In a move that could blow up in the face of the energy industry, refineries and petrochemical plants in the United States are dialling back on their insurance purchases, following years of severe accidents that have driven up the price tag of coverage. Some of the high-profile accidents have included a handful of explosions at petrochemical plants in Texas, as well as a fire that closed the Philadelphia Energy Solutions refinery in 2019.
In fact, energy companies – once the buyers of billions of dollars of insurance – are more broadly buying less coverage than in the past. As a result, energy firms stand to be liable for millions of dollars for repairs and lost business if an explosion or fire were to occur, according to Reuters. One end-game scenario would even see refineries close down completely if their coverage is not adequate.
The rising costs are nothing to scoff at – rates for property and business interruption coverage have risen by 25% to as high as 100% for some refiners, especially if they’ve had explosions or fires before.
“Refiners are choosing to buy coverage for only 90, 80, 70% of their total asset value in response to insurance rate hikes,” a senior refining executive told Reuters.
In the case of the blaze at the Philadelphia Energy Solutions refinery, that incident could cost $1.25 billion in insured losses alone, although industry sources told Reuters that the company will probably receive less from its insurers.
It was also reported that the liability to insurers for incidents in the global refining and petrochemical sector over the past three years totals more than $12.5 billion, which is more than twice the gross premiums paid to insurance companies, according to global broker Marsh in a recent report. For insureds in the sector, yearly premiums are costly, with a refiner worth $1 billion likely getting a bill for $2.5 million or more.
Insurers like AIG and CV Starr, which have a lot of exposure to the energy space, are now providing less capacity as well as reducing their exposure, according to insurance industry sources in the Reuters report.
At the same time, risks for refineries are increasing. The number of unexpected outages have shot up recently, with more than 2,000 incidents reported in 2019, which is 4x the number of outages in 2015, according to Industrial Info Resources.
And with energy and chemical production in the US booming, complex refineries – where an interruption in one unit can impact production across other units – are running at full speed and taking no downtime to boost profits. Reuters noted that refining margins have been strong over the past two years, which is why refiners have been discouraged from shutting down for maintenance.
“When refinery margins are high, there can be a tendency for refineries to extend turnarounds in order to take advantage of the more profitable environment,” said Ian Robb, head of risk engineering at Liberty Specialty Markets.