Insurance Jottings
Tipping point for downstream energy?
Paul Sankey, Liberty Specialty Markets’ head of energy & construction, says the downstream energy market needs to do some serious thinking about its profitability.
2017 is expected to be the worst year for operational losses in the downstream energy market since the turn of the century. So far, losses for 2017 and 2018 are estimated at US$5 billion and more than US$3 billion, respectively. These figures are set against a global premium income for the downstream energy market currently believed to be in the region of US$1.8 billion.
Recent loss activity includes refinery events in the US, Germany and Canada, plus a fire at a major petrochemical facility in Saudi Arabia. All these losses included business interruption impacts resulting from extensive property damage.
2018 was the first year since the turn of the century in which four distinct and unrelated operational events have produced combined losses of roughly US$3 billion. This figure means the market is loss-making even before smaller attritional events are taken into consideration.
Status quo no longer
What exactly is happening? At a fundamental level, in order to estimate loss frequency and magnitude, the market relies on a relatively predictable frequency of large and attritional events combined with the usual modelling techniques. This allows pricing models to be set which produce a margin to give an adequate return on capital.
However, the experience of the last two years suggests that this may no longer be a reliable approach. In terms of where we go from here, it is clear the market needs to marshal all of its technical experience and knowledge to address this problem.
We need to understand the underlying root causes of each of these events individually, although history suggests that most of their causes have been experienced before by the industry.
If this does turn out to be the case, we will need to dig deeper to examine the sector’s underlying trends in order to explain better the reasons behind recent increased frequency of major events.
External issues may need much more detailed further analysis. Do we need a better understanding of the effects of merger and acquisition activity? What is the impact of governmental and regulatory involvement? What is the impact of operational pressures? And how do changes in workforce demographics affect an organisation?
New thinking needed
One example of the potential pressures produced by improved refining margins could be the predicted impact of the new International Maritime Organisation fuel specifications on global refining margins over the next two to three years.
Most analysts suggest that a significant upswing in refining margins is likely, particularly for highly complex refineries capable of handling sour crudes and converting these into the low sulphur fuels required by the new regulations.
This ‘window of opportunity’ may be short-lived but the potential pressures on refinery managers can only be negative in terms of insurance loss frequency and magnitude due to significantly increased business interruption values.
It is very doubtful that any single factor will be the underlying cause of the recent increase in loss activity and magnitude.
However, it is likely that a combination of these have contributed significantly to the loss figures experienced by the market over the last two years and may well continue to do so for the foreseeable future.
As a market providing security and stability for our customers in the downstream energy business, our message has to be simple and clear. We believe the market landscape has changed due to a fundamental shift in loss activity in the business.
We cannot go on assuming things will revert to normal and loss activity will somehow magically come back in line with the market premium income.
We need to dig deeper, question everything we do and produce new approaches to risk analysis and technical pricing that can ensure the stability and strength of the downstream energy market for many years to come.
Green groups tentatively welcome Nationale Nederlanden coal exclusion policy
From the 1st July this year, Dutch insurance and asset management company Nationale Nederlanden (NN) said it will “stop providing insurance services to companies which derive more than 30 percent of their revenues from thermal coal mining or that use at least 30 percent thermal coal for power generation”.
This is the company’s new coal exclusion policy aimed at cutting coal use. It also means that existing insurance contracts which use coal at these levels will not be renewed.
NN said it would develop guidelines to ensure that by 2030, it will only provide new insurance cover to clients who have an exposure of five percent or lower to coal-related activities.
However, there are exemptions. NN’s marine cargo business will be exempt from these restrictions “where this includes package and company insurance”. And the firm said that stand-alone coverage of thermal coal transport is not part of NN’s existing product offering and will not be considered in the future.
Provision of products or services will also be exempt if they are intended for the benefit of employees (e.g. pension products, workers compensation).
The group said it would restrict its investment in coal “to ‘close to zero’ by 2030” and engage with power generation firms to encourage a move to lower carbon alternatives, adding that it had revised its insurance underwriting policy to “create consistency across its business” and align with the investment side.
However, green campaigners questioned how NN would be able to implement its coal exclusion policy for companies involved in both coal power and mining activity.
They noted that NN is one of the biggest investors in Polish coal, with around €398.4 million investments. Polish coal company PGE is a major coal plant developer, but is also reportedly planning an expansion of the Turow mine.
NN’s policy does not state whether the company will exclude PGE, and other such companies, they said. Campaigners also noted that the policy “does not prevent NN from investing in companies planning new coal plants with a coal exposure below 30 percent”.
NN follows Allianz and Hannover Re in its commitment to phase out its own assets fully.
