Energy insurance and oil industry
Aging installations
The oil industry is characterized by aging installations. Most of the refineries in operation date back to the 1960s. In the United States, the most recent refinery was built in 1976. This situation accounts for the drastic fall in the number of refineries in USA from 300 to 149 between 1980 and 2003. The situation is identical or even worse in Europe and in Russia.
Overuse
In order to meet demand, the oil installations are operating in full swing. Stoppage periods for maintenance and servicing have been spaced out. While in the past, meticulous controls were scheduled every 3 or 4 years, today they have been extended to 5 and 6 years. Moreover, numerous controls have been simplified and transformed into mere routine visits.
Equipment obsolescence
Numerous refineries and oil facilities have become obsolete. The technology in use is outdated.
Aging, obsolescence and overuse are factors that often account for the frequency and the intensity of the losses happening in recent years in equipments that have largely outlived their normal life-time duration.
Actors
Because of globalisation, the number of stakeholders is steadily declining.
Oil companies
Being very powerful, they reign over an enormous market characterized by gigantism. SHELL, CHEVRON, TEXACO, MOBIL, TOTAL, ELF, ARAMCO, AGIP, CONOCO PHILIPS and a few others are pulling the strings.
Insurers, reinsurers and brokers
Very few companies have the technical skills and the financial resources to insure such important risks. The most active insurers and reinsurers to fill this niche are Munich Re, Swiss Re, AXA, SCOR, and Lloyd's Syndicates, Allianz, AIG [4], Oil Insurance Ltd.
Some brokers such as MARSH, WILLIS, AON have developed a true know-how in energy risks. They are the main suppliers of insurance and reinsurance premiums.
Energy insurance: Oil Insurance Limited, the oil risks mutual
 Endicott Island © Edibobb, CC BY 3.0 |
Based in Bermuda, Oil Insurance Limited was set up in 1971 by 16 oil companies. It is a mutual whose task is to serve the needs of the energy industry.
Initially created to cover the liabilities of environment-related risks, its scope of activities extended to touch the whole sector. The number of its members has, therefore, reached 81 in 2004.
In 2004, the company wrote a premium volume amounting to 443 million USD. As of June 2006, the group members have reduced their liability per event from 1 billion USD to 500 million USD. This means that OIL declines to cover an important number of exposures. Furthermore, and following the 2005 huge losses, OIL has proceeded to a reminder of premiums among its affiliates.
Captives
All large oil companies, the so-called “majors”, have their own captive insurance company from which they collect premiums of all their subsidiaries scattered around the world.
These captives do also have recourse to brokers and get excess of loss reinsurance covers in order to retain maximum premiums and to reduce catastrophes' exposure.
Energy insurance market
The insurance market of oil, gas and petrochemical industries is divided into upstream and downstream risks and liabilities.
- Upstream risks pertain to exploration and production operations
- Downstream risks relate to refining, transport and marketing
Upstream and downstream risks may regard off-shore as well as on-shore activities.
Capacities of insurers
The crucial problem for the energy market is that of long-term financial capacities. It is a market with little room for speculators. The “stop-and-go” policy, so dear to some companies, is very hard to apply to the market of energy risks.
The 2006 perspectives forecast a straightforward and very tense market due to the reinsurance rising rates, especially for off-shore operations and for risks located in the cyclonal areas of the Gulf of Mexico.
Reinsurers | Financial maximum capacity |
|---|---|
ACE | 150 |
AIG | 125 |
SCOR | 100 |
ALLIANZ Londres | 100 |
AXIS | 100 |
Swiss Re | 75 |
Zurich Re | 75 |
Liberty | 75 |
Partner Re | 20 |
In order to underwrite on the energy market, an insurer must also be endowed with technical capacities like having real experts able to accompany risks on the long-term basis. With long-term human investment being so important, very few insurers have the capacity to get positioned on this niche. The market remains, therefore, in the hands of a limited but well-organised and powerful club of insurers and reinsurers.
Loss ratio
In recent years, the energy sector has been characterized by a destructive loss ratio, affecting both the economy and the oil companies' image. Pollution, oil slick, natural catastrophes, cyclones, blazes in storage sites. Although the 2005 result is still unknown, as the business interruption files following the disasters of Katrina and Rita have not yet been closed, the past year will have broken all loss records.
Costly oil triggers costly claims as their cost is directly affected by the skyrocketing energy prices which raises construction costs and increases considerably the business interruption losses.
Recent losses
- Skikda 01/19/2004 :Algeria - The explosion followed by a fire on the GNL 1/K site caused the destruction of 3 liquefaction units and damaged neighbouring third-party property buildings. This claim amounting to 447 million USD is regarded as the most important on the international on-shore and off-shore energy market for the year 2004.
- Athabasca 01/2005:Alberta-Canada - An explosion on the oilfield of SUNCOR company caused a loss higher than 1.3 billion USD for the insurance market.
- Katrina 08/2005 :
Gulf of Mexico - Hurricane Katrina caused the destruction of off-shore and on-shore oil installations with claims amounting to 150 billion USD, 50 billion USD of which being insured. - Buncefield 12/2005:United Kingdom - The explosion and the huge blaze that ensued in a fuel warehouse caused property damages, third party liability exclusive, estimated between 50 and 100 million USD.
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Prevention
Due to its complexity and to technological evolution, the prevention of the energy sector requires a top-level expertise and thus a perfect command over risks on part of the engineers.
Prevention is now ranking high in insurance schemes. Statistics and background knowledge are no longer sufficient to estimate this risk, hence, the necessity for insurers to set up new prevention, risk management and cost strategy tools.
Several tools such as the extremely powerful disaster simulation software enable insurers to refine their appraisal of potential or actual risks.
Energy insurance : The market's current trends
The 2005 losses and the stiffening anti-pollution regulations have weighed down the market which breaks into 2 segments: risks located in the Gulf of Mexico and the risks outside the Gulf of Mexico.
Risks located in the Gulf of Mexico
- Considerable increase of the rates for the risks that do not comply with the American Petroleum Institute's clauses is noticed. November 1, 2006 is the deadline set for oil companies in order to comply with the said clauses.
- A minimum 5% increase in deductibles for cyclone risks.
- Development of a separate market for cyclone risks with very high premium rates.
- Difficulty in placing business interruption covers on the market. Many insurers stopped writing such covers. Business interruption deductibles have reached 90 days instead of 45 days.
Risks located outside the Gulf of Mexico
These risks are examined on a case-per-case basis with an average rate increase ranging between 10% and 15%.
Energy insurance: The Middle East: a stable market
The energy risk in the Middle East is mainly the London and European market's business. Dominated by on-shore operations and hardly exposed to natural catastrophes, the market has managed to maintain relatively moderate rates in the course of recent years.
The planned investments are huge, especially in Qatar, Saudi Arabia, United Arab Emirates and Kuwait. These favourable perspectives are likely to incite some large oil companies to retain further risks and to build up reserves in preparation for possible stiffening insurance conditions.
Even though terrorism and sabotage risks are not specifically linked to the Middle East region, they remain quite high. Between 2000 and 2004, acts of terrorism and sabotage took place particularly in Russia, Chile, Columbia, Ecuador, India, Indonesia, Iraq, Nigeria, Sudan, Yemen and Pakistan.
In the Middle East, vulnerability to terrorism risk is accounted for, among other factors, by the nature of the oil installations themselves. There exists a 15 000 kilometre-stretch of gas and oil pipelines in Saudi Arabia and about 8 000 km in Iraq. Gas and oil pipelines are often laid on bare ground and stand as easy targets for terrorist and sabotage acts.
In Algeria: 
On-shore market: Algeria has improved its safety system and thus reducing its exposure to terrorism and sabotage risks. Algerian risks are strained, however, by aging installations, a lack of maintenance and risk prevention scheme.
Following the 2004 Skikda loss, the state-owned oil company SONATRACH, Algeria's main operator, is planning to invest about 1.2 billion USD in risk prevention for the 2006-2010 period.
In Nigeria: Since the 1960s when the country was acknowledged as an important oil producer, the first in Africa, the local insurance companies have failed to play an active role in promoting the sector. The large reinsurance brokers and the London market remain by far the main actors to be reckoned with.
The creation of a local reinsurance pool for oil risks and the increase of the financial capacities of Nigerian insurance and reinsurance companies will not be enough to change the market trend.
Nigeria remains highly exposed to the terrorism and sabotage risks targeting its installations especially oil pipelines.