Volatile Oil Prices Prompt Firms to Reassess their Risk Tolerance

falling oil prices

Oil prices have dropped 40% in the past six months alone, leading many oil companies to significantly curtail their production. Profit margins and cash flows have been considerably impacted as a result and now, the drastic drop in prices means that all oil companies need to reconsider their tolerance for taking on risk as their reported property values may have significantly changed.

Oil Prices and Business Interruption Values

As pricing pressure continues to impact the oil and gas industry, accurately measuring and presenting business interruption values is a critical part of pre-loss planning and improves not only the post-loss process, but will also assist in making the insurance renewal process more manageable. Assumptions previously made in the property insurance placement process will need to be revisited as values based on historical results could be significantly overstated in today’s climate.

Accurate values can be critical to making informed decisions pertaining to the appropriate levels of coverage required and in identifying where a company should apply its resources in disaster recovery and business continuity planning. Accurate business interruption values will also assist in refining the accuracy of catastrophe models.

The best approach to better understand business interruption values is to start with a company’s business interruption exposures. Companies may want to consider the following which might not typically be taken in to account:

  • Profit & loss statements
  • Disaster recovery plans
  • Redundancies
  • Interdependencies
  • Any potential bottlenecks

Risk Tolerance

Given the new standard of inherent volatility in the oil and gas sector, risk tolerance needs to be re-evaluated. A corporation’s risk tolerance should consider these changing dynamics and the differing views of investor/stakeholder sentiment to evaluate future unforeseen financial deviations through a more conservative lens. In the current environment, this should result in reduced risk thresholds regarding financial uncertainty and a higher value assigned to volatility reduction measures, such as insurance.

 


 

Guest bloggers Ben Fidlow, Global Head of Core Analytics, and Justin Paglio, Forensic Accounting & Complex Claims, work in Willis Risk & Analytics practice, based in New York.

Categories: Analytics, Energy, Property | Tags: ,

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