Geopolitical pressures that drive environmental social and governance (ESG) initiatives have been front and centre for all energy related companies, and the approach to insuring the sector has experienced a major shift.
Stewart Halstead, vice president of energy at BFL Canada, sat down with Insurance Business to discuss how the industry is placing its underwriting focus on ESG.
“Oil and gas companies need to have a robust and detailed plan surrounding their emissions to achieve any success with their insurance renewal,” he said. “These same geopolitical pressures are also pushing global insurers to walk away from the oil and gas sector altogether.”
Lloyd’s recently stated its intent to completely leave the fossil fuels sector by 2030. Halstead explained that global energy insurance premiums are approximately $14 billion, and Lloyd’s writes 25% of that business.
“For the first time in many years, insurance is a primary concern for the board of directors of energy companies,” he added.
With more and more players leaving the sector, tackling capacity issues in the marketplace is top of mind. A primary theme Halstead noted is the push towards self-insurance and assessing how much risk can be retained.
“In 2022, we’re going to see more energy clients, even on a smaller scale, investigating captives and fronted insurance programs than ever before,” Halstead said.
“It really comes down to the practice of retention analysis and understanding what your intent is and what you’re truly trying to insure,” he said. “We’re getting into understanding the analytical approach of self-insurance which has become the barrier of entry for any broker who wants to compete in the oil and gas sector.”
Brokers need to be taking a customized approach for each renewal and educate themselves on the overall metrics of a client to help underwriters get a handle on the exposures that truly exist.
“If you can begin from a financial and operational lens, brokers will do well in the energy space. It’s not going anywhere - it’s just changing,” Halstead noted.
Captives do not necessarily provide clients with the same level of risk management, so it’s in brokers’ best interest to start acting as a risk advisor for clients to retain business.
“Carving out certain risks that are highly related within the actuarial model of an insurance company will lead to intense savings across a program, and from a brokerage perspective spending more time with clients and understanding their entire operation helps assess prevalent exposures,” he emphasized.
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Halstead added that 90% of the conversations he has with underwriters pertain to energy risks and ESG pressures, and this will remain something to work through moving into 2022.
In addition to ESG issues, the price of oil and gas is also top of mind - Halstead emphasized that quarterly reporting is one of the best approaches to prevent a client from being under or over insured.
“If revenues are steadily rising and operations are doing the same because of commodity pricing, it allows clients to have lower premiums, but of course the reverse can be true,” he said. “Rates will stabilize with more capacity, but we don’t know what the marketplace will look like as underwriters start drawing more lines in the sand.”