The insurance sector is at a point where it could be a key enabler of the energy transition that will take place over the next few decades, according to Joe Brennan, director of INDECS Consulting Ltd, who was on a panel at last week’s Energy Insurance London, from Cannon Events.
Speaking on the topic of “Supply chain – The Rising Cost of Claims”, Brennan said that there had been a change in the make-up of companies in the sector, with smaller operators coming into the field which did not have the self-insurance capabilities of the likes of BP and Shell.
Within the renewables sector, there was room for innovation. “No-one is 100% happy with the insurance products that are available. That’s no-one’s fault, but if the insurance market can address that and produce products that fit the sector better, the I think that insurance will be a key enabler in helping investment in such renewables”.
Brennan also noted that insurance contracts in the renewables sector showed a lot more variety than when it came to fossil fuels, because it was less mature. He had also noted a difference in the behaviour of owner-operators, who were more likely to call back contractors to repair defects. That would in turn lead to an insurance claim by the contractors, so greater number of claims would emerge.
Other members of the panel were moderator Patrick Foss, a partner at law firm Kennedys; John Swann, senior underwriter in offshore energy at CNA Hardy, and Edward Parker, divisional head of specialty risks at Tokio Marine Kiln.
Referring to the title of the panel, Swann said that
since 2020 the extent to which clients were in control of their supply chain
was now a far stronger signal on underwriters’ radar. With inflation added into
the mix, underwriters had to check the extent to which clients were on top of
their valuations. When it came to a claim and a replacement part was involved,
time and cost were the two factors. The cost of replacing the part was one
half, while the time it took to access that part and to get it to where it was
needed was the other half.
Swann also said that one of the impacts of changes in valuations would be a flow-through to the reinsurance market. “It’s a truly hard market out there and there is a mismatch between supply and demand”, Swann said. “Reinsurers have struggled to attract new capital over the past 24 months. With inflation, there’s a need for another $20bn of limit, and that could leave a gap between now and 1/1(the major date for the inception or reinsurance treaty insurance)”.
Tokio Marine Kiln’s Edward Parker observed that supply chains had been getting longer and longer over the past 30 years. In the energy sector that had always been long lead times for parts, but now replacements were becoming more expensive and longer to get into place. “You have to work this in with a pricing environment which is currently favourable”, Parker said, although he also noted that we should be careful of not being to developed-world-blinkered. “10% inflation is an aspiration in quite a few places”, he said, while also noting that oil and gas was produced mainly from the developed world.
There was a lack of agreement between the panellists about the implication of recent events, which had meant that many projects were lengthening in the time taken to complete. Swann noted that three-to-five year projects were becoming six-to-eight year projects. This meant that the retentions and valuations applied at the beginning of projects estimated for three-plus years were not accurate when the projects lengthened to more than six years. However, on the client side, Brennan said that, although there might be time delays, the concept of the project had not changed – the volume of the project remained the same. However, for the underwriters it was a matter of time and risk. There was greater risk, a longer time period, higher premiums and higher exposure, which the underwriters seemed to indicate they felt changed the fundamental nature of the insurance offered on the project. That the physical nature of the project had not changed was just one part of the whole insurance equation, the underwriters said. Parker said that “when pricing project risk you are pricing for the future. A 12-month project is priced very differently from a 60-month project, even if they are physically identical, he said.