Commodity Pricing Volatility Increases Under-insurance Risks Says Marsh

October 7, 2011

Marsh has issued a report, which highlights the rising gap between insurance coverage amounts and the actual costs that may be incurred in rebuilding and repairing after a loss due to rising commodity prices.

“Commodity price volatility and the rising cost of raw materials such as steel are fuelling arise in rebuilding costs for plants and facilities, particularly for companies operating in the energy sector,” said Marsh. As a result firms that fail to “update their insured values routinely,” are potentially exposed to the risk of under-insurance,” Marsh warned.

Energy companies are particularly vulnerable if they fail to update their insurance valuations due to “sharp rises in plant inflation costs after a relatively benign period in 2009-10. An upturn in construction activity is placing an added premium on labor and equipment costs, which should also be factored into insurance reinstatement calculations.”

John Munnings-Tomes, a Senior Risk Engineer in Marsh’s Energy Practice, commented: “This year, plant construction costs for refineries and petrochemical facilities have exceeded the previous high of 2008, while costs for offshore facilities are fast approaching 2008 levels. This upward trend is showing no signs of turning, particularly in the case of continued high and relatively stable crude oil pricing.

“The need for up-to-date valuations of plants and facilities for insurance purposes is critical. By failing to have an accurate picture of what exactly these assets are worth and what it would cost to reinstate them, companies are leaving themselves exposed to a substantial hit on their balance sheets, should the worst happen.”

Source: Marsh

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