Filed Under:Risk Management, Cybersecurity

Opportunities abound for energy insurance brokers

The energy market continues to expand

The energy insurance market is ever-evolving, as such emerging threats as climate change, competition and cyberterrorism pose growing risks. (Illustration: ALM Media)
The energy insurance market is ever-evolving, as such emerging threats as climate change, competition and cyberterrorism pose growing risks. (Illustration: ALM Media)

The risks inherent in the energy insurance market are complex, challenging and potentially catastrophic. They are also ever-evolving, as such emerging threats as climate change, competition and cyberterrorism pose growing risks to energy providers.

Related: Using trade credit insurance in the energy industry

"Despite an encouraging uplift during the last 12 months, the energy industry is still beset by some significant challenges," reports Robin Somerville, global communications director for Willis Towers Watson's Natural Resources Industry Group and editor of the firm's 2017 Energy Market Review. These challenges include low oil prices, cost-control pressures, workforce layoffs, onerous legislation and regulation, and the escalating risk of cyber attacks (see sidebar).

Mother Nature's fury


Of course, climate change also poses growing challenges: The 2017 hurricane season was unprecedented in terms of severity and damage, so it's no wonder that the recent windstorms have caused apprehension in the Energy insurance market, according to Willis Towers Watson's “2018 Marketplace Realities Report.” Forecasts by global risk modeling and analytics firm RMS put insured losses from wind, storm surge and inland flood from Hurricane Harvey at $25 billion to $35 billion and for Hurricane Irma at $25 billion to $40 billion — for a potential total of $75 billion, Somerville points out.

Related: U.S. weather disaster losses total record-setting $306 billion in 2017

"With [Hurricane] Maria, the consensus is that the total insured losses will exceed $100 billion," Somerville says. "There has been a significant impact on refinery production, and several major (re)insurers are already purchasing additional top-up reinsurance protection."

He believes the final bill to the energy insurance market may not be severe, as insurance claims will only be recoverable from policies that have been specifically endorsed to cover named windstorms. "History suggests hurricanes are likely to be seized on as a rationale to increase prices," he explains, "and we fully anticipate some type of market correction after insurers have a chance to estimate their ultimate losses."

“In addition to hurricane losses, a new concern is the proliferation of wildfire losses,” points out Jerry Wosleger, senior vice president of NavTech, Navigators’ global business that underwrites energy and engineering/construction and other technical industrial-related risks. As wildfires continue to become more extreme, he expects to see more claims and losses from clients in affected areas.

Related: Top 10 ZIP codes for fire loss

Emerging opportunities energize the market


Despite the losses from hurricanes and other natural disasters, “the abundance of reinsurance market capital — the driving dynamic behind market conditions now for nearly a decade — is likely to remain dedicated to the industry, regardless of what individual sector loss records produce,” says Somerville.”Reinsurance treaty prices will likely rise in the short term. However, as long as capital continues to flood the market, not much is likely to change in the long run.”

Related: 10 U.S. cities with the highest & lowest natural-disaster risk level

Insurers agree that the Energy market is ripe for investment. In 2016, The Hartford launched a dedicated energy practice to provide specialized underwriting, insurance coverage and risk management services for energy companies.

“We feel this is the right time to invest in the energy sector, as we continue our focus on broadening and deepening our commercial insurance expertise and capabilities to serve key industry sectors,” says Ric Pena, head of Energy for The Hartford.

Pena's clients continue to expand and build new pipelines and midstream facilities, and they continue to invest in the extraction of oil and natural gas. Rig counts are up and so are employee counts. “On the Power-Gen side, new plants are being built, and existing plants are being converted to cleaner natural gas-powered facilities,” he adds. All this presents opportunities in both the construction and operational risk arenas.

Beyond oil and gas, Pena is seeing continued investment in traditional and green energy, noting that energy market clients are seeking providers that understand their businesses, partner with them, and help them manage their total cost of risk. “We are seeing opportunities with emerging companies in the energy space backed by private equity. As newer ventures, these companies need partner carriers who are open to working with them during the initial phases of their journey,” he points out.

