Eyeing an Uncertain Future: 2013 LIU Survey of Risk Managers' Perspectives on the Marine and E&P...

Eyeing an Uncertain FutureRisk Managers’ Perspectives on Marine and E&P Insurance MarketA Survey Conducted by LIU, September 2013 – Part I

November 2013

LIU’s Marine and E&P teams of underwriting, claims, and risk engineering professionals are here to work closely with you to understand and anticipate your clients’ risks, now and in the future.

That’s why we conducted a survey with risk managers to help us understand the challenges they face in this complex market environment. We thought you might find the results of LIU’s risk man-ager survey helpful for your business. The study provides insight to risk managers’ views on the Ma-rine and E&P market, and, outlines three key areas of discussion, being mainly:

• The availability of capacity as both global assets and risks increase, especially for windstorm risks

• The degree in which the insurance industry mitigate our clients risks

• The availability of expanded insurer-provided loss engineering services The survey’s insights wouldn’t be possible without LIU’s strong, long-term connections with brokers and clients around the world like you. We strive to deliver the types of programs and service risk managers told us they want, and continue to focus on supporting all of the needs of the marketplace.

Please give us a call to discuss the results of this research. And look for Part II of this whitepaper to arrive soon.

Sincerely,

Don HarrellSenior Vice President, LIU Marine / E&P

Gordon BrowneVice President, LIU E&P

Don HarrellSenior Vice President LIU Marine / E&P

1 Risk Managers’ Perspectives on Marine and E&P Insurance Market – Part I

Gordon BrowneVice President LIU E&P

Few human endeavors are as complex as the movement of cargo and people across vast oceans, drilling for oil in seas several miles deep, supporting communities of workers on an oil platform in wind-whipped waters, or sailing massive tankers loaded with volatile chemicals or fuels. With regard to the latter alone, sensitive marine environments are exposed to environmental damages posing dire consequences for human life, marine habitats, the health of the oceans and the financial solvency of many businesses. Bearing these risks are the maritime and E&P orga-nizations involved in these enterprises, in addition to their respective insurers. Even with superior risk management, losses are inevitable, a consequence of extreme weather events and other natural disasters, in addition to human error, construction defects and malfunctioning equipment. When cata-strophic losses occur, the publicity surrounding the event can tarnish the reputation of the organization involved, with long-lasting financial repercussions.

Several risk managers expressed significant apprehension regarding their companies’ reputa-tional risk, understandable in light of the lingering litigation over the Macondo well blowout and the recent grounding and partial sinking of the MS Costa Concordia cruise ship. Stringent regulations promulgated in the aftermath of these disasters, in addition to stepped-up enforcement activities, have exacerbated these concerns.

“This is an important issue for us, given our growing relationships with ExxonMobil, Marathon, Phillips 66 and Chevron,” said Doug Downing, CFO at Canal Barge Company, Inc., a New Orleans-based marine transportation company specializing in the movement of liquid and dry goods along the inland waterway between the Gulf Coast and mid-America. “If we have an incident, we can be pursued rightfully or wrongfully in ways that are harmful to our reputation. There’s only so much control we have over our reputation, and it is something that cannot be insured. Consequently, it’s important we try to get things right, all the time.”

Joey Hayles, Manager of Risk Management and Insurance at Hilcorp Energy Company, said the company’s entry into new opportunities in Alaska’s Cook Inlet and the Utica shale play in Pennsylvania and Ohio has put reputational risk more in focus. “We strive to be good stewards of the environ-ment—the best of the best,” said Mr. Hayles at the Houston headquarters of the large, privately held independent oil & gas exploration company. “But reputational risk requires more than just excellent stewardship; it insists on superior communications with regard to our risk management efforts. Frankly, the industry as a whole can always do more in this area.”

“There’s only so much control we have over our reputation, and it is something that cannot be insured. Consequently, it’s important we try to get things right, all the time.”— Doug Downing, Canal Barge Company, Inc.

2

Current and Intruding Concerns

Risk Managers’ Perspectives on Marine and E&P Insurance Market – Part I

He noted that Hilcorp did not have an external communications officer in the past. “We never felt the need for it,” Mr. Hayles explained. “We now have someone on staff whose sole job is to make sure that the decisions we make are communicated to our stakeholders. And we routinely engage our stakeholders in an ongoing dialogue to ensure they understand what we are doing.”

“Safety and regulatory compliance are critical to our industry,” says Mark Mozell, Risk Manager at energy company Fieldwood Energy LLC. The company was formed in late 2012 by Riverstone Holdings and Fieldwood management to pursue conventional oil and gas acquisition and develop-ment opportunities throughout the United States. In July 2013, the company entered into a definitive agreement to acquire Apache Corporation’s shallow Gulf of Mexico oil and gas business.

Like other energy concerns, the federal govern-ment’s Bureau of Safety and Environmental Enforcement (BSEE) will annually inspect an operator’s offshore platforms and can issue an INC—Incident of Non-Compliance—for potentially hazardous conditions or mechanical or housekeep-ing issues.

“Safety and regulatory compliance are critical to our industry.”— Mark Mozell, Fieldwood Energy LLC

3

Current and Intruding Concerns


The risk managers also commented on the increas-ing vulnerability of their companies’ global supply chains to extreme weather events and other natural and man-made disasters disrupting the continuity of operations. Since 2000, economic losses from natural disasters are estimated at US$2.5 trillion globally—50 percent more damage than previously expected, according to a report released by the United Nations Office for Disaster Risk Reduction in May 2013.1

“It is imperative that you understand where your weaknesses are in the supply chain,” said Hilcorp’s Mr. Hayles. “I certainly have a fuller appreciation for this risk now that we have moved into Alaska, which is thousands of miles away from our headquarters. We’re transporting supplies and people around the clock to the Cook Inlet.”

The company has a business unit with the sole responsibility of ensuring the safe, efficient movement of people and equipment, he noted. “We also have a central facility to optimize routing, and we’ve enhanced our logistics and procurement operations, putting staff in the field (in Alaska and the Utica shale region) to manage our supply chain risks, as opposed to having them entirely in Houston,” Mr. Hayles said.

Huntsman Corporation does not have a central-ized supply chain department, but Matt Wallace, International Risk and Insurance Manager at The Woodlands, Texas-based manufacturer and ship-per of diverse chemicals and related products, said the subject of supply chain risk comes up often at meetings of the company’s Enterprise Risk Man-agement (ERM) committee.

“We are increasingly aware of the risks to our many products from a supply chain standpoint, but we have yet to centralize this responsibility across our five different business segments,” Mr. Wallace explained. “There is probably some opportunity for us in doing this, but we are doing a great job managing the risk as is. For instance, we’ve identi-fied situations where there might be a sole source supplier situation and put in place backup strate-gies to address the risk if this supplier is shut down for some reason.”

“We’ve identified situations where there might be a sole source supplier situation and put in place backup strategies to address the risk if this supplier is shut down for some reason.”— Matt Wallace, Huntsman Corporation

1 http://www.google.com/hostednews/afp/article/ALeqM5jV9D6nzyH3E2IR69FV-KJLzfa7hA?docId=CNG.1a691b61df3d3b381326a60721d9bfcc.2f1

4

Supply Chain Disengagement


Each of Huntsman Corporation’s business segments has collaborated with the ERM committee to identify and assess its respective supply chain exposures and put in place mitigating strategies. “We’ve also engaged internal audit to analyze sole source supplier exposures, and we are currently reviewing the findings,” Mr. Wallace said.

Several risk managers commented on their need for more robust business interruption insurance and especially contingent business interruption coverages, which address the risks of a supplier’s suppliers defaulting on contracts. These concerns largely stem from weather-related catastrophes such as Hurricane Katrina, the Thailand monsoons in 2011 and Superstorm Sandy in 2012. In each case, many organizations’ supply chains unraveled. Said Mr. Wallace, “Although none of our own facilities were affected by these events, they got us thinking more deeply on the subject.”

Hilcorp Energy has “altered” its risk transfer program to address its enlarged supply chain exposures, Mr. Hayles said. “We are beginning analysis of our supply chain exposures from a risk-bearing standpoint,” he explained. “We’re also contractually laying off risks to other providers (partnering in plays), and have increased our financial limits substantially in some lines [of insurance] by getting rid of insurance coverage in other lines, being more strategic with our capital resources. We’re taking much more of a ‘targeted’ approach to risk transfer.”

5

Supply Chain Disengagement


The risk managers responded to questions about the efficacy of their pre-disaster and post-disaster strategies. Several candidly commented that their organizations have recently enhanced the effec-tiveness of their plans. In the case of Black Elk Energy Offshore Operations, LLC, this subject is on the front burner following a deadly explosion at one of the company’s rigs in November 2012. BSEE subsequently ordered Black Elk to take immediate steps to improve safety at its offshore platforms.

“We provided BSEE a list of the improvements in our disaster recovery plan as well as the new systems and protocols we’ve already implement-ed,” said Marizza Pichè, General Counsel at the Houston-based independent oil and gas company, which holds multiple offshore property interests in the Gulf of Mexico, ranging from less than 10 feet in water depth to more than 6,000 feet.

Ms. Pichè introduced some of these changes. Two new initiatives the organization has implemented are the “Boots On Deck” work philosophy and the Safe Work Practice (SWP) Workshop. The Boots On Deck program is an Offshore Operational expectation that mandates the presence of key company personnel at jobsites. These personnel provide oversight and must remain in the vicinity of the work in progress until the task is complete. The second initiative, the SWP workshop, is another implemented “lesson learned” that requires all offshore company personnel and key contractors to attend a training workshop reviewing various key safety topics with an emphasis on hazard recognition.

“Every contractor now has to go through a newly initiated offshore operations training class called ‘Boots On Deck,’” Ms. Pichè said. “The plan also calls for a Black Elk representative to be physi-cally on each of our platforms, someone who must know all the contractual parties involved and what is expected of them in terms of safety, maintenance and repairs and is cognizant of these parties’ own disaster recovery plans in the event of an incident.”

Les Eckert, Director, Insurance and Risk Finance at EPL Oil & Gas, said, “In the four years I’ve been here, I’ve been told by regulators that we are far out in front of the industry in terms of how we would respond to a worst-case discharge. We charter vessels in the event of a pending major windstorm. We also secure diving contractors, heavy-lift ves-sels and helicopters ahead of anything that might happen during windstorm season.”

“We provided BSEE a list of the improvements in our disaster recovery plan as well as the new systems and protocols we’ve already implemented.” — Marizza Pichè, Black Elk Energy Offshore Operations, LLC

6

Disaster Planning and Recovery


Mr. Downing at Canal Barge also has endeavored to improve the company’s disaster recovery. “We were not completely satisfied with our shoreside response plan during Hurricane Katrina, a disaster that forced us to leave our city and manage our business from Houston for a significant period of time,” he said. “Although I consider our response to Katrina to be one of our finer moments, it none-theless made us rethink our backup plans. For instance, we’ve taken steps like moving our servers to Illinois and out of ‘hurricane alley.’”

The company also has invested in technology systems enhancing navigation. “We’re using a tool called Rose Point [Navigation Systems] that provides high-tech GPS positioning along with these amazing algorithms that help the captain moving a tow confidently keep it on track,” Mr. Downing said.

Hilcorp Energy has similarly updated its disaster recovery plan. Mr. Hayles said, “We worked with our IT group to identify exposures, perform ‘what if’ scenarios and do stochastic modeling [examining random variables that are based on a collective assessment of probabilities]. This led to some positive changes.”

For instance, the company now manages two backup hot sites housing its IT systems, one 40 miles from headquarters and the other 1,500 miles away. “We’ve also put in notification systems for emergencies and installed a program that assists employees if they’re adversely affected by a disas-ter,” Mr. Hayles added. “When Hurricane Ike struck, for instance, generators were loaned to employees needing them, and we provided repairs to dam-aged housing.”

“We’ve also put in notification systems for emergencies and installed a program that assists employees if they’re adversely affected by a disaster. When Hurricane Ike struck, for instance, generators were loaned to employees needing them, and we provided repairs to damaged housing.”— Joey Hayles, Hilcorp Energy Company

7

Disaster Planning and Recovery


The risk managers also addressed the key risks that tend to concern them most. Given their companies’ wide-ranging activities, their responses are hinged on each organization’s specific operations. For instance, Mr. Downing at Canal Barge lamented the difficulty managing the risks posed by working with third-party vendors that are sometimes called on to perform services on more than 800 barges in 16 states. “We are focused on ensuring that they efficiently and safely deliver services to our customers like ExxonMobil and Chevron on a consistent basis,” he said.

On the other hand, Michael Alvarez, President and CFO at First Wind Energy LLC, said, “The loss of a substation connecting multiple wind-powered tur-bines gives me deepest pause for consideration.” The Boston-based energy company operates 980 megawatts of generating capacity at 16 wind energy projects in Maine, New York, Vermont, Utah, Washington and Hawaii.

While unlikely, particularly in the shallow waters of the Gulf of Mexico where Fieldwood will oper-ate, another Macondo event is a concern. “It could result in more stringent regulatory oversight and governmental overreach,” Mr. Mozell stated.

Ms. Pichè from Black Elk said she frets about whether the company is specifically named as an insured or additional insured in so-called knock-for-knock anti-indemnity statutes. “I worry about things like did we receive the invoice from the contrac-tor, or did we issue an invoice or did we pay the premium on time,” she explained. “Administrative things like that tend to stand out in my head.” She noted that the company is in discussions with an IT vendor “about a computerized system that would alert us if a certificate of insurance has expired.”

One concern was expressed by all the E&P risk managers— difficulty purchasing adequate levels of windstorm coverage on a cost-effective basis. “That’s what keeps us up at night, especially during the months of August and September [hurricane season],” said Mr. Mozell. “There’s just not enough capacity in the commercial insurance market. When you have a large asset base, it is difficult to insure.”

“The loss of a substation connecting multiple wind-powered turbines gives [me] deepest pause for consideration.” — Michael Alvarez, First Wind Energy LLC

8

Sleepless Nights


Mr. Eckert from EPL Oil & Gas said he too is concerned over the pronounced lack of capacity to more fully absorb property losses from windstorm-related causes. “While named windstorm capacity for shelf E&P companies appears to have been relatively stable the last four years, the markets are fairly rigid in providing it,” he asserted. Conse-quently, the capacity that does exist is not fungible. Significant capacity is simply not available for certain coverages and/or limits. Also, the markets each have a view of what their minimum rates will be, which may not relate to what we’re doing at EPL versus other companies.”

“Finding carriers that provide the coverage in a format and pricing level that makes sense is difficult,” Mr. Eckert added. “The capacity that is out there is not necessarily usable. As a result, we’re working hard to arrange additional protections as we grow our business.”

Mr. Mozell conceded that there is not much a company can do to address the capacity issue, other than “taking out what are idle, nonproductive assets through decommissioning, plugging and abandoning wells sooner than later,” he explained. “We try to be as proactive as possible in reducing this exposure to risk.”

While some E&P companies in the past have transferred a portion of these risks to the capital markets via insurance-linked securities, Mr. Mozell feels these risk solutions have too much of a miss factor to be an effective risk solution for companies with a large, diverse reserve portfolio, such as Fieldwood.

“Finding carriers that provide the coverage in a format and pricing level that makes sense is difficult.” — Les Eckert, EPL Oil & Gas

9

Sleepless Nights


Part I of this LIU Marine survey covers the history of the maritime and E&P industries, and their long-standing relationship with marine insurance market—one that has been tested by time and experience. The maritime and energy industries will continue to intersect and evolve, playing an even more vital role in the global economy. As they do, marine insurers and reinsurers will have to anticipate new risks their clients face—in particular, rapid changes caused by unpre-dictable market and weather conditions—as mentioned by the risk managers and others we surveyed. Reputational risk and the need for cost-effective business interruption insurance are other growing areas of concern that present opportunities for insurers and brokers alike.

We see these points supported by market trend data as well. As the statistics at right show there’s volatility of the market across both Marine and E&P, a rising average cost of losses over time and changing risks and technology. All of these factors demonstrate the need to adapt underwriting to account for these every changing exposures.

To stay a step ahead of these risks, and to help energy and maritime-related businesses stay competitive, insurers will have to keep developing sophisticated risk transfer prod-ucts and value-added services such as risk engineering and claims management.

What’s Next?

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Control Of Well-Number Of Losses By SizeLosses over $1m only

Platforms And Pipelines-Number Of Losses By SizeLosses over $1m only

Serious And Total Losses 1996 - 2012 By Number(vessels > 500 GT)

Provided courtesy of IUMI and SwissRe


This report also indicates that insurers and the brokers and businesses they serve must increase their level of communication. More clarity around pricing and risk modeling is urgently needed in order for insurance markets to continue to provide value and remain trusted business partners, particularly as new energy-related opportunities arise.

Additional loss prevention and risk mitigation services, as well as creative coverage terms and conditions, are much sought-after by those we surveyed, putting the responsibility on insurers to create innovative solutions.

Part II of this survey will explore in greater detail how brokers and insurers can work together to produce more effective risk management strategies and coverage for their clients.

For more information on the complete 2013 LIU Marine and E&P whitepaper series, please contact Don Harrell at 212-208-2862 or [email protected] or Gordon Browne at 713-470-5837 or [email protected].

About LIU Marine and E&P

LIU provides a range of marine and exploration and production insurance products including, Cargo, Project Cargo, Marine Liabilities, Hull & Shipbuilder’s Risk and E&P. At LIU, we’re committed to maintaining a regional network that brings our world-class expertise to local markets. So our experts in underwriting, claims and risk management can work closer to your businesses—while leveraging the exceptional capacities, treaties and diversified appetite that have made LIU the choice of some of the world’s largest firms.

What’s Next?

11 Risk Managers’ Perspectives on Marine and E&P Insurance Market – Part I

Appendix

12

Hull Statistics


Serious Losses 1998 - 2012 By Cause, All Vessel Type(vessels > 500 GT)

Total Losses 1998 - 2012 By Cause, All Vessel Type(vessels > 500 GT)

Total Losses 1996 - 2012 As Percentage Of Worldfleet(vessels > 500 GT)

Total Losses 1996 - 2012 By Tonnage(vessels > 500 GT)

Total Losses 1996 - 2012 By Number(vessels > 500 GT)

Serious And Total Losses 1996 - 2012 By Number(vessels > 500 GT)


Appendix

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Control of Well Statistics


Control of Well-Average Claims CostLosses over $1m only; exc Cat claims and losses over US$100m

Control of Well-Claims CostLosses over $1m

Control of Well-Number of Losses by SizeLosses over $1m


Appendix

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Platforms and Pipelines Statistics


Platforms and Pipelines-Average Claims CostLosses over $1m only; exc Cat claims and losses over $100m

Platforms and Pipelines-Number of Losses by SizeLosses over $1m only

Platforms and Pipelines-Claims CostLosses over $1m


Eyeing an Uncertain Future: 2013 LIU Survey of Risk Managers' Perspectives on the Marine and E&P...

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