The deadline of 2030 is aligned with climate science goals to keep global warming below 1.5°C.
Kees Kodde, campaigner for climate and energy at Greenpeace Netherlands, said: “NN Group is phasing out coal investments – a smart move in times when the public’s call for climate action is unmistakable; losses from extreme weather events are rising for insurers; and the cost of coal is increasing and costs of wind and solar energy rapidly declining.
“NN Group is sending a clear message to the financial sector: investments in coal are outdated and irresponsible. Financial institutions need to walk away from coal and stop investing in burning the planet.”
Lucie Pinson, coordinator of the Unfriend Coal campaign, added: “Despite a lack of commitment to implement the policy for all assets managed for third-parties, Nationale Nederlanden is clearly showing the way that other insurers must follow.
“After having adopted an already strong policy on tar sands, Nationale Nederlanden is now showing leadership once more with a science-based commitment to totally phase out coal from its proprietary investment and insurance portfolios by 2030.
“There is now a clear gap between it and other insurers such as Aegon and Aviva, which remain big drivers of the coal expansion.”
Oil Tankers in the Persian Gulf Face Highest Risk Since 2005
Not since 2005 have the world’s insurers considered shipping in the Persian Gulf so dangerous for oil tankers.
The Joint War Committee of London’s Lloyd’s Market Association said on the 17th May that it would expand its so-called “listed areas” — those regions which pose the greatest risks for shipping, and potentially warranting higher insurance costs — to include the entire Persian Gulf.
The last time the entire region held the designation was a period that ended in June 2005 and encompassed the most recent Iraq War. It highlights the growing risks in the world’s most important export region and chokepoint for oil.
The classification comes after the committee met to discuss the sabotage of four tankers at the port of Fujairah in the United Arab Emirates. Saudi Arabia said those incidents represented an attack on its fleet, with the nation’s energy minister describing it as an attempt to prevent the free flow of goods over the world’s oceans.
Intense Period
Tensions between Saudi Arabia and Iran — two key global oil producers — have been steadily rising in recent weeks, while the US is ratcheting up its sanctions regime on the Persian Gulf state.
“In terms of geopolitics, I don’t remember a period that was as intense as today,” said Olivier Jakob, managing director of consultancy Petromatrix GmbH.
Growing tensions in the region are significant for oil markets, as the Strait of Hormuz, the key bottleneck in and out of the Persian Gulf, sees tankers hauling about 16.5 million barrels of oil passing through it daily. As such, any curb to flows through the region would have a significant impact on crude prices.
Fujairah Too
The Joint War Committee’s decision also means the port of Fujairah is now considered an area of more significant risk. That matters because it’s one of the world’s major areas for refuelling tankers, along with Singapore and Rotterdam.
“We’ve heightened the security levels on our ships,” Robert Hvide Macleod, CEO at tanker company Frontline Ltd, said. “The situation in the area, in terms of the risk levels, they’re obviously up and we’re raising the alerts on the ships.”
It will take time for higher insurance costs to filter through to the market. The Committee’s decision will could lead to an additional premium for ships sailing to the Persian Gulf, but some underwriters are still deciding how to respond.
The Committee’s decisions are not binding, although they are generally followed by the world’s insurers.
Real Impact
Most important though, is the potential effect on global oil supply if the insurers’ concerns turn out to be well founded.
Both the US and Iran have escalated a war of words which culminated in President Trump saying on the 19th May that further acts of aggression would be “the official end of Iran.”
Although both the US and Iranian regimes have also dismissed the prospect of war, those in charge of valuing risks see skirmishes like the sabotage in the UAE as adding to the potential financial cost of doing business in the region.
“There is no doubt that considerable damage was done and there will be significant claims,” the Committee said in a statement, referring to the attacks at Fujairah, adding that there is now “heightened risk across the region.”
(Article dated the 22nd May)
EU removes Bermuda, Barbados and Aruba from tax haven blacklist
The Economic & Financial Affairs Council (ECOFIN) in Brussels has removed Bermuda, Barbados and Aruba from the list of non-cooperative tax jurisdictions, the so called EU ‘blacklist’.
These three jurisdictions had been added to the blacklist in March 2019 after not modifying their tax regimes to comply with rules set by the EU Code of Conduct Group in December 2017, which relate to tax transparency, fair taxation, and the commitment to anti-base erosion and profit shifting (BEPS) measures. They were given 12 months to comply with the new rules.
Bermuda was moved from the so-called grey-list to the blacklist for having failed to follow up on commitments previously made but not taken.
Bermuda has now agreed to take the required steps to avoid being blacklisted next year. This includes further expanding its legislative framework, to include the EU’s economic substance requirements for collective investment funds (CIVs).