3 ways brokers can help oil and gas companies maintain coverage

Brokers with clients in the oil and gas industry are closely watching statements by insurers announcing intentions to exit from coverage of Canada’s oil sands.

Those insurers, like many other companies globally, are under intense pressure from consumers and governments to address concerns about climate change.

“As a broker in the energy industry, we have clients that have oil sands operations,” said Javier Pardo, senior vice president for the complex risk solutions group at NFP in Canada. “Oil and gas operations can generate significant risk and we need [to cover] those risks for our clients.”

Going forward, he said, oil and gas firms will have to apply one of three strategies to ensure future coverage: convincing, creating capacity and self-insuring.

Convincing may not be quite as hard as it sounds, he noted, since many oils sands operators have robust sustainability stories.

“Everything from keeping their people safe to process-safety management, which has to do with stewarding the environment and keeping hazardous goods confined where they’re supposed to be,” Pardo said.

“And recycling water and reclaiming land and everything around governance and ethics and diversity and inclusiveness. They’ve taken baseline measurements on their C02 emissions year-after-year. And every single one of those companies would support the net-zero target by 2050.”

Still, he said, that strategy has its difficulties because the insurance companies have already begun stepping away from the oil and gas industry. Which also means, those insurers that haven’t exited have an opportunity.

Alternative Number 2 is to create capacity, possibly by forming mutual operations. Pardo noted this approach essentially returns to the foundations of insurance, whereby the premiums of the many indemnify the losses of the few. Other industries facing difficulty finding adequate coverage have adopted the strategy in the past, he noted.

“What if they were to get together themselves and create an energy mutual?” he asked. “That’s not a quick solution or a quick fix either, but people need to be creative and think about things like that.”

The third option, self-insurance, makes use of captives so that companies can effectively self-insure. Plus, recently passed laws in Alberta encourage commercial, third-party reinsurance entities to write new business in Alberta that can be structured as reinsurance behind a captive. That helps reduce the energy companies’ need to self-insure and potentially replaces lost capacity.

“We’ve been encouraging investment in reinsurance capacity. A lot of that just means that you’re fundamentally self-insuring the risk,” Pardo said.

“You’re setting aside an amount of money each year so that you’re building a bit of a war chest so that if you ever did have a catastrophe, it isn’t going to be as volatile on your financial results as if you had nothing saved up to address the repair costs and the loss of revenue.”

 

Feature image by iStock.com/Polina-Petrenko