With the global economic climate remaining as threatening as ever, 150 delegates gathered last month at Willis’ second North American Energy Conference at the Lost Pines Resort, Austin TX to hear our Deputy Chairman Martin Sullivan open the conference with the keynote address. Before he spoke, we asked the delegates to rank the threats to the industry that Martin was to address—the “icebergs” that have the potential to seriously destabilise the existing business environment—in order of importance to them. Here are the results:
1. Managing natural catastrophe risk
Given the unprecedented global natural catastrophe loss record in 2011 (and the proximity of the conference to the Gulf of Mexico) it’s perhaps not so surprising that this was considered by the delegates as the energy industry’s number one threat. Martin posed this question: Is there a correlation between climate change and the increase in frequency and severity of natural catastrophe losses around the world? That’s a subject that of course is fiercely debated by experts from both sides of the green divide. But given the astonishing run of natural catastrophe losses in 2011, it is surely only a matter of time before the lack of traditional risk transfer solutions to the natural catastrophe risks that energy companies face becomes a real problem for the energy industry.
2. Supply chain disruption
Supply chain disruption has been very much in the news in the last few years for several reasons, from the global recession that began in 2008 and put many suppliers out of business to the volcanic eruption in Iceland two years ago that interrupted transatlantic air cargo over a period of 6 weeks. Since then of course we have had the massive upswing in the frequency and severity of natural catastrophe losses. Martin Sullivan identified an important link between these events and a renewed focus in the downstream market on contingent business interruption risks.
3. Lack of adherence to best industry practice
Demonstrating that an energy company always adheres to best industry practice is intrinsically linked to the production of optimum terms and conditions from the market. Martin Sullivan pointed out that the consequences of not doing this—of simply carrying on in the same way that some contractors have done—now mean that you won’t get the cover you need if your operations are going to continue to be viable. In short, it’s the difference between being in business or being out of business.
4. Increased oil prices
Oil prices may have slipped a bit in the last few days but the threat of another spike is not far way—especially given the possible closure of the Straits of Hormuz if the situation in the Middle East deteriorates. History teaches us that increased oil prices usually lead to the deployment of new, untried and untested technologies at a time when the pressure to maximise production levels is greater than ever. An oil price spike also had a knock-on effect on the calculation of the replacement cost of assets in the energy sector, as well as a dramatically increased the potential for more frequent and severe Business Interruption losses.
5. Risk of insufficient insurer capacity
Our April 2012 Energy Market Review may have shown capacity for both upstream and downstream risks at record or near record levels. But Martin pointed to a recent Swiss Re report in which they forecast a possible 24% reduction in overall European capacity levels should the meltdown in the Eurozone become a reality. What would that mean for the global energy insurance market? Martin pointed out that this would mean a marked decline in available capacity just at the time when future demand in the energy sector is likely to skyrocket. He pointed to massive floating LNG vessels that are going to require at least USD 7 bn if the risk is to be fully transferred, while noting the appetite in the downstream sector for USD 5bn programme limits at the right price.
I’ll be bringing more news from our Austin conference in future posts.