Complex Energy Industry Requires ‘Power’ Underwriters

By | September 25, 2014

The energy industry is not a risk for every underwriter; it requires considerable underwriting expertise due to its complexity and rapid growth.

“Power is one of the fastest growing segments in the U.S,” according to Tom Fitzgerald, CEO of Aon Risk Solutions U.S. retail operations. “Between rapid expansion and growth, legislative, regulations and supply chain complexity, power and utility operators need a partner with an intimate understanding of the unique risks they face every day.”

“It [the power industry] creates a very complex underwriting process that requires expertise specific to this industry,” said Mark Fishbaugh, the recently-appointed practice leader for Aon Risk Solutions’ national power practice group who shared his thoughts on underwriting the power in a recent podcast with Claims Journal.

Fishbaugh said that while the various energy segments share the goal of generating power, the risk profiles differ among coal, nuclear, gas and renewable energy. Also, the supply chains in the power industry are more complex than in other industries.

“You have to have the loss engineers, claims handling experts and loss preventions services to understand this risk well,” said Fishbaugh.

Each type of power has its own unique risks such as the physical size and location of the plant, regulations, use of potentially unproven technology, regulated versus non-regulated companies, project finance arrangements and ownership structures.

“When you develop something new, the less history you have on it, the greater you have for the uncertainty of loss in the short term and the long term,” said Fishbaugh.

For example, the coal industry faces risks over its aging fleet, regulatory pressures and the impact of low gas prices. The gas industry depends on new technology and exploring the unknown. Renewable energy does not have a long track record and is fast-moving. Nuclear has its built-in hazard along with the risk of disposal, which is highly regulated.

In addition, the power industry has to manage the transmission and distribution grid to get the power where it needs to go, said the Aon practice leader. “The risks here is really the disruption of the interconnection,” said Fishbaugh.

Fishbaugh said that as a result of the variety of risk associated with the power industry, decisions on rates, retentions and limits are typically made on a case-by-case business.

The risk type doesn’t change much from year to year. The day-to-day operational management is very complex and the risks are compounded by extreme weather conditions, periods of high demand or fuel cost fluctuations.

In addition, there is frequently no long term historical track record.

The degree of risk is what really changes, said Fishbaugh.

Companies and insurers are focusing on the aging infrastructure and modeling natural perils, such as flood surge.

Additional focus is being placed on new generation technology intended to generate more megawatts more efficiently, vegetation management, ash ponds and dams.

Asset security and cyber-risk are also concerns. “It’s been specifically noted in this sector,” Fishbaugh said. “Not only for personal information protection, but also the potential terrorism threats or other threats to the grid.”

Fishbaugh shared his perspective on underwriting the power industry in a podcast with Claims Journal Editor Denise Johnson. Listen here.

Topics Legislation Underwriting

About Denise Johnson

Denise Johnson is editor of More from Denise Johnson

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