Axco’s unique network allows us privileged access to leading professionals in the re/insurance and risk sectors. Recently, we enjoyed a presentation from a leading global broker, who gave us a greater insight into the insurance of upstream risks. Axco explores the themes and discussion held in the presentation as well as providing insight into the industry itself.

The energy industry is traditionally separated into chronological sectors. Upstream, the identification of oil and gas deposits (exploration) and the extraction of these involving the refining of crude oil and gas processing known as the downstream sector (production).

London remains the pre-eminent market for upstream insurance. These policies are based on the risks entailed at all stages, these include natural disasters and oil spills and blowouts. 

Other policies such as products and public liability insurance (PPL) cover businesses following a claim for financial compensation and is being used more and more within the energy industry. Within the UK market, decommissioning is also a large part of the industry and an emerging risk in many other global markets, ‘cost spikes over the next 30 years could increase to around GBP 50bn in the North Sea alone’ says the broker. The North Sea has also seen a continual growth in the number of deep sea ventures. Shell recently announced its Penguin platform, a project which amounts to around £350 million as mentioned in their annual financial report.

Investment strategies must be within a framework which takes political and environmental risks into consideration as new corporate and social responsibility laws come in to play. 

Local laws within different locations vary drastically and are also important while formulating policies. Key considerations include regulation such as compliance, sanctions, fronting and reinsurance as well as the regulatory environment with mergers & acquisitions, tort, protection and indemnity, finance, decommissioning and security.

‘The key of risk management is to understand the risk in order to identify gaps in layers of protection. This enables a platform to provide risk control recommendations though risk grading and benchmarking.’

Economic variables within the market also play a big role in finances and can have significant consequences. Lloyd’s own figures point to a rapidly declining premium income pool for the energy business. From a high of £1.06bn in 2014, two years later, Lloyd’s premium income from energy business declined to just £700m in 2016. Since 2014, oil prices have been falling and reached USD50/bbl in 2015. This results in reduced drilling and construction activity both onshore and offshore, and an increased pressure on oil companies to reduce contractor costs.

As the mentioned in the broker’s presentation, this could lead to ‘a knock-on effect on the insurance market [which] means a reduced insurance spending on the market as well as possible compromises in safety leading to higher risks requiring more claims and intensification of competition for market shares between insurers.’

With such unpredictable environments worldwide, it is crucial that risk analytics are at the forefront.

Predictive analytics through investigation of historical events and disasters along with in-depth analysis of existing variables can help to paint a picture of the dangers and liabilities, although many instances are still unknown. The growing complexity of asset bases and supply chains creates the need to diversify business models.