Managing energy industry risk in a volatile world

The world has experienced rapid and profound changes in recent years, and the energy industry has been no exception. Climate changes (in-cluding global warming), market fluctuations, ever-increasing business mergers and acquisitions, natural disasters, terrorism threats, war, political risk, increasing regulatory and financial scrutiny and evolving environmental pressures in the United States and abroad, are only some of the forces impacting today’s energy industry — in particular for risk managers and financial officers.

With more change looming on an increasingly volatile global horizon, risk management professionals are scrambling to address emerging risks, eliminate existing threats before exposures occur, and re-evaluate the range of potential consequences associated with long-recognized hazards. The risks presented on a global enterprise level for the energy industry require underwriting and financial consideration in terms of frequency, severity, and catastrophic impact. In addition, the industry has an overwhelming desire and need to explore new sources of energy, which requires global expansion in more places than ever before. Furthermore, risk “uncertainty” may arise from the energy industry’s quest for untapped, alternative and cleaner energy sources and the technological advances required to support them. All of these must be fully factored into the risk management equation. Un-doubtedly, the energy industry has a pronounced position throughout the world on economic, environmental and public safety platforms. The impacts of events are often immediate, widespread, and often long-lasting. In addition, risk managers have a considerable amount of corporate and public responsibility placed on them.

With so many unpredictable forces in play, risk levels can change rapidly, and when they do, risk managers must be ready to respond with quick, flexible and efficient solutions. As a result, it is essential that they have the support from experienced insurance agents and brokers, and insurance carriers, in order to provide coverage, capacity and confidence in claims execution. If risk management energy professionals were asked to describe their “worst nightmare” some examples could be: 1) determining what kind of coverages are in place, if any, to protect against significant events, 2) quantifying the financial impact to senior management, 3) identifying inconsistencies or “gaps” in coverage between primary and excess layers, and 4) micro-managing claims adjusting to assure consistency, data quality and overall communication.

The first, and most vital, step toward meeting these and other risk management challenges is insurance carrier selection. Taking the time to qualify a responsive and capable carrier with energy industry-specific expertise, upfront, before scrambling to line up quotes or compare policy parameters, is worth the investment.

As outlined earlier, underwriting energy risks require keen insight into the volatile nature of the industry, the flexibility and agility to match the policy to the risk, and the global network and financial resources to shoulder that risk. At the same time, if an organization is doing business anywhere in the world, it needs more than energy-specific coverages to assure the safety of its employees as well as to safeguard its bottom line from a variety of business risks. These carrier considerations can help producers guide their energy risk manager clients through the selection process.

Commitment
If a carrier can’t demonstrate its long-term commitment to the energy industry, why should a company trust it to shoulder the company’s energy industry risk? Remember, if a carrier pulls away from or out of underwriting a particular industry, a policyholder’s risk doesn’t magically disappear, too. Look for a carrier who is in it for the long haul, with a proven track record.

When reviewing candidate carriers, ask questions.

• How long has the carrier been insuring energy risk?
• Does the carrier devote resources to its energy industry-specific operations? For example, the best carriers will cite their physical offices and dedicated underwriting and other essential staff in recognized energy industry hubs, such as Houston. After all, it’s hard to gain insight into a complex and specialized industry such as energy from afar.
• Can the carrier offer customer references? This is critical, given that the energy industry is a tight community and shares its market experiences openly.

Underwriting expertise
The most qualified carriers offer dedicated energy underwriters with appropriate knowledge and experience. Energy buyers are generally risk takers and as such, the carrier’s underwriters should be financially astute and capable of constructing sophisticated risk financing solutions.

Questions for carrier candidates include:

• How many dedicated energy-industry underwriters are on staff, and how long have the underwriters been serving the energy industry?
• Does the carrier develop energy-industry specific insurance products?
• Does it offer energy-industry specific risk management services?
• Does the carrier offer an energy “center of excellence” team?

Global capabilities
Energy-industry risks can occur anywhere in the world, and the most qualified carriers will be able to demonstrate a global, energy industry-specific, network of underwriting, claims and risk management professionals. Regardless of where an insurance product is negotiated, underwritten, marketed, distributed or ultimately used, a claim under that product can usually be litigated in a number of jurisdictions — including worldwide. Don’t wait for claims to occur — find out if, or how professionally, a carrier is equipped to respond:

• In how many countries can the carrier write policies?
• In how many countries worldwide does it operate?
• In addition to energy-specific products and services, does the carrier offer a complete range of global business insurance products and risk management services?
• How does the carrier offer claims data integration on a worldwide basis?

Financial strength
Today, carriers that support the energy industry are held to financial tests by a variety of rating agencies and regulatory authorities. Given the catastrophic nature of this industry, it is essential that a carrier have the financial wherewithal to shoulder large losses — potentially in the billions of dollars for any one event. Do research when reviewing carrier candidates:

• How well recognized is the carrier within the insurance industry? Is it considered an industry leader?
• How is it rated by A.M. Best Company, and by Standard & Poors?
• Does it have the financial strength to safely shoulder an organization’s fluctuating energy industry risk in today’s increasingly volatile world?
• How does the carrier manage its aggregation of risk — divisionally and globally?

Tailored products and services
A truly global carrier with a demonstrated, long-term commitment to the energy industry will offer a full range of products. Can the carrier offer the energy-industry specific insurance products and risk management services listed below? How innovative is it in terms of identifying the energy industry’s risk management needs, and responding with flexible and strategic insurance products designed to meet them? If a carrier doesn’t offer all of the products and services listed below, expand the carrier search. If it does, ask it to demonstrate its flexibility — is it willing, and able, to craft the policies it provides to your organization’s real world, real-time risks, such as:

• Primary casualty: workers’ compensation, general liability and automobile liability
• Defense base act
• United States Longshoreman & Harbor Workers Act (USL&H) and maritime liability
• Excess casualty (umbrella)
• Global property (offshore and onshore)
• Commercial marine (global)
• Environmental (global)
• Risk management services
• Catastrophic services (claims and emergency response services)

If one thing is certain, it is that the energy industry will continue to evolve at an ever increasing pace. Risk management professionals must continue to evolve as well, and the best way to assure a company’s success is to work with a forward-thinking, dedicated, energy focused global carrier that has demonstrated their commitment and expertise over time while also leading in the industry during times of change.

Keith Mattheessen is senior vice president, ACE Risk Management, and leads the ACE USA Energy Casualty Practice. Based in Houston, Texas, Mattheessen is responsible for driving the marketing, product development and distribution of ACE USA’s energy capabilities. ACE USA is the U.S.-based retail operating division of the ACE Group of Companies, headed by ACE Limited, www.ace-ina.com.