Insurance Jottings
Is it time for an offshore marine decom product? Dennis Culligan of risk, insurance and claims management company Longdown|EIC Risk Consulting Ltd feels there remains a worrying lack of consensus over the extent of liabilities relating to the decommissioning of offshore assets and whether existing covers cater adequately for the risks
The latest Decommissioning Insight, published by trade association Oil & Gas this month, highlights that from 2017 to 2025 decommissioning is forecast to take place on 349 fields across the four regions of the North Sea, including six fields on the Danish Continental Shelf, 23 on the Norwegian Continental Shelf (NCS), 106 on the Dutch Continental Shelf and 214 fields on the UK Continental Shelf (UKCS).
These figures include more than 200 platforms with close to 2,500 wells expected to be plugged and abandoned and nearly 7,800 kilometres of pipelines forecast to be decommissioned. The figures attached to these initiatives highlight the costs. Decommissioning as a proportion of the total UKCS expenditure was 7% in 2016, when the market was worth £1.2 billion (US$1.6 billion). Operators forecast this figure will rise to 11% (£1.8 billion) for the last 12 months. The complete spend on decommissioning on the UKCS alone from now until 2015 is put at £17 billion. Of that figure, £7.9 billion (46%) of the total UKCS spend from 2017 to 2025 will be concentrated in the central North Sea.
It has prompted the UK government to unveil a new transferable tax history (TTH) scheme, which will come into effect from November this year as part of its efforts to encourage merger and acquisition activity in late field life assets, where decommissioning costs have hitherto discouraged new entrants. But this remains a global offshore concern not only in the North Sea, but also the Gulf of Mexico and south-east Asia. Broker Willis Towers Watson has estimated more than 50% of Indonesian platforms are more than 20 years old at present.
Funding Abandonment
Falling prices since 2014 have exacerbated the pace towards the end of economic field life in multiple locations, but the resulting cashflow squeeze has made funding for abandonment much more onerous, stretching both company balance sheets and the credit ratings of many offshore operators.
Notwithstanding the recent oil-price rally, the issues around abandonment funding remain a significant challenge. For insurers, there are several challenges around how they can assist clients to mitigate risks surrounding decommissioning. Decommissioning has been carried out on a substantial basis for over two decades but there is not yet an established insurance practice regarding coverage for the risks involved. This contrasts markedly with construction or operational risks in the upstream energy sector.
One factor hindering efforts to create workable insurance solutions is the lack of consensus over the extent of liabilities and whether existing insurance covers available cater adequately for the decommissioning risk. The breadth of the type of assets and the environment in which they are placed at present creates a significant spread of risk factors and no two decommissions are the same. However, can we truly believe, in terms of decommissioning, it is a case the risk profile is simply contractor’s all-risks in reverse?
As an industry, we must ask whether the policies which are available at present to clients with offshore interests adequately meet the needs of the sector. Some insureds and insurers take the view, however, that operating phase operator’s extra expense ((OEE) legal liability and removal of wreck covers offer sufficient protection for the full range of decommissioning activities.
This may be an unwise assumption, however. Take on example – removal of wreck/debris insurance limits. Under a conventional energy package policy, these are often set at 25% of the declared value of a structure. How will this work if the value of the structure itself is written down to zero or a nominal value for the decom phase?
Long-term security
The insurance market can play a significant role in two very different ways. First, by offering an alternative form of long-term security to ensure abandonment finds are available when required. The second, and more straightforward issue, is by covering the conventional insurance risks associated with the decommissioning process.
It also raises the question whether tailored specific insurance products are required to match the risk exposures inherent in offshore decommissioning. The marine energy insurance sector has a justifiable reputation for innovation, so it is surprising that there have not been greater efforts in the past to establish a decom insurance product.
A major hurdle is convincing clients to spend money on covers which will mitigate risk on structures and facilities which have little or no residual value. This leads, in turn, to the question as to whether sufficient premium volume could be generated to make stand-alone products a viable option for insurers. Without doubt, the level of decommissioning activity will increase in future, as will the sums expended on the process. The question remains for insureds and insurers whether there is the opportunity to tailor products to meet a growing need or does the market already have the risks under cover?
Skuld expands in 2018 P&I renewals
Marine insurance provider Skuld has reported a 9.4 percent year on year net increase in mutual P&I (protection and indemnity) gross tonnage in renewals for 2018.
The figure includes committed tonnage for delivery throughout 2018, the firm said on the 26th February.
Following the renewals, which were completed on the 20th February, Skuld’s mutual P&I tonnage now stands at 92 million gross tonnes (GT).
Significant growth was recorded in all commercial P&I business lines, including charterers, offshore and fixed premium/yachts.
“In a very competitive market we are pleased to conclude a successful renewal in our 121st operating year, and to record another increase on our previous year’s gross tonnage,” said Skuld CEO Ståle Hansen.
“Skuld’s overall focus on sustainable growth through careful selection of quality tonnage contributes to a very strong and robust foundation for further growth in 2018 and beyond, and enables us to continue providing our members, clients and brokers with the service and competence they can rely on,” Mr Hansen noted.
AEGIS expands Syndicate 1225 capacity
Mutual insurance company AEGIS is expanding the stamp capacity for Syndicate 1225 by 21 percent year on year to £400 million in 2018 to “take advantage of opportunities,” the company has said.
Despite the highly testing backdrop of industry-wide catastrophe losses, the Mexican earthquake and California wildfires, AEGIS London delivered a combined ratio of 99 percent in 2017 and holds reserves of ten percent in excess of actuarial best estimates, the company noted on the 26th February.
At £462 million, gross written premium was ahead of plan in 2017 and a 23 percent increase on the prior year.
“This is a strong set of results, delivered in the face of substantial headwinds,” AEGIS London managing director David Croom-Johnson, commented.
“We have consistently sought to take a thoughtful and prudent approach to our underwriting and to build resilience via the depth and breadth of our offering. It is this careful and balanced approach right across the syndicate that underpins our consistently strong performance,” Mr Croom-Johnson noted.
“AEGIS London is an innovative, growing business which continues to outperform the market. We find that we have become an attractive home for talent as we expand our product offering and grow out our existing book. In delivering a positive underwriting result, our teams have performed exceptionally well and we are delighted with the ongoing contribution made by Opal, our online platform that allows coverholders and wholesale brokers to quote and bind business in a couple of minutes. We intend to broaden the Opal product offering during 2018 as the demand for it has far exceeded our expectations.”
Bermuda-registered AEGIS (Associated Electric & Gas Insurance Services Limited) provides liability and property coverage, as well as related risk management services, to the energy industry.
UK Marine Insurer Steamship Mutual Chooses Netherlands for Post-Brexit HQ
British ship insurer Steamship Mutual plans to set up a new Dutch subsidiary to ensure continued access to trade in the European Union in case Britain loses single market access.
“We are about to apply for a licence to establish a subsidiary company in the Netherlands,” Steamship Mutual’s executive chairman Gary Rynsard said, adding it would opt for the port city of Rotterdam.
Britain dominates the global marine insurance market and losing access to specialist Protection and Indemnity (P&I) clubs could weaken its multi-billion pound shipping services sector.
Steamship Mutual, which employs around 150 people in the UK, is one of 13 major global P&I clubs and Europe represents more than 30 percent of the insurer’s global business.
Mr Rynsard said it needed “to act now” to ensure it could continue to underwrite business in the bloc at the annual renewal date of the 20th February 2019.
This would be just ahead of the 29th March 2019 date when Britain is due to leave the EU and Mr Rynsard said the insurer expected to have five staff in the Netherlands by the end of 2018.
“We cannot rely on transitional plans and will take action assuming a worst-case scenario,” he said.
Insurers are making contingency plans after Britain’s vote to leave the EU means they risk losing “passporting” rights which allow UK financial services firms to trade in Europe without the need for locally regulated entities.
The six P&I clubs regulated in Britain are estimated to account for over half the revenue of an industry which insures about 90 percent of the world’s ocean-going tonnage.
P&I clubs North and Standard said in late November they would set up EU subsidiaries in Dublin, while UK P&I Club was next to announce it was opting for the Netherlands and was followed by Britannia, which would create a hub in Luxembourg.
The other UK-regulated P&I club, London, has not yet announced its plans.
Many of these clubs – owned by shipping companies – have been an integral part of the City of London for nearly two centuries, insuring ocean going ships against pollution and injury claims, typically the biggest costs when a vessel sinks.
Hull and machinery cover, which protects vessels against physical damage, is provided separately by other marine insurers.
Dublin, Luxembourg and Brussels are among the EU locations which have emerged for a number of players in the wider insurance market.
Ryan Specialty snaps up Lodestar Marine
On the 13th February, it was reported that Ryan Specialty Group (RSG) has reached a definitive agreement to acquire Lodestar Marine, a managing general agent (MGA) in the protection and indemnity (P&I) fixed premium marine market.
Brexit: Lloyd’s Brussels prepares for launch
The London insurance market thinks its Lloyd’s Brussels company will offer corporate clients and stakeholders certainty and continuity despite Brexit
Moving to provide surety to clients amid the uncertainties of Brexit, Lloyd’s is working to get its new Brussels subsidiary operationally ready this summer.
The London-based insurance market is in the process of gaining approval from Belgium’s regulator to begin underwriting Continental European business from ‘Lloyd’s Insurance Company SA’ in time for renewals on the 1st January 2019.
“Essentially we had to try to remove the uncertainty that Brexit created. The main intention has been to secure and bring certainty to customers and to all our market stakeholders,” said Vincent Vandendael, chief commercial officer of Lloyd’s.
Lloyd’s chose Brussels as the location for its new insurance company, designed to provide single market passporting continuity. “Brussels being the heart of the European Union is obviously helpful. Lloyd’s is committed to Europe and all our stakeholders and customers within the single market,” Mr Vandendael said.
He expressed confidence that the National Bank of Belgium (NBB) would approve the new company on time. “We’re well within the timelines. Of course, it’s also the NBB’s timeline, so we need to be patient, but we enjoy a very good collaboration with the Belgian regulator.”
The new subsidiary is a significant undertaking, with €130 million in capital. “It is a fully-fledged insurance company, entirely capitalised and compliant with Solvency II, using standard formula, meeting all governance requirements, with a staff in Brussels, and its own C-suite and board. We want to start writing business on the 1st January 2019, but operationally we want to be ready by the middle of 2018 for a six-months testing period,” he said.
Despite the costs, it provides the best option for French customers and stakeholders, Guy-Antoine de la Rochefoucauld, director general of Lloyd’s France suggested. He noted that in 2016 Lloyd’s underwrote €0.5 billion premium in France. “We’re confident the new structure offers an even better opportunity for Lloyd’s to grow in the French market,” he said.
“The beauty of this Brexit model is that the distribution of products is fundamentally unchanged. The underwriter can sit in London, Brussels or France. The difference will be that today the underwriter would use syndicate stamp, and in future it will be a Lloyd’s Brussels stamp,” Mr de la Rochefoucauld added.
Lloyd’s is “looking at costs carefully to minimise their impact”, Mr Vandendael stressed.
“Brexit is a big challenge, but we have to turn that challenge into optimising how businesses deal with Lloyd’s. There is no doubt that in comparison with the current situation we will incur additional costs and have capital outside where it currently is,” he said.
“However, we know that our model is the most efficient compared to the other options that our members have. The alternative is that you would have to set up an insurer that is fully Solvency II compliant, capitalise it on your own, and replicate the Lloyd’s branch structure of 17 branches Lloyd’s across the single market,” Mr Vandendael added.