It's clear that renewable energy will present growing opportunities for insurers.

It's clear that renewable energy will present growing opportunities for insurers. (Photo: National Underwriter Property & Casualty)


"The renewable energy business is continuing to grow in North America and globally," says David Barclay, senior vice president of Chubb's Energy Resources Practice. "Many states and provinces are encouraging solar and wind projects through various incentives."

The ability to store power economically until it is needed will be the real game-changer for solar and wind energy. However, storage technology is still emerging and presents hazards such as breakdown and fire, he adds.

Barclay predicts that renewable energy will continue to grow as technology improves, in turn enhancing the renewables sector's ability to compete with traditional power generation. He points out that the renewable energy space is growing not only for power providers but for manufacturers of renewable energy products.

At the same time, Barclay acknowledges that although renewable energy is growing, traditional energy still makes up the largest portion of the energy market for insurers. Oil and gas operators are seeing a steady upturn from 2015 with improved oil prices. Metal mining and oil and gas companies have trimmed expenses and are better poised to operate profitably. Additionally, with the proliferation of shale gas many power generators are converting their fleets from coal to natural gas with confidence that it will be a sustainable, economical fuel for many years. "This pivot to natural gas will also spur growth for midstream gas pipelines and ancillary operations," he notes.

Related: Solar spotlight: New opportunities in renewable energy

It's worth noting, Barclay adds, that traditional and renewable energy are coming together for many insureds. As an example, mining companies with remote locations have traditionally generated power via portable diesel generation. He is now seeing mines use wind or solar to support their power needs.

Improved terms and conditions


Mike Newman, principal at Integro Insurance Brokers, points out that because the market is so soft, there's an opportunity for insurance buyers to negotiate improvement in terms and conditions.

According to Barclay, terms and conditions “have loosened, to a degree.” He points out that most long-term energy insurance providers recognize the severe nature of the business and are changing the corresponding strict terms and conditions cautiously, based on the quality of the risk.

(Photo: National Underwriter Property & Casualty)

Although renewable energy is growing, traditional energy still makes up the largest portion of the energy market for insurers. (Photo: National Underwriter Property & Casualty)


Newer energy technologies pose unique challenges because there simply isn't the same amount of historical loss data.

"Underwriters have to meet this challenge with an intense underwriting process to help determine adequate pricing," Barclay stresses.

He offers wind turbines as one example. They've been around for many years and have become more dependable and efficient — but they’ve also become larger in size, causing replacement costs to increase. "A fire loss to the equipment in the nacelle is substantially greater than it was a few years ago," he points out. In addition, finding a crane of adequate size to repair the damage is difficult, possibly resulting in longer rebuilding time and higher claim costs, including those losses associated with business interruption.

Related: Exposures are 'greater than ever,' but opportunity remains in energy insurance

Keys to success


How can agents and brokers compete effectively in the intricate, challenging, and rapidly evolving Energy market?

Barclay believes that the producers that succeed in the energy space are those that are dedicated to deep knowledge of the industry, noting that the industry is complex and can change quickly.

See also: 4 ways insurance agents can master social media marketing

"An agent or broker that is committed to understanding their client base will prevail," he says. He also believes that it's vital to engage with carriers that have deep subject matter expertise across the underwriting, risk engineering and claims ranks and are equally committed to the energy space for the long term.

Producers who succeed in the energy space tend to be dedicated to gaining deep knowledge of the industry. (Photo: National Underwriter Property & Casualty)

Producers who succeed in the energy space tend to be dedicated to gaining deep knowledge of the industry. (Photo: National Underwriter Property & Casualty)

Knowing the market is key


Agents and brokers competing in the current market should make a point to carefully manage their clients' pricing expectations and help them see the big picture when it comes to market equilibrium, points out Wosleger of NavTech. "Prices are going up, as they should, after four to five years of rate-cutting. It's in everyone's best interest to have the client, broker and underwriter prosper, and a long-term partnership among the three entities is an ideal model to strive for. Brokers need to prepare clients for rate increases in 2018."

See also: 5 key insurance trend predictions for 2018

Pena agrees, noting that at The Hartford "we invest in internal and external data, which we use to help make risk decisions, and translate it to the best products for our clients." This doesn't always translate into a direct correlation with historical, client-specific data, however. As the energy sector changes and new risks and clients emerge, he says, "We rely on our deep expertise and industry knowledge to understand the root of a business' risks, anticipate claims and trends that could occur, and in the end, make the right underwriting decisions."

When it comes to the Energy market, "Agents and brokers must become specialists and know what they’re talking about," stresses Newman, who has spent the last three decades specializing in the oil and gas industries. "As we move into 2018, my best advice is: Be prepared for anything. The energy industry has its swings."

Cyber breaches are the new normal. (Photo: National Underwriter Property & Casualty)

Cyber breaches are the new normal. (Photo: National Underwriter Property & Casualty)

Cyber attacks: a growing risk to the energy market


The escalating threat of cyber attacks and their potentially catastrophic results may reflect a “new normal” in the energy industry, cautions Robin Somerville, global communications director for Willis Towers Watson's Natural Resources Industry Group and editor of the firm's 2017 Energy Market Review. The top risks in terms of cyber attacks include hacks and viruses that lead to breaches of data or privacy, loss of records, or events such as system failure.

Related: Cyber liability insurance market: Equal parts promise and peril

Willis Towers Watson's "2018 Marketplace Realities Report: Cyber Risk" identifies trends cyber insurance buyers can expect in the coming year, including the following:

        • Annual cyber premiums will climb as more companies seek coverage. Global premiums, which are around $2.5 billion now, will continue to rise and are expected to reach $10 billion by 2020.

        • Capacity will keep up with rising demand. As demand for coverage increases, the “supply of capacity is more than keeping up,” the report notes, with new carriers and additional capacity entering the marketplace.

        • Carriers will reward clients with the strongest cybersecurity programs. Carriers will likely lower premiums for organizations that have demonstrated increased levels of security and internal policy controls.

        • Coverage will expand. More carriers will address gaps in property, general liability and special crime coverage to include cyber risks.

"When it comes to emerging risks for the energy market, cyber risk is really getting a lot of attention," says Jerry Wosleger, senior vice president of NavTech, Navigators' global business that underwrites energy and engineering/construction and other technical industrial-related risks. "Because this area is very new to us as property underwriters, we are trying hard to understand the exposures and what we are affording. It is vital for underwriters to understand the exposures and how they fit into the policies we offer."

Wosleger points out that there is a growing market for separate cyber policies attached to property and nat-cat contracts. "More clients are opting for separate cyber policies," he says. "Our concern as underwriters is to determine to what extent clients understand their own risks and control their cyber security. There is no 'one size fits all,' and often a separate policy is a much better fit for clients."

The consequences to an energy supplier of inadequate cyber coverage can be catastrophic. "A cyber attack on an oil refinery could cause a malfunction or fire that could shut it down for a long period of time," Wosleger warns.

Joyce Anne Grabel is a partner in Editorial Direction LLC, an editorial services firm based in New London, CT. She can be reached at jagrabel@editorialdirectionllc.com

See also:

6 ways cybersecurity will impact insurers in 2018

How social engineering fueled the cyber-attack business

Related

18 emerging risks for the insurance industry, its customers and society at large

Insights into emerging risks and how they can best be tackled.

Featured Video

Most Recent Videos

Video Library ››

Top Story

5 social marketing trends for insurance agents in 2018

Social media marketing has been accepted as one of the best practices for spreading an insurance marketing message and establishing a brand.

Top Story

20 safest airlines to fly with in 2018

To recognize those leading the way, AirlineRatings.com released its annual list of the world's safest airlines. Of the 409 airlines it monitors, 20 stand out as the 'best of the best.'

More Resources

Comments

eNewsletter Sign Up

PropertyCasualty360 Daily eNews

Get P&C insurance news to stay ahead of the competition in one concise format - FREE. Sign Up Now!

Mobile Phone

Advertisement. Closing in 15 seconds.