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ALTHOUGH MEDIA noise around renewable energy shows no signs of quieting, the reality is that the vast majority of homes and businesses across the country are still powered by traditional oil and natural gas sources. Various investment funds and firms are divesting oil & gas firms from their portfolios, but that seems to be more of an image-building strategy than a moneybuilding one. Oil & gas producers remain economic powerhouses, as do hundreds of the ancillary organizations involved in the industry.
Despite the seemingly constant controversy that engulfs the industry, oil & gas remains a strong and extremely profitable business. For brokers and agents, the space offers a steady flow of clients, from huge multinational conglomerates down to smaller independent operators. Given the vast array of risk exposures that present themselves on a daily basis, companies operating in the space are well aware of the value of comprehensive insurance coverage, and they have big budgets set aside to pay for it.
Environmental concerns
Although it’s a complex and often challenging business, according to Brian Vassallo, senior vice president at Worldwide Facilities, oil & gas insurance is actually not that complicated. “There is third-party bodily injury and property damage that can happen on, around or in relation to your job, just like a homeowner can have a slipand- fall on his sidewalk or a contractor can drop a hammer from a piece of scaffolding onto someone’s head,” he says. “Oil & gas insurance just has been better tailored to the oil & gas industry.”
The main exposures faced by oil & gas companies usually revolve around job-site safety, property damage or theft, the failing of complicated and heavy machinery, and failure to supply. However, thanks to recent catastrophes, risks around environmental accidents and damage remain top of mind.
“Probably the largest concern for the oil & gas industry remains the responsibility to minimize the potential impact their work has on the earth and the environment in both the short- and long-term,” Vassallo says. “Everyone from the equipment manufacturers to the contractors to the inspectors have to have a better understanding of the environmental side of the insurance products they purchase.”
The oil & gas sector is subject to everevolving government regulations and constant public and media attention, but that scrutiny now looks likely to lessen. The new pro-business, pro-America presidential administration is looking to roll back federal regulations as it plans to transfer regulatory responsibility to state and local governments.
“That will likely work out well in the Midwest and Northeastern states, which have administrations that are in tune with the industry,” Vassallo says. “A state like California, with irresponsible leadership and a skewed view on the industry, could spell big problems for oil & gas companies wishing to do business in their shales. That’s unfortunate for Californians and residents of any other states that may share similar views.”
Vassallo sees energy independence as being key to the country’s national security and an integral part of the ongoing economic recovery. He doesn’t buy into the idea that the oil & gas industry is the ‘big bad wolf ’ and believes the current administration is a “wonderful thing” for all companies involved in the industry.
“With loosened federal regulations comes great responsibility for the oil & gas industry to learn from past mistakes, make innovation a priority and be responsible inhabitants of our planet,” he says.
The price roller-coaster
The price of oil has been volatile over the past 18 months, first plunging from around $100 a barrel to $50 in January 2015 before sinking below the $30 mark a year later. Since then, oil prices have recovered gradually toward a $50 price point, but the market remains unpredictable. Even though OPEC members have agreed once again to cut production in attempt to stabilize the market, more pricing turbulence can be expected, which has a direct impact on the insurance industry.
“There are now fewer amounts of risks and more insurance companies fighting over them, which has meant that rates have dropped,” says Thomas Blanquez, senior vice president of commercial lines at Quirk & Company. “The plummeting rates have mirrored the behavior of the price of oil, because everyone is competing for a smaller market share.”
Although insurers are writing coverage at significantly reduced rates, claims activity has not slowed, nor has the severity of those claims lessened. The potential for large losses remains, but incomes have been cut, which creates obvious challenges unique to an insurance sector so closely tied to the price of oil.
“It is very problematic for insurance companies because they are under pressure to find that sweet spot,” Blanquez says. “They have to decide whether it’s the right decision to write an account at a far lower rate than they would have two years ago.”
The complexity of the risks means that organizations operating in the oil & gas space require bundled coverages that may not be available to other industries. Brokers and agents need to find policies that accept the risk transfer created by the master service agreements that allow work to flow from vendor to vendor. Clients are looking for more enhanced coverage in all areas, and Blanquez has noticed that in some cases, sudden and accidental pollution coverage is being replaced by contractor’s pollution, which is a broader form.
“Brokers and agents should also ensure there is no language that excludes thirdparty action-over claims, which needs to be included in this type of bundle,” he says. “Some carriers will cut out these coverages in an attempt to reduce costs, so the insurance agent needs to be aware of that and make sure their clients are covered.”
Lloyd’s has experienced record losses on its energy books over the past couple of years, and syndicates are reaching a breaking point – they say that current rates are unsustainable and must go up. How quickly Lloyd’s can get a change implemented remains to be seen because there is a lot of “naïve capacity” domestically, as Blanquez puts it, which is undercutting the market.
“That’s presenting a problem because companies that have historically been in this space have loss reserves to deal with and are unable to keep up with this new capacity,” he says.
Drilling down
In order to grow a solid book of business in the oil & gas space, Vassallo believes brokers and agents need to first understand how significant a role the geopolitical climate plays in the success of the industry. He encourages agents to build an understanding of how the dollar correlates with oil prices and other commodities, including gold, silver, copper and iron, and to stay on top of federal, state and local regulations that relate to the oil & gas industry.
“Energy insurance is a global issue, and if you don’t understand how the world works, you won’t be able to help your clients prepare for the best or the worst,” Vassallo says. “Lastly, never stop learning. Renewable energy will shape the industry; it’s captivating a new generation. We have to stay on top of it.”
