Exposures are 'greater than ever,' but opportunity remains in energy insurance
Source: http://www.propertycasualty360.com, December 7, 2016
By: Melissa Hillebrand
Market seeing a rush of claims approaching, and even topping, billion-dollar losses
While more risks exist in the energy industry than ever before and challenges to underwriters have never been as great, opportunities still abound for insurers willing to do their due diligence in a market that is constantly evolving.
Which is not to say that insuring clients in the energy market is without its perils; clients in some sectors are facing greater exposures than they’ve seen in years. It doesn’t help that oil hit a 12-year low earlier this year, when the price per barrel fell below $27: An oversupply of oil translates to lower prices per barrel, which in turn means that energy companies can’t afford to make upgrades to their assets.
Billion-dollar losses
Many of those companies affected by the downturn have deferred asset maintenance and upgrades over the past several years, says Pascal Ray, senior vice president, marine and energy programs manager at USI Insurance Services in Houston. That has resulted in a rush of claims that approach and even top billion-dollar losses.
During the 2015–2016 Los Angeles Aliso Canyon gas leak (also referred to as the Porter Ranch gas blowout), for example, an estimated 97,100 metric tons of methane and 7,300 metric tons of ethane were released into the atmosphere, making it the worst single natural gas leak in U.S. history. Losses to SoCal Gas are at $700 million and rising. According to reports, the source of the leak was a decades-old metal pipe some 8,750 feet below ground level that had not been considered a danger.
Wave of claims in near future
Ray predicts that the energy industry will see a wave of claims in the near future because of deferred and delayed maintenance, upgrades and integrity testing of a company’s crucial assets of wells, pipelines and refineries. “The downturn in the [oil] industry has forced cutbacks in maintenance and asset integrity testing, which is most likely going to manifest itself in asset integrity-related claims,” he says.
Those strained resources, says Ray, also can cloud executives’ judgment when it comes to crafting the policies that protect their business: “Many companies can’t afford to buy the insurance coverage they need, forcing risk managers into difficult decisions based on survivability,” he says.
Clients, however, still need the proper coverage, whether it’s a drain on their finances or not — and “some agents may see the current environment as an opportunity to get involved and grow with the energy sector as it transforms through the cycle,” says Jeanne Jankowski, head of energy and marine for Zurich North America.
Extremely thorough underwriting and asking the right questions of the client are critical for survival in this market. Increased competition has led to a soft rate environment in the energy marketplace, with more players — but not always ones that possess a deep bench of expertise.
“The challenge is that there is a tremendous amount of competition to write business,” says Todd Westcott, vice president, underwriting energy product line manager at Vela Insurance Services in Atlanta, a part of W.R. Berkley Corp. Westcott concurs that rates are continuing to go down as capacity remains abundant in this market.
More risk
The soft market created by this increased competition may continue to soften into the near future except in the midstream sector (transportation and storage entities, such as pipelines, oil tankers and storage systems), where rates may flatten, says Ray. The U.S. and Canadian midstream sector has been hit with an “unusually high” number of large pipeline losses this year, he says, which has caused more stringent underwriting and rating of these accounts.
“More risk exists now than ever before,” Ray adds. “One thing all companies can do to reduce the uncertainty of one of their greatest risks — asset integrity — is to focus resources on the maintenance and testing of their assets to help prevent them from becoming the next member of the billion-dollar claims club.”
Far-reaching exposures
Cyber risk is a serious danger in many sectors in the energy market, Jankowski says, and the exposures extend far beyond the usual considerations of data loss. “The energy sector in particular should be concerned about cyber attacks in which hackers could take over a power grid or an oil refinery,” she says.
According to “Business Blackout,” a joint report by Lloyd’s of London and the University of Cambridge’s Centre for Risk Studies, it would cost more than $1 trillion to the U.S. economy if malware shuts down parts of the power grid in the northeastern United States, leaving 93 million people in the dark.
The 2015 report, which examines a hypothetical catastrophe of a 50-generator blackout that affects 15 northeastern states, also predicts a rise in mortality rates as health and safety systems fail, a decline in trade as ports shut down, disruption to water supplies as electric pumps fail and chaos to transport networks and infrastructure collapses.
Electrical power generation and distribution companies are seeing exposures as demand for their products increases in the western states, says Ric Pena, vice president of Hartford Financial Service Group’s energy practice: “The drought, coupled with demand, has resulted in wildfire incidents and the resulting first- and third-party exposure.”
Another risk affecting the energy sector is its aging workforce. Jankowski cites figures stating that 50 percent of U.S. employees in the oil and gas industry will be eligible for retirement in the next five years. “These imminent retirees will take a lot of experience and technical know-how with them,” she explains. “It is important that the succeeding generation that will replace these retirees has the necessary skills for the jobs and plan for the future by properly training the generation behind them.”
Natural risks
Additionally, in areas of the United States that face exposure to such natural risks, earthquake activity may be tied into the energy industry. Pena says this “is an area to watch carefully and monitor,” as there are new exposures centered on upstream wastewater injection operations. Oil and natural gas can be found in porous rocks, particularly in Oklahoma, for example. During extraction, saltwater is produced. This “oilfield brine” can be handled through saltwater disposal wells, in which it is injected back into the ground. However, there’s a risk that this wastewater can be injected into fault lines.
Westcott says that Vela Insurance Services is starting to see claims related to this, “and when we look at loss runs, they have earthquake reserves.”
Pena notes that the energy market is transitioning from an oil-and-gas boom era to a more balanced, diverse, evolving economy. “Upstream oil and gas has been most impacted by the global oversupply of oil, but the midstream and downstream sectors continue to perform well,” he says.
Ray agrees that limited opportunity exists in the upstream sector because of a substantial drop in drilling activity. “Companies in this sector, in many cases, are buying less insurance and retaining more risk,” Ray says, and in some cases “taking on more risk than their company can financially survive in the event of a large loss.”
As such, midstream and some downstream companies are viewed as better opportunities in this sector, “as they continue, for the most part, to fully insure their assets,” Ray adds.
Get schooled
The best way to develop expertise in the energy insurance market is through on-the-job experience, pairing up with a seasoned professional who can provide mentoring, Ray says.
Due to the energy market’s size, agents and brokers should “really pick an area of focus — decide where your expertise lies and then go deep into that area,” adds Pena. “The agents and brokers who can partner [with carriers] best and ‘go deep’ are the brokers who will be the most successful in the energy sector.”
The University of Texas Petroleum Extension “Rig School” also offers week-long oil and gas education courses, in addition to the International Risk Management Institute, which now offers an energy risk and insurance specialist series of courses that leads to a certification.
The Houston Mariners conference and the IRMI Energy Risk and Insurance Conference both cater to a wide range of issues in the oil and gas industry, and the Texas and Oklahoma Independent Insurance Agents associations also provide energy insurance education opportunities, Ray adds.
Renewable energy picture
Meanwhile, renewable energy sources continue to grow in the U.S. According to the Washington-based Solar Energy Industries Association, solar energy grew 64 percent and wind energy grew 33 percent in the first quarter of 2016 alone.
The renewable-energy insurance marketplace “really revolves around wind or solar,” explains Pete Wilcox, national underwriting officer for renewable energy at Travelers Cos. solar energy projects, he notes, “can basically be built anywhere.”
Wind turbines, Wilcox says, require acres of land and cost much more to build than solar farms, which can be harnessed through panels installed on nearly any surface, including buildings and landfills. Solar also is being integrated into building materials such as solar windows and roof tiles.
The lower product and installation costs, and the greater bang for your buck that comes with solar energy, is translating to increased opportunity in the property and casualty industry. “There’s a lot of competition in the marketplace,” says Wilcox. “Domestic insurers and the global market all want to insure that solar space because it is such an attractive commodity — it has lower maintenance and upkeep than a wind turbine will have.”
There’s less competition for wind farms, which are increasingly being consolidated by utility companies — which, in turn, wrap the farms into their existing policies. Additionally, there’s less interest from private investors in wind farms because of the scale of resources and cost to create them.
For large utility-scale wind farms, “there’s less competition just because of the sheer limits that people are looking for,” says Wilcox. “It’s not uncommon for a wind farm to cost $200 million — I’ve seen them higher than a billion dollars. So that really thins out the competition, or competition starts working together to insure those on a quota share-type arrangement.”
Growth may not continue past 2023
While renewable energy is expected to continue to grow at a fast pace, Wilcox and Eileen Kauffman, head of global renewable energy at Travelers, agree that growth may not continue past 2023, when the federally mandated Solar Investment Tax Credit will drop to zero. (Currently, the credit is 30 percent on residential and commercial properties.) According to the Solar Energy Industries Association, the investment tax credit has helped solar installations grow an average of 76 percent each year since being implemented in 2006. “If the ITC isn’t updated [in 2023], then a lot of solar will start slowing down,” says Wilcox.
“The new administration will have an impact on clean energy,” adds Kaufmann. “There’s going to be development over the next couple of years, but it could drop off after the ITC ends.”
While a slowdown in renewable energy installations can result in a decrease of new business on the insurance side, Wilcox explains that the marketplace will always be needed for existing products.
“The thing is, all of the existing [installations] out there are still going to need to be insured,” he notes. “That marketplace will still be there because the solar energy system sitting on top of a factory is typically not owned by the factory building owner: It’s owned by somebody else. So that’s always going to have to have insurance on it.”
