The petroleum industry continues to play a significant role in the global trade. The increasing worldwide demand for energy sends oil and gas prospectors in deeper and deeper waters. While exploration and production challenges are generally magnified, mitigating risk is the foreground. After the Deepwater Horizon spill, industry and government security best practices have improved. With today's changing world, the industry is facing new challenges and new exposures to loss every day. We need insurance programs that can keep up with the times. Insurance in the Exploration & Production sector was an ancient practice. Of a company unique shots whether an oil and gas lease operators, service contractor or pipeline operators before choosing an insurance plan must be understood. The energy specialists build a tailored insurance program, the specific package and umbrella liability and workers compensation policies, including among other things covers. It should also effective loss control and claim services.
The age of easy energy is over. This is particularly true of oil. Easily accessible reserves either dwindling or subject to greater political uncertainty. With the International Energy Agency expects 1.7 billion cars on the world's roads by 2035, double today's total world demand of new discoveries. With new and challenging exploration and production, also increases the risk. To minimize these losses, it is very important that the risks are identified, classified, and then worried.
Executing an oil and gas business is no easy task. Monitoring rig equipment and tools, the implementation and evaluation, managing crew and regulatory compliance require any in-depth industry knowledge and a commitment to exceptional practices. Sun fix problems that could affect the operations should be a lot more concern to you than worrying whether you are protected if something goes wrong. That's why a portfolio of insurance products and services tailored to the specific needs of the oil and gas customers' expectations.
Oil companies have by exploring extreme environments that often those in which reserves yet responded as unrecoverable. Technological advances and rising oil prices have made tantalizing prospects into attractive investments. Sitting on the top of the development are deepwater offshore platforms, whose oil production has risen from almost nothing in the 1980s to eight million barrels a day in 2010, nearly 10 percent of global consumption by energy analyst Douglas-Westwood.
This is despite the Deepwater Horizon (Macondo or) disaster in April 2010, which killed 11 workers and spilled 4.9 million barrels of oil into the Gulf of Mexico. Just two years later, the U.S. government lifted the latest auction Gulf leases $ 1.7 billion, more than five times as much in 2011. Deepwater drilling is needed again. Total liabilities to Macondo were in the order of $ 37Billion and effective insurance covers could have led to a better handling of the losses.
A lease operator has a well blowout, the injured subcontractors on site. Dirt and liquids from the well affect many residents in the area. The blowout results damages do not exceed $ 6,000,000. The impact of an unexpected loss like this could be disastrous for the company. So it is of utmost importance that an array of petroleum insurance products, including a package policy, liability, automobile liability, umbrella and workers compensation are taken into account.
This paper sheds light on the Principles of Insurance, the classification of risks and identify more if they are insurable or not. Also gives a brief example of the kind of covers companies in the Exploration & Production Sector are providing.
Research Methodology:
This involves the collection of Secondary data from the specified documents and compiling databases in
order to analyze the material and arrive at a more complete understanding using research papers, internet, business magazines, newspapers, etc. for comparing the various Insurance Programs adopted by Exploration & Production companies. A detailed literature review will reveal various variables and parameters which will be helpful in the completion of the objectives of the research.
Secondary data will also be collected from Insurance Companies in order to have a better understanding of the risks identification and classification for E&P Companies. The data so collected will then be simulated to analyze the effect of this classification has on the covers received by the companies and how it affects the returns.
Define the objective
To study the various Insurable & Non Insurable Risks in Exploration & Production Sector
Background study
Detailed reading of Principles of Insurance. Studied different Insurance Covers of various E&P Companies to have a better understanding of the application of Insurance.
Collection of data
Secondary Data Collected the required data from various websites, research papers, internet, business magazines, newspapers etc.
Analysis and review
Analyzed and interpreted the data based on the Principles of Insurance.
Understood the factors which affect the organizations favourably for Insurance.
Preparing the report
The theoretical framework, findings, analysis, conclusions and recommendations
presented in the form a project report to enable proper reporting of the findings and study.
Objectives of the study:
The objectives of the proposed research are as follows:
To gain knowledge regarding Insurance as a Risk Mitigation tool.
To identify and classify the risks as Insurable/Non-Insurable associated with Exploration & Production Sector.
To have a better understanding of the Role of Insurance in Petroleum Sector.
To study the effect of Insurance on these identified risks and what more could be done to have a better cover.
Literature Review
Risk
Risk implies to the chance of loss or damage. The notion implies that a choice having an influence on the outcome exists (or existed). Losses can be called "risks". All human purposeful or industrious undertaking carries some risk, but some may be more risky.
ISO31000:2009 Risk Management Standard
The ISO 31000 (2009) /ISO Guide 73:2002 definition of risk is the 'effect of uncertainty on objectives'. In this definition, uncertainties include events (which may or not happen) and uncertainties caused by ambiguity or a lack of information. It also includes both negative and positive impacts on objectives.
Insurance
Insurance is a risk mitigation method majorly used to hedge against the risk of a uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one unit to another, in return for payment. An insurer, is a company selling insurance; the insured, is person buying insurance policy. The amount charged for insurance coverage is called premium. Risk management, the practice involving careful evaluations and controlling risk, has transformed as a distinct field of study and practice.
Principles of Insurance
Insurability
Uncertainty that can be insured by have following common characteristics:
Large number of similar exposure units:
Insurance provided works through pool of resources, the majority of insurance policies for individual members of large classes, allowing insurers to gain from this law in which expected losses are equivalent to real losses. One of the Exceptions is Lloyds of London, who are famous for insuring the life or health of actors, athletes and other famous people. However, different risks have different premiums charged.
Definite loss:
If the loss occurs at an estimated time and at a known place of a known reason. The best example is demise of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. To long-lasting difficult conditions where no definite time, place or source can be known Ideally, the time, place and origin of a loss to validate clear enough that a logical person could, with enough information to all three objective elements.
Accidental loss:
Losses which happen by chance, and are hence outside the control of the recipient of the insurance. The loss should be pure, in the sense that they are of an event, for which it performs only the possibility of cost. Events that speculative elements, such as usual business risks or even incorporated the buy of a lottery are generally not considered insurable.
Large loss:
Amount of the loss should be significant from the insured's perspective. Insurance premiums, both the estimated cost of losses, plus the cost of issue and administering of policy, adjusting losses, and supply of capital required to reasonably promise that the insurer cover to be able to claim payments. Small losses these final outlay a multiple of the size of the expected cost of losses.
Affordable premium:
If the possibility of an insured event is so elevated, or the cost of the event so huge, that the resultant premium is big in relation to the available amount of shield, it is not expected that the insurance will be purchased. The accounting occupation officially identifies in (FAS) financial accounting standards, the premium cannot be so huge that there is not even a useful chance of a major loss to insurer.
Calculable loss:
There are two elements that must be at least estimable, the probability of loss and the related costs. Likelihood of loss is in general an experimental exercise, whereas cost is more related to the ability of a reasonable person in possession of a copy of the policy and a evidence of loss with a claim under this policy, represents a somewhat exclusive and is thus related objective evaluation of the amount of the loss redeemable as a result of claim.
Limited risk of catastrophically large losses:
Insurable losses are supremely autonomous and non-catastrophic, implying that losses do not happen all at once and individual losses are not strong enough to keep the insurer insolvent. Insurers may prefer to bound their exposure to a loss from a single happening to some small part of their wealth base. Capital forcing insurers capability to sell earthquake insurance and also wind insurance in cyclone prone areas.
Legal
These principles are the fundamentals or needs of insurance disregarding type of insurance concerned. There are seven basic principles of Insurance:
Principle of Utmost good faith:
It is the main principle of insurance. This rationale demands that contract signed by both parties (insurer and insured) in total good trust or confidence. Both parties must disclose all facts to the benefit of one another. Fake information disclosed regarding any important fact makes the contract void.
Principle of Indemnity:
This principle of compensation applies to all types of insurance except life insurance. Indemnification means shield, security, and payment given against damage, loss or injury. Insurers promise to help the insured to reinstate the insured to the position before losses. The insured will be paid only up to the extent of loss of his. Insured should not earn profit out of the insurance contract. The maximum reimbursement sum will be up to the value of the policy laid down at the time of the contract.
Principle of Insurable Interest:
The party or person getting an insurance policy must have an insurable interest in the property insured or life. Insurable interest exists when the loss to the property or person directly affects the person/party seeking insurance. The presence of insurable interest is mandatory by law. An insurance contract without the being of insurable interest is not legally valid and cannot be questionable in court. The point of this principle is to avoid insurance from becoming more of a gamble.
Principle of Subrogation:
As per this principle, when the insured is compensated for losses due to damage to his property, the right to ownership of the possessions then switches to the insurance company. This principle implements to all types of insurance apart from life assurance. If insured has paid compensation for the loss suffered by him, he cannot claim the same amount of loss from another party. It prevents the insured being compensated from two different sources for a loss.
Principle of Contribution:
There are times when a property is insured by more than one company at the same time. In such cases, the insured cannot claim more than the total losses from all the companies together. He can not claim the same loss from different companies. The compensation to be paid in these cases, is to be in proportion with the extent of insurance with each of the insurer. Indemnification can never be more than the actual cost i.e. an insured is not to gain from insurance but be compensated for the losses suffered. The total loss by the insured will be subscribed by different companies in proportion to the value of the policies issued by them.
Principle of Proximate Cause:
It means that when a loss is caused by more than one reason, the next or the next or the next cause should be taken into consideration in order to determine liability insurance. This principle is very helpful when the loss occurred because of sequence of events. But case of life insurance, this principle of proximate cause does not apply. Whatever may be the cause of death, the insurer is obliged to pay the sum of insurance.
Principle of Loss minimization:
According to this principle, the insured forever tries its level best to reduce the loss of his insured property in the event of unexpected happenings such as fire, and others. The insured shall adopt all essential methods to reduce injuries and to save whatever is left over. This principle makes the insured more vigilant towards his property insured.
Indemnification
To "indemnify" means to give security for, or to be reinstated to the position that one was earlier in, before the incidence of a specific happening or peril. As a result, life insurance is usually not considered to be liability, but rather "contingent" insurance (i.e., a claim arises on the occurrence of a specific event). There are generally two types of insurance contracts that are trying to keep an insured:
an "indemnity" policy, and
a "pay on behalf" or "on behalf of" policy.
The dissimilarity is noteworthy on paper, but hardly ever material in exercise.
An "indemnity" policy never pays claims until the insured has paid out of his own pocket to some third party, such as slipping a visitor to your home on a floor that you left wet and sues you for $ 10,000 and wins.
In the same condition, a "pay on behalf" policy would make the insurance carrier to pay the claim and the insured would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language.
Classification of Risk:
Fundamental vs Particular:
Fundamental risk is a form of risk which affects large statistics of people in an financial system. E.g: Earthquake, war. If it is as a result of the nature of society, naming act of war and unemployment risk, these are uninsurable. The basic risks as a result of bodily or natural causes can be insured.
Whereas, a particular is which only affect the individual. E.g:, fires, robberies and thefts. Such risks can be insured.
Dynamic vs Static:
Dynamic risk is those which arise from changes in the financial system, resulting in financial losses. It is found to be as a repercussion of adjustment to apportionment of resources in the financial system. Quick change in the IT industry is an example of this.
Whereas, Static risk, happen, even while there are no alterations happening. During the market changes, there are people who suffer losses. Static risk brings no benefits to society, only pure loss.
Pure vs Speculative:
Pure risk is either a possible loss or no loss. Whereas in speculative risks, there is a possibility of gains or losses. Pure risk are insurable whereas speculative risk are uninsurable. Pure risk consequences of speculative risk can be insured. E.g: Decision to produce a new product is speculative risk. Hence, not insurable. But if the plant is burned by fire and as a result cannot deliver to dealers, these losses are considered as a pure risk and therefore uninsurable.
Identification of Type of Risk:
When you have a business, there are various risks involved that could result in the failure of your business. However, not all the risks can be insured.
Factors determining uninsurable risk:
A risk is insurable, when an insurance company cannot calculate the probability of a risk and therefore cannot figure out a premium to be paid by. For example, you cannot take out insurance against possible failure of your business.
Risk is too widespread, for example, when there is a war in the country.
Where damage is caused by your own deliberate actions, it cannot be insured. For example if you have financial problems in your business and decide to set fire to your business for a cash payment from insurance, this will be a void claim.
You cannot insure a business for:
price fluctuations from the time the order for goods is placed and the delivery of the goods
different price levels at different places
new inventions that replace old technology, e.g. in the IT industry
nuclear weapons or war
changes in fashions when goods become obsolete
Factors determining insurable risk
If the insurer has enough statistics to determine the probability that the risk is called an insurable risk.
Actuaries are highly skilled people who work for insurance companies, and their role is to find out exactly what risks the company will implement. The degree of risk will affect insurance premiums.
Some examples of the insured risk
Fire insurance
A fire insurance is a contract of compensation for losses caused by a fire. A building and its contents can be insured against fire, but additional clauses should be added for damage by hail, wind or riots. Fire insurance is expensive - the greater the risk, the higher the premium. The fire will also have a clause called iron safe clause. All books and records must be retained securely backup the claim after a fire.
The book value and the market value or replacement value of insured property
Assuming a building is insured for R1, 00,000 (book value), and replacement cost is R3, 00,000. Should the building burn down, the insurance company will only pay R1, 00,000 and the building owner will lose R2, 00,000 should be rebuilt.
Storm, damage and theft
This is a common insurance contract that will protect a homeowner house building (homeowners' policy) and the contents of the house (homeowner policy).
Money in transit
Banks make use of armoured vehicles to transport cash deposits and their outlets. A policy can be taken out of the transported.
Fidelity insurance
An employer may take out fidelity insurance to protect his business from dishonest employees.
Determination of the necessary characteristics of an insured risk is important in several ways, including the following.
The risk management tools of evaluation and decision-making presented to students of insurance are founded on such characteristics.
Insurance regulation (particularly the state premium taxes on insurance) and tax deductibility requires ever-finer definitions of insurance.
Some possibility exists that new "insurance" products cover potentially uninsurable risks.
Requisites of an Ideally Insurable Risk
An employer may take out fidelity insurance to protect his business from dishonest employees.
The subject of the prerequisites for an ideal insurable risk is generally included in insurance and risk management texts. Thus, the value seems to exist in hearing these writings as a "definition" of an insurable risk. As a first step to characterize insurance, leading some insurers references consulted. These references provided lists of conditions for ideal insurable risk, a special case of an insurable risk
The complete list of requisites of an ideally insurable risk as given by the authors of these texts is as follows:
large number of homogeneous exposure units;
independence among exposure units;
calculable expected loss in monetary values;
definite loss as to time, place, amount, and cause;
fortuitous loss;
economic feasibility;
Avoidance of catastrophe potential.
It should be noted that this list of seven defines IDEAL risk. It does not mean that any risk meets all seven characteristics. But neither the authors provide their readers with an indication of which, if any, of the assumptions is crucial for insurance. Therefore, the use of a given rank as a standard for comparison of the necessary elements for the insured risk.
List of few of the Coverable Risks of Exploration & Production Sector:
Risk engineers and claims managers work in fully-integrated teams dedicatedly to the business of Insurance for E&P sector. Big Insurance companies provide coverage for a range of onshore and offshore exploration and production risks, plus onshore and offshore midstream risks, including:
Upstream processing facilities
Terminals
Renewables
physical damage,
control of well (OEE),
business interruption,
Construction and installation.
removal of debris,
costs of well control,
Redrilling expense
Construction All Risks
Fixed platforms,
spars,
offshore mobile drilling units,
pipelines,
land rigs
oilfield property.
Engineering and service contractor vessels
Floating production and storage units
Gathering systems
Builders Risk
Liabilities
property insurance
Offshore construction contractors
containing seepage and pollution
Comprehensive cover for offshore construction projects comprising procurement transits, land fabrication, load-out, transportation to site, installation, hook-up and commissioning.
All risks of physical loss or damage may be for for unscheduled oil lease property, including pump jacks, tanks, treaters and related equipment.
Business interruption covers
Boilers and machinery damage covers.
Automatic blanket limit which may include protection for valuable papers and the costs to replace data such as well logs, mineral leases, seismic data and maps.
Automatic protection for newly acquired wells.
Contractors' equipment including service rigs can also be included.
Machinery breakdown protection also can be provided for the machinery and equipment that is vital to the operation.
Business income, contingent business income and extra expense insurance are available.
An example of Allianz Global Corporate & Specialty provides a full range of products and services.
The Oil And Gas Business:
Sample Insurance Policy of Chubb Insurance highlights include:
The Solution from Chubb:
Customarq for the Energy Industry
Customarq from Chubb-the only package policy in the energy industry-offers broad insurance solutions in a modular format. We tailor Customarq to meet your company's needs through seamless property and general liability coverages-from construction/ installation to commercial operation-all supported by exceptional loss control and claim services.
Customarq policy features include:
• Optional coverage for Property, Mobile Equipment, Builders Risk and General Liability
• A $250,000* automatic blanket limit for certain property extensions, allowing your company to spend its insurance dollars where they are most needed following a loss
• No sublimit/deductible for extra expense (part of the Business Income limit)
• Separate limits can be offered for surface and underground equipment
• Additional property coverage extensions are also available
Liability insurance provides protection for bodily injury, property damage, personal injury and advertising injury. Coverage enhancements for your oil and gas exploration and production include:
Contractual liability
Newly acquired or formed organizations
Newly acquired wells automatically covered
Underground resources for third-party damages
Insured status for non-operating working interests you manage and control
Blanket additional insured and waiver of subrogation as required by contract
Defense in addition to the limit
All-risk property protection, with an automatic limit of $10,000 for unscheduled oil lease property including pump jacks, tanks, treaters and related equipment. Lease property can also be amended to include electric lines and poles and crude stored in tanks. Contractors' equipment including service rigs can also be included.
Machinery breakdown protection also can be provided for the machinery and equipment that is vital to your operation.
Business income, contingent business income and extra expense insurance are available.
* Aggregate limit can increase to $1 million, subject to underwriting guidelines.
Round Out Your Insurance Program
To complement your Customarq policy, Chubb also offers insurance protection for:
Commercial Auto
Excess/Umbrella
Executive Protection
Multinational
Pollution
Workers Compensation
Chubb's package approach for the petroleum industry is designed specifically for petroleum operations and offers many enhancements:
Newly acquired wells automatically included
Co-owners of working interest and non-operating working interests you manage and control are insureds
Defense in addition to the limit
Lease property form includes tanks, pump jacks, dehydrators and associated lease equipment, as well as crude stored in tanks
Per well liability limit for underground resources and equipment
Blanket additional insured and primary wording available
Ability to schedule gas storage and gas extraction/recovery facilities
Contractors equipment form can include oil field servicing equipment
Ability to schedule pipelines including pipeline metering, gas conditioning and compressor stations
Chubb also offers insurance protection for:
Pollution Liability - helps to provide protection for suits brought against you for damages to the environment (can be extended to include on-site cleanup costs)
Excess/Umbrella Liability - offers high limits to help protect against catastrophic liability, as well as:
Two insuring agreements:
Coverage A affords vertical continuity with your primary coverage
Coverage B closes many gaps in your primary liability program
No aggregate is imposed on unaggregated policies such as auto
Separate aggregