While much of the rest of the world is still taking tentative steps forward in its recovery from a global economic crisis, some industries and regions are already making strides in the right direction. Anglo-Arab Insurance Broker’s Chief Operating Officer, Mr. Robert Edwards, surveys the risk-transfer buying patterns of the energy industry in some of the more challenging areas of the MENA region.
From time to time people from outside the insurance industry express their surprise that not only is insurance available in emerging and hostile territories but that it is available for high risk exposures. It is usually at this point that some insurance veteran will offer the (perhaps apocryphal) Lloyd’s epithet that there is no such thing as a bad risk, only a bad rate. Of course, there always exist entrepreneurial individuals and organizations that will pioneer in new markets, and equally adventurous underwriters and brokers who will follow them in to offer risk transfer to mitigate some of the exposure in such a high risk and high reward environment. The energy sector manifestly has potential for generations to come, with the major oil-producing nations in the region having reserve lives ranging from 41 years in Nigeria to 150 years in Iraq, so there is every reason to plan well.
Risk transfer, in these situations, is critical in high value and high volume industries such as energy and the risk transfer journey is a staged one with three main components. A market entrant may find out that their so-called ‘global’ insurance policy stops at the border of a volatile country, such as Iraq, and at this point all risk is self-insured unless a transfer can be arranged when the issue of priorities becomes critical in keeping the project moving forward. Experienced insurers see a pattern where people come first, followed by liabilities and then by physical assets and from the earliest reconnaissance to the eventual running of a multi-billion dollar facility it is an endeavour that will rely, at every stage, on local networks and relationships for all the robust cornerstones to be in place. And to help the pioneer avoid being scalped.
There is the oft-repeated mantra that ‘our people are our biggest asset’ and we know that the oil and gas industry is a wealthy one with significant earning potential for many workers with key skills. And that is what reaches the country first: the people. People with their own personal high risk and high reward; just enter “oil kidnapping” as an exact-phrase search in Google and see how many results appear.
The key transfers of risk in volatile territories for early-stage reconnaissance-in-force are insurance and security. Insurances are available for many personal exposures including Personal Accident, Kidnap & Ransom, Medical and Travel. These are all available from “A” rated carriers who deal in this niche; and it is a niche. Many ‘global’ programmes do indeed stop at the border and perhaps that is no surprise; wise even. Underwriters are cautious professionals by nature and, for some, the reason for excluding a territory is because they do not know what lies over that border. For the others, it is because they do.
Choosing your key partners on the ground is critical at this stage and some risk may be transferred to a reliable security firm with good local and international credentials. This also applies to insurance brokers and underwriters who can handle enquiries on local matters on the ground including claims, extractions and evacuations, both medical and political. The under-management of a risk is more likely down to ignorance than penny-pinching but if you gain an honestly-earned reputation for failing to look after your people, consider the project dead. Bringing in a local and trustworthy insurance adviser at an early stage in your project plans means they can tell you which risks are transferrable and they will have the presence, contacts, products and experience to support your plans.
As the project develops and an organization moves into a territory it will start to incur responsibilities often long before significant physical assets are in place. Contracts are signed and projects initiated and, again, the importance of local expertise for legal, banking, insurance and security will be vital. Contract negotiation is an opportunity to transfer risk and, even when liability is assumed under contract, some of that may be transferred by sub-contracting. Of course, some liabilities (pollution) become a consideration once an operation is active but in the early days of establishment an operation it is fair to say that for potential damage to an operation, the scale of liability exposure exceeds the physical assets at work.
One large oil firm has recently negotiated a particularly large contract and is proposing to construct 1,200 homes for its workers, they are clearly planning for the long-haul and there will be significant engineering and construction liabilities generated in developing a community to support such a sizable project. Clearly, oil exploration and extraction carries significant potential for large environmental hazards and these are taken care of in traditional energy insurance markets, but also there are regular third party liability issues to be dealt with and the difference is that these can be in challenging areas with legal environments which are not wholly congruent with other territories where litigation may be more prevalent and awards and costs higher. There are no good time or places to get dragged into court but there are some particularly bad ones.
Ensuring a good local procurement of legal services and liability coverage is going to transfer some of the financial and entrepreneurial risk in this environment. Hiring and firing well and managing human resource issues of a large international and local staff is going to require robust internal procedures underpinned by adequate employment liability insurance including Defence Base Act (DBA coverage) as a minimum requirement on some contracts.
In turn, the physical assets will grow and significant sums insured will be exposed on rigs themselves as well as up-, mid- and down-stream operations. In turn, the support for a running operation will entail substantial cargo shipments of supplies and with these the types and complexity of claims increase with more dependency on local claims-handling, loss adjusting, knowledge of law and third party assistance. It is critical to have a dependable local cedant to whom the risk and loss management can be transferred. In some high risk environments,
the transfer options extend beyond security and insurance to include extortion. Some of these areas are not for the faint-hearted and should be entered with full knowledge of the facts, however unpalatable.
Many major industry players will, of course, have their own captive insurance companies and will bear high deductibles but these market leaders do not stand alone. Smaller companies and those servicing the industry have the same issues on a smaller scale and it is all the more vital for them to find local partners who can provide facilities that others cannot because these service companies will be unwilling to bear such high deductibles. They will also be at the mercy of political risks including expropriation of physical assets as well as non-payment by foreign governments. The former risks their assets, the latter their income. These are all transferrable risks and if any company wishes to self-insure they should do so consciously after considering options to transfer the exposure to a specialist carrier.
The ‘Bad Risk’
Libya, Nigeria, Iraq and many other oil-rich countries can look forward, with prudent handling, to stabilizing their economies on the strength of oil and gas revenues and it is a golden opportunity to build such a platform. In turn, this will rely on foreign expertise moving in and taking their own chances to develop new markets albeit at certain risk.
Andrew George, leader of Marsh's Energy Practice for Europe, the Middle East and Africa, indicates that 2010 is expected to be a year of softening rate but goes on to caution; “[However,] cheaper insurance pricing is no substitute for robust risk management. By having a more complete picture of the risks facing their organisations, energy companies can maximise the impact of these market trends and gain a competitive advantage as the economy recovers."
Some underwriters may very well believe that there is no such thing as a bad risk but there will always exist the opportunity to make bad plans and worse decisions. For many of the oil industry players and their support services, their own stabilization will rely on a combination of good planning, agility and the transfer of risk. Able insurance partners can assist in all three areas and it is always worth bringing the insurance advisor into the planning process at an early stage to avoid out-running ones lines of supply. After all, no one plans to get scalped. Do they?
Robert Edwards, B.A. (Hons.), M.B.A., F.C.I.I. is the Chief Operating Officer of Anglo-Arab Insurance Brokers. He is a Chartered Insurer with over twenty years’ experience who has held senior industry positions in Europe, America, Afghanistan and the Middle East in underwriting, broking and operations.
Anglo-Arab Insurance Brokers is a UK-owned private insurance intermediary, established in 2005 with offices in Jordan, Iraq and Kurdistan all of whose trading brokers are UK-market experienced. AAIB specializes in personal and commercial insurances in high-risk territories, including Iraq, Kurdistan and Afghanistan. www.aaib-insurance.com
© L R Edwards 2010