Historical loss trends reveal a potential correlation between significant oil price falls and increased energy losses, according to Marsh.
“Due to the low price environment, energy companies are shelving and cancelling new projects and reducing staff numbers. It may only be a matter of time before companies also reduce spending on maintenance, health and safety measures, and employee training. If this is the case, then, based on past experience, such cuts in spending will lead to an uptick in losses”, said Marsh in a research report.
The report, “Can Energy Firms Break the Historical Nexus Between Oil Price Falls and Large Losses?”, launched at the firm’s National Oil Companies (NOC) conference in March in Dubai, noted that insured losses in the global upstream energy sector reached a peak in the 1980s shortly after the price of Brent crude oil fell from US$35 to $15 per barrel. In the late 1990s, this cycle occurred again when the price fell below $10 per barrel and again in the years following the 2008 slump, when the price fell from more than $100 to $32 per barrel.
One might expect that, as volatility increases and insurance rates continue to fall, companies would be looking to take additional risk off their balance sheets. However, companies are yet to take advantage of lower prices in a benign insurance market to push for increased protection in uncertain times, noted Marsh.
“With the cost of insurance capital at historic lows, the opportunity clearly exists for companies to access cheap sources of capital from the insurance markets, reduce overall insurance premium costs, purchase insurance in areas that were previously omitted due to cost, and renegotiate coverage terms.
However, buyers continue to purchase largely ‘traditional’ policies, in an attempt to take advantage of the cost savings available from the current soft insurance market, rather than expand the protection they have in place and/ or take advantage of new and innovative coverage options. Now would appear the time to transfer risk off their balance sheets before volatility increases,” the report said.
On top of a decreased ability to withstand volatility, new risks are emerging from technological and socioeconomic developments, the report warned. Organisations that take a more forward-looking approach, re-evaluate their risk appetite and tolerance, and use the energy insurance market to transfer greater amounts of risk off their balance sheets will likely be in a stronger position over the longer term.
Marsh said: “The next challenge is for the commercial insurance market to respond to the changing demand of energy companies and offer lower retentions, higher limits, and/or increased coverage, in such a way that recognises the continuing cost pressures faced by the energy industry.”