Insurance market up for the challenge—at a price

The energy insurance market is not a line in stress and is currently able to offer about $2bn in property capacity alone, according to leading executives on a panel at the Marsh National Oil Companies conference in Dubai. Apart from high catastrophe exposed areas like the Gulf of Mexico there is plenty of capacity and this has helped deliver a flat pricing environment for many years. The experts agree that the outlook for the market is currently flat. But, the panellists also concede that big changes are underway in the risk profiles of the companies in the sector as they seek more reserves in ever deeper and more remote locations, use new technologies to do so, and reorganise the way they run their businesses with greater partnerships between the National Oil Companies (NOCs) and the private sector.hideThis will have significant implications for the risk transfer needs of the companies that they insure, said the experts. Ralph Mucerino, Chief Operating Officer and Chairman of Global Marine & Energy at Chartis International, said that NOCs need to change their insurance buying culture to reflect the more dynamic and commercial world in which they now operate. DISLOCATION “NOCs tend to carry out annual tenders for brokers and insurers and this leads to dislocation and lack of continuity. It certainly helps the NOCs obtain efficient pricing but does not help with service. It is very difficult to build rapport and understanding and therefore build bespoke coverages and related services. Also when a catastrophe hits, those companies with the cheapest rates and highest exposures tend to find rates increase the most,” he said. Mr. Mucerino said that technological risk is certainly a factor. He said that NOCs have a tremendous need for capacity for E&P programs when working with joint venture partners. “They are drilling deeper and further out and using new technology that is developed on the fly and therefore it is becoming more difficult to underwrite performance risk with no experience,” he explained. And, the development of the joint venture culture is a risk in itself because projects become more complex and also insurers may be asked to cover different partners in a single risk. “This could stretch capacity,” said Mr. Mucerino. Another potential problem is political risk. The insurance executive said that he has seen problems in Venezuela, Ecuador and the Middle East and added that the greater involvement of Chinese companies means that companies have to deal with different attitudes and business cultures. “The political risk of any project needs to be managed very carefully but it can change day by day,” he added. The recent pressure on margins within oil companies because of the drop in the oil price is also a challenge, said Mr. Mucerino. “Any dollars spent to invest in new technology and safety comes off the bottom line. This means insurers need to keep a closer eye on maintenance and quality in general. Most NOCs are looking to hold costs. Only really Brazil has continued to expand currently. This seems stable currently, but, we need to keep an eye on this,” he said. George Reeth, President and Deputy Chairman of Validus, the Bermuda-based insurance and reinsurance group, said that NOCs need to focus on practical risk management as they continue to grow. “Engineering is an important consideration for NOCs from a risk management standpoint. As a specialist insurer to this market we have records of losses worldwide and so can provide very useful data and intelligence on what can go wrong. This is particularly important as the market transfers from older to newer technologies. We can have a greater understanding of what can go wrong and bring a different perspective to the table,” he said. Mr. Reeth said that following the financial crisis it is very important for insurers to demonstrate a ‘long term responsibility’ and, equally, for customers to show a similar long term commitment and pick their partners carefully. “It is very important for an insurer to feel that there is an opportunity to secure a long-term relationship with a client. Annual tenders can make this extremely challenging. At the same time, clients need to feel comfortable that their insurers will be there to respond to losses. Overall, the majority of the insurance industry fared very well through the financial crisis. There were exceptions, but these were limited. Clients need to pick their insurance partners carefully and focus on the insurers that have dedicated resources with knowledge of the energy industry. Diversifying their placement with a panel of specialty insurers can assist in mitigating financial risk,” he said. And, Mr. Reeth said that it is important for insurers to show innovation and flexibility to customers in this market. “With the pace of change in this market and evolution of both NOCs and IOCs it is also important for insurers in this sector to be innovative and flexible and seek new alternative solutions and applications to changing needs. This includes the use of captives and varying retention levels and the like. Insurers, working with a client’s broker, can assist in designing effective program structures.” Victor Peignet, CEO, SCOR P&C, the Paris-based global reinsurance group, said that the internationalisation and vertical integration of operations such as E&P, transport, refining and marketing, petrochemicals and distribution means that the future of NOCs is to become IOCs (international oil companies). Mr. Peignet said that demand is already rising for insurance and reinsurance coverage among NOCs as they transform. “As the exposures are getting wider and higher in foreign environments, the risks are being experienced and the demand for risk management and risk transfer is increasing with the curve,” he said. “NOCs have become more global through internationalisation and integration and will continue to do so. The speed of that transformation varies between NOCs but, for all of them, changing and successfully managing changes will be key to their success. The exposures faced by NOCs are changing dramatically to include more immaterial risks such as direct and contingent business interruption, political or terrorism risks and reputational risks. These are more difficult exposures to manage,” continued the reinsurer. “At the same time, NOCs are moving away from pure state ownership and towards listed status and are buying listed companies, bringing upfront financial and professional liabilities. Reinsurers and insurers can accompany NOCs on this journey with advice and proven risk transfer that efficiently plays as cost-effective substitute capital,” he added. SHARED DATA Emerging risks and the ability or otherwise of the insurance and reinsurance market to respond to new demands from risk and insurance managers is a consistent theme in discussions among customers, not least high-risk and fast developing industries such as oil and gas. Mr. Peignet said that the insurance and reinsurance industry is ready and willing to step up to the plate in this regard but needs to meet the customers half way. “The value added comes from the sharing of knowledge and data acquired over many years of continuous worldwide involvement in the energy business. It also comes from being recognised by its peers as a professional leader whereby innovations can be launched and followed in a market where syndicated placements are still the norm. It however requires more of a partnership-based approach with free access to often confidential information,” he said. “The fact is that all risks cannot be transferred and carried by third parties. There are risks that qualify as enterprise risks and, for those, no solution has yet been found and ‘industrialised’, by which reinsurers and insurers could become parties to a project venture and benefit from a risk reward treatment commensurate to how critical their contribution may be to the feasibility of such a project. Beyond the issues of risk quantification and pricing for which reinsurers and insurers may not have a solution, there can be such a gap in knowledge and information that there is no chance for a third party to the corporation to responsibly accept the risk transfer,” he continued. The oil and gas sector is experiencing huge change that is driven by a wide array of factors that are a function of major global social, political and economic changes. This change offers big opportunities as well as risks for insurers and reinsurers that are willing and able to play in this high value, high risk game. The key to success for the risk carriers, just as it is for the risk producers, is to identify, measure and above all, actively manage those risks.

Insurance market up for the challenge—at a price

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