrate they have strong risk management programmes in place. For example, underwriters will want to see that there are robust physical protection systems in place as well as process safety management regimes.

Insurers also expect clients to have accurate risk engineering reports and to be able to show that they are implementing best practice.

Downstream energy clients usually have the risk appetite to take notable risk retentions – this can help them manage their total cost of risk and obtain coverage for risks that are sometimes difficult to find or too pricey in the open market. Again, this goes back to the importance of sound risk management – when the client retains a large proportion of a risk, they clearly need to have a good handle on the impact of those risks on their own balance sheet and to work with insurers with experience and expertise in dealing with these large and often complex risks.

What about the risks associated with using contractors?

This is not a new area of risk for energy companies, which have been outsourcing and using contractors for decades.

But while this is not a unique risk to the energy sectors, it is clear – and history tells us – that using contractors can introduce elements of unnecessary risk if not properly managed.

Clients should have robust induction processes for contractors and well-designed process safety programmes in place in order to minimise these risks.

It goes back to having a strong – and holistic – programme for managing risks that enables clients to manage both the physical and human elements.

How big a challenge is cyber risk for energy clients?

Cyber risk is certainly an emerging area of risk for the energy sector. Clients are increasingly using automation, robotics and systems that are operated remotely; these can improve efficiency and productivity, but also potentially open up new areas of vulnerability.

The potential for systemic risk exists of course – an attack, random or purposeful, on several refineries at once could be hugely disruptive to the world’s oil supply. It wasn’t too long ago (June 2017) that the NotPetya cyberattack affected several major unrelated corporations and countries, which is still considered the most devasting cyberattack on a global basis. The exposures associated with these attacks are hard to qualify and quantify, but insurers – and clients – are learning and adapting all the time.

Clients can obtain insurance coverage for cyber risk, but the challenging question sometimes can be: ‘How much should they buy and is it the most appropriate coverage?’

Many large energy clients retain a portion of this risk and then work with insurers that have cyber capabilities, to transfer some of that risk. Working with insurers that have cyber expertise and are learning from cyber risk in other industry sectors can be hugely beneficial.

How can downstream energy clients work with insurers to get the best out of their multinational insurance programmes?

Given the size and potential impact of the risks that downstream energy clients are managing, it is important for them to know their insurers have underwriting appetite and expertise, and are not simply providing ‘naive’ capacity.

When we talk to multinational energy companies, they tell us they want to work with an insurer that has an international network and regional hubs of expertise, in order to formulate a multinational programme that is both compliant and relevant to their risk management and transfer goals.

Energy clients that have captives, as most do, need an insurer with a strong network that can use a local partner to issue local paper.

These days, there are a lot of partnerships between oil companies where the respective captives each take a proportion of the risks and then use traditional insurance capacity on top of that; again, this requires an insurer with both an international footprint and captive expertise as well as significant risk appetite and capacity.

For large energy clients, the sums involved in risk transfer are often significant, and this means it is important to work with an insurer that has capability to deal with credit risk too.

And claims are of course a vital part of deriving value from a multinational insurance programme. It is important to work with insurers that have claims professionals that understand the energy industry and are able to make clients feel comfortable throughout the process if a claim does occur, no matter where they are located in the world.

Contributed by Todd Wilhelm, regional product leader for energy, property and construction for Asia-Pacific at AXA XL