Insurance Jottings
Breaking Down the Silos in the Energy Insurance Market
The drive to green energy is forcing the Hands of world’s energy producers, with important consequences for insurers, writes Dennis Culligan, Longdown|EIC Ltd.
Last month some of the world’s major oil companies and the energy insurance market met in Dubai for the biennial conference hosted by Marsh.
What is clear from the discussions at the event and the wider debate within the energy industry is times are changing and the pace of change is increasing.
Oil and gas companies, including the majors, are increasingly looking towards renewable energy as part of their future portfolio. They recognise oil and gas production will be supplanted by renewable energy sources and are looking to realign their investment strategies to reflect this inevitable evolution.
It comes with advances in technology which mean renewable energy production is becoming more efficient and less subsidy-driven. The insurance sector must understand that change is coming and get to grips with what these changes will mean for the market.
Companies which have historically been just oil and gas producers are now repositioning themselves as energy providers, and as such, the source for that energy is set to change and they will change with it. Oil and gas production will continue be a significant factor for the foreseeable future.
Renewable energy is set for expotential growth globally in the next 20 years and will lead increasingly to decentralised power generation. Oil and gas companies recognise this and are responding. Their insurers will need to do likewise.
For the energy insurance market, one of the key issues will be how to adjust their business model from reliance on premium generation via high-value assets and capex products to an industry where power production and distribution is more decentralised and more customer-focussed.
While we will continue to see oil and gas projects both up- and downstream, the renewable sector will play a more significant role and is far more decentralised with many smaller projects rather than a concentration on significant operations in a defined area.
There is little doubt governmental and environmental pressure will see a reduction in the dominance of fossil fuel power. In a growing number of western nations, coal-powered energy generation is increasingly frowned upon and is being shunned by institutional investors, including insurers, and in the years to come it is likely oil will generate a similar perception.
Technology is set to play an increasing part in the energy sector with an ever-closer integration and dependency of IT and operational technology systems and the growing deployment of artificial intelligence within control systems. All energy companies are becoming increasingly digitised. Cyber risk should be at or near the top of concerns of energy company senior executives.
Firms must take the view that cyber risks are the responsibility of the Board itself and cannot simply delegated to the IT department or the chief information officer.
Indeed, there are those who say that at present there only two types of companies: those which have been hacked and those who do not know that they have been hacked yet. Cyber security specialists allege the average time for a hack to identified is between five to eight months.
With technology making the control systems for energy projects ever more interdependent, the potential for hackers to access one area of the energy firm’s systems and be able to take control of other areas is growing. Energy firms are looking at how they can derive the benefits and efficiencies which such a system brings while mitigating the vulnerabilities which come with such interconnectivity.
Companies are recognising they should be spending more time on cyber risk management including undertaking scenario testing and regular BCP updates.
Greater attention is needed on physical control access to networks by staff and third parties and the number of administrators should be carefully monitored and kept to a minimum.
For insurers, there is still a significant grey area around cyber coverage in the energy sector.
The stand-alone cyber insurance market is developing but playing catch-up. . One of the challenges for the market is how can it assess aggregate exposure for a risk which is not geographically limited?
Insurance fears the unquantifiable and the ability to model the potential aggregate exposure levels remains a deterrent to the market offering the level of cover required by the energy sector given the values of the assets at risk.
Still unanswered is the question, inter alia, of how a cyber attack can be defined for insurance purposes? Is cyber insurance, and should it be, a separate product or just a write-back of existing policy exclusions such as war, sabotage and terrorism? The outcome of the Merck claim following the Not Petya cyber attack in 2017 could prove to be market-changing.
Energy insurers face seismic shifts in the market including the move from fossil to renewable energy, the change in the size and value of projects coupled with the growing use of technology and the attendant cyber-related risks.
Insureds are defining themselves simply as energy companies, throwing off the shackles in terms of how that energy is fuelled and sourced. Energy insurers will need to break down the silos which exist around oil and gas and renewable energy if they are to keep pace with their customers in the future.
Lloyd’s expands in Africa with new Moroccan office
Lloyd’s has opened a new office in Casablanca Finance City (CFC) to provide tailored risk solutions in North Africa while appointing Salah El-Kadiri as its general representative.
The licence allows Lloyd’s managing agents to appoint coverholders and service companies established in the CFC to underwrite Moroccan and regional re/insurance business on their behalf.
This includes marine, aviation and other specialist risks where there are no solutions provided locally, and reinsurance on Moroccan and non-Moroccan risks.