Author: bomuo

Although the US represents only 5% of the world population it consumes 25% of the world’s total energy supply. About 40% of the US energy comes from oil, 23% from coal and about the same amount from natural gas.

Underwriting energy is regarded a far more hazardous than many other industrial risk. The nature of these risks include high concentration of values, highly flammable substances, harsh operating conditions, often hostile environments, complex business inter-dependencies, harsh weather conditions. Losses from physical damage and the associated business interruption from the major U.S. windstorms have cost many billions of dollars alone in a two year period, the large majority of which have been borne by insurance (and reinsurance) underwriters. Offshore energy underwriters in particular will ask themselves as to whether the premiums they receive for assuming these heavy (and often difficult to evaluate) risks are adequate, taking into account “normal” losses plus “shock” losses. The profitability of insurers in the energy business is best judged over a long period of time, such as 10 years, but there has to be a commensurate balance between risk and reward, otherwise why bother with such high risks? Hurricane Ivan produced unexpectedly high accumulated business interruption losses arising from mudslides that caused damage to the vital sub-sea pipelines. The age and condition of platforms and rigs were key determining factors for the extent of damage suffered in the 2004 hurricane. Similarly, Hurricanes Katrina and Rita serve as costly reminders of how oil and gas businesses can be interrupted by direct damage to owned assets or more significantly by problems stemming from customers or suppliers being affected. A heightened appreciation of the technical characteristics of each risk is necessary. The temptation to focus too much on the latest natural catastrophe and ignore the important operational risks such as fire, explosion and machinery breakdown must be avoided. Quality of management and maintenance standards has a direct bearing on loss experience and allows a differentiation between two seemingly similar risks. Satisfactory details of hurricane preparedness plans that go beyond the priority for protecting health and safety of human life are a key part of the risk assessment. Orderly and timely shutdown of plants, platforms, etc., securing unfixed materials and safe start up procedures are all important points to be examined. Better appreciation of extensions to the basic insurance cover is required. How extensions might increase the indemnity being offered, setting realistic sub limits and how to price the additional cover being granted are essential parts of the underwriter’s thinking, e.g., removal of debris, making wells safe, contingent business interruption. Price spiking as a consequence of a major interference in the supply chain and its spiraling effect on an individual operator’s profits an issue familiar to power generation underwriters, whose policies refer to actual loss sustained and maximum daily values. Improved techniques for monitoring risk accumulation and loss simulation are necessary for good portfolio control and responding to the growing demand for high-level management reporting. Geographical spread within the portfolio serves as a useful balancing tool for underwriters (and perhaps energy companies themselves) when considering natural catastrophe and they may look increasingly towards more benign parts of the globe.