Carrier Perspectives of the Energy Marketplace
A View from the Top
Devastating oil spills. Fracking. Wildly fluctuating gas prices. An increase in environmental regulations and lawsuits. The energy business has gotten a tremendous amount of publicity and analysis over the last several years, and much of this attention has impacted the way consumers―and insurance companies―view demand, accountability, and the practices of energy companies. These energy contractors and consultants are tasked with performing energy-related operations that are vital to our global economy. And the combination of environmental awareness among the public, politics surrounding the oil & gas sector, and the impact of energy stories in social media and other news outlets have brought this industry to the forefront even more. As the energy market expands and contracts, insurance companies have experienced some interesting challenges when evaluating the risks associated with an industry where pricing and demand can change so quickly.
This year has seen particularly significant changes to the way carriers are underwriting these risks. “With the uncertainty of the price of crude, operators are not planning new projects, leading to a decline in work.” Said John Termini, Managing Director, Environmental & Energy Product Line at Markel Corp. “Contractors and consultants in the upstream sector are seeing less contracts, therefore, exposure basis is down and we are beginning to see the start of mergers and acquisitions in this sector of the energy market.” Significant developments like this can result in stricter guidelines in both the breadth and type of coverage being offered. “We are starting to see carriers reduce capacity and not offer the limits that they did previously.” Said Rob Owens, Senior Vice President, Environmental at ACE Westchester. “In addition, we are seeing markets get tighter on terms and conditions by either adding exclusionary language or restricting specific operations.” Setting realistic expectations of coverage and price with brokers, agents, and insureds is becoming a part of the process that is even more delicate and crucial than ever before.
While the energy business may be declining in certain areas, there are processes that are most definitely thriving, and even growing. Stuart Samuel, Senior Vice President at Kinsale Insurance weighs in on trends in energy, stating “Production has definitely slowed down and new wells are not being drilled as much, which is the natural effect of dropping oil prices. No new wells means no new work for all the support and ancillary industries. We have, however, seen stable or increasing activity in infrastructure work, including pipelines, refineries, etc. We have also seen more activity in other energy sectors―alternative, solar, wind, etc.”
So just because companies may be struggling on the production side, doesn’t mean that midstream, downstream, and even alternative energy operations aren’t flourishing. The timing aspect of oil & gas processes is one of the most important factors to consider; how long to store oil, when and how much to refine at a time, etc. Additionally, companies and investors are spending a great deal of resources to identify the best time to enter some of the newer alternative energy markets, including wind, geothermal, and hydroelectric, to name a few. Even in the area of solar energy, which is an alternative energy market that has been around longer than most, research and the associated capital is still being deployed in order to enhance conductivity and subsequent efficiencies.
Since the energy space can be uncertain and sometimes undefined, many of these companies have prepared for times like this. “The North American rotary rig count is less than half of what it was this time last year. Equipment is being stacked, revenue streams cut and bankruptcies being filed.” Said Richard Kern, Division Manager of the Environmental and Energy Divisions at James River Insurance. “On the positive side, there are energy companies that prepared for the downturn. They have money, no heavy debt load, and are waiting to make acquisitions and grow.”
As we head into the last part of 2015 and into next year, some insurance carriers continue to forecast a leveling out of business, leading to stability for the short term but possible volatility moving forward. Termini predicts “Although future contracts have decreased, upstream oil field contractors still have enough work to maintain their operations throughout 2015 and into the first quarter of 2016. Doubt exists beyond the first quarter of 2016, leading to a major shift in exposure basis and insureds making changes to their insurance buying decisions.”
Many energy insurance carriers agree that the issues impacting the energy market will not have a detrimental effect on the industry as a whole. “Regardless of the price of oil per barrel, I believe the overall energy sector is strong and will remain so as we move forward.” Said Scott McDougall, CEO at Energy, Industrial & Utility-Risk Solutions (EIURS). “Let’s face it, even with recent price decreases most oil companies remain profitable. In many companies, their capital expenditures are increasing to meet the global demand of population growth, dated infrastructure, transportation, and storage, as well as the need to satisfy their shareholders via profits. In my opinion, that translates into a tremendous opportunity.”
On the other hand, there is concern among some insurance providers about the overall health of the industry as prices continue to change and competition increases. Kern says “We see all of the various business segments that make up the energy business world having a difficult time the next few years.” He adds, “We mentioned what is happening to the price of oil. That not only impacts the oil & gas companies but alternative energy as well. Alternative energy products and projects now have to compete against a much cheaper energy source in oil.” Increasing competition can also mean that quantifying exposures will become more challenging. According to Owens, “Many energy contractors and consultants perform multiple operations/services, so it can be difficult at times to adequately assess the risk. This is why it is important we obtain a complete underwriting submission that provides accurate details regarding the insured’s operations and services.”
One things is clear: underwriting coverage for energy risks remains a moving target. Carriers are having to constantly reflect on their corporate and personal standards to successfully write business and stay competitive. Samuel believes that “most underwriters have as their primary goals remaining viable, competitive, and stable. Some succeed quite well while others will suffer fatally from their lack of underwriting and pricing discipline.”
The combination of a broker that is knowledgeable in the vast array of products that have been developed for this sector, teaming with underwriters that can offer creative product enhancements, is critical to the security of the firms in this industry. Whatever direction oil prices head, the insurance industry is prepared to assess the risks and support the companies bringing much needed resources to the market. As the foregoing illustrates, markets focused on this class universally agree that there is opportunity in the energy sector for thoughtful underwriting and risk taking. The insurance industry will clearly remain a long term partner to the oil and gas development industry.
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