What’s in store for oil and gas insurance in 2022? Geopolitical pressures driving environmental, social, and governance (ESG) activities have been front and center for all energy-related enterprises, and the method to insuring the sector has shifted dramatically.
Stewart Halstead, vice president of energy at BFL Canada, spoke with Insurance Business about how the industry is focusing on ESG in its underwriting.
“To achieve any success with their insurance renewal, oil and gas businesses must have a solid and precise plan surrounding their emissions,” he said. “The same geopolitical factors are causing global insurers to abandon the oil and gas sector entirely.”
Lloyd’s recently indicated its intention to exit the fossil fuels market entirely by 2030. According to Halstead, global energy insurance premiums are around $14 billion, with Lloyd’s writing 25% of that business.
“Insurance is a primary concern for the board of directors of energy firms for the first time in many years,” he continued.
With a growing number of firms exiting the sector, addressing capacity challenges in the marketplace is front of mind. The movement toward self-insurance and determining how much risk can be kept is a major subject highlighted by Halstead.
“By 2022, we’ll see more energy clients, even on a lesser scale, looking into captives and fronted insurance programs than ever before,” Halstead predicted.
“It really comes down to retention analysis and knowing what your objective is and what you’re genuinely trying to insure,” he says. “We’re getting into the analytical method of self-insurance, which has become a barrier to entry for any broker looking to compete in the oil and gas market.”
Brokers must take a personalized approach to each renewal and educate themselves on a client’s total metrics in order to assist underwriters in determining the true exposures.
“Brokers will perform well in the energy area if they can start from a financial and operational standpoint.” “It’s not going away; it’s just evolving,” Halstead observed.
Because captives do not always provide the same level of risk management, it is in brokers’ best interests to begin serving as risk advisors in order to retain clients.
“Carving out specific risks that are heavily associated inside an insurance company’s actuarial model will lead to intense savings across a program,” he noted. “From a brokerage standpoint, spending more time with clients and understanding their complete operation helps analyze current exposures.”
Halstead said that 90 percent of his talks with underwriters are about energy risks and ESG demands, and that this will be something to work through in 2022.
In addition to ESG concerns, the price of oil and gas is a major concern – Halstead underlined that quarterly reporting is one of the greatest ways to ensure that a customer is not under or over insured.
“If revenues are constantly increasing and operations are doing the same as a result of commodity pricing, it allows clients to have reduced premiums, but the opposite can also be true,” he explained. “With increased capacity, rates will stabilize, but we don’t know what the marketplace will look like as underwriters draw more lines in the sand.”
Insurers are under increasing pressure to handle ESG risk concerns.
Environmental, social, and governance (ESG) risk considerations are becoming increasingly important to insurance companies around the world, with implications for their investment portfolios and lending policies.
According to DBRS Morningstar, the world’s fourth largest credit ratings firm, large institutions, in particular, are under increased pressure from external shareholders to better manage their environmental risk exposures. After several years of increased natural disaster losses, this is more critical than ever for property and casualty (P&C) insurers.
According to Munich Re, global natural disaster damages in 2020 will total US$210 billion, with only US$82 billion insured. Overall losses and insured losses were much larger than in 2019, when a total loss of US$166 billion was recorded, with US$57 billion insured.
After a record-breaking North Atlantic hurricane season, severe thunderstorms in the American Midwest, and yet another series of huge wildfires in the western US driven by drought conditions, North America suffered the largest losses in 2020. Natural catastrophe losses in Asia were lower than the previous year, but floods and cyclones were the most common threats. Meanwhile, natural catastrophe estimates for 2020 in Europe were “quite benign,” with some localized catastrophic losses, primarily flash flooding.
One thing is certain: climate change will play a greater role in all of these dangers, putting an increased burden on P&C insurers to manage their environmental exposures effectively.
“The assessment of environmental hazards is a major component of DBRS Morningstar’s analysis for the property and casualty (P&C) insurance business,” according to the firm. “This encompasses the effect of insured catastrophes on an insurance company’s financial strength, as well as claims predictability, frequency, and severity.”
Social risk factors can also have a substantial impact on the client and employee base of an insurance company, as well as its financial strength. In general, authorities intensively monitor financial institutions with retail-oriented activities to ensure that social risk elements are managed fairly. Insurers may face fines and penalties if they fall short of expectations, such as through a data breach or mis-selling goods. They may also suffer permanent reputational damage, which may have a detrimental influence on their investing capacities.
“Weak corporate governance, as well as weak business ethics,” DBRS Morningstar stated, “may have a negative influence on a financial institution, perhaps resulting in fines, decreased financial performance, or even the revocation of an operating license.”
DBRS Morningstar has announced a more formal approach to integrate ESG issues into its rating methodology across all rating groups worldwide, including financial institutions (which includes insurance companies). The firm has identified 17 major ESG aspects — five environmental, seven social, and five governance – that analysts will now evaluate when grading organizations.
“These [factors] are already incorporated into the ratings process in large part,” said Gordon Kerr, DBRS Morningstar’s head of global structured finance research located in London. “What we’re doing now is bringing these ESG issues forward and out so they can be acknowledged and addressed [officially] in that ratings process.” If we discover that one of these elements is involved and influential in deciding our ratings, we will identify and discuss it in our press releases and ratings reports.
“Not all of the 17 factors apply to each rating group. Land impact on biodiversity, for example, is very relevant for governments and corporate financing, but less so for financial institutions and structured finance. Business ethics, on the other hand, is more relevant for financial organizations… but not necessarily for governments. We’re taking a worldwide strategy across the ratings groups where the 17 ESG elements are applicable.”
As a credit rating agency, DBRS Morningstar examines how ESG variables affect an insurance organization’s overall credit status and financial condition.
“It’s essential to highlight that we’re not looking at this from a sustainability standpoint,” said Andrew Lin, managing director, global corporates at DBRS Morningstar in Toronto. “It’s really from the standpoint of such factors as [an organization’s] revenue line, expenses, cash flows, [or] how it affects asset value or refinancing potential.” We’ve always taken these ESG factors into account. The goal of these criteria is to make it more transparent and explicit, rather than implicit. We are not introducing new factors; rather, this is a procedure for better disclosing what we have been doing.”
Oil and gas insurance companies will be one of my article for 2022,stay tuned.