Growing gap between coverage and exposure in booming energy sector

The booming energy sector generally — and in particular, the hot oil and gas construction industry — can have a serious impact on replacement costs and business interruption coverages, so insurers need to ensure exposures are adequately priced, a Swiss Re report warns.

In its latest Focus report, “Energy construction boom — a paradigm shift for insurers,” Swiss Re suggests insurers maintain valuations reflecting current replacement costs. Instead of solely relying on past cost increases, other cost drivers that are plant-specific and include regional variations should play an important role in determining repair and rebuilding costs, the report says.

For business interruption, the estimated maximum loss should be based on the latest values, margins and oil price to ensure that loss limits are adequate, it continues.

In addition, indemnity periods should be examined in light of current delivery times for process plants and major equipment items.

“The growing gap between coverage and exposure poses a significant threat to the energy industry, which may find itself underinsured in the event of a major incident or an extended business interruption,” the report says. “At the same time, insurers are not receiving an adequate premium to cover the increasing sums at risk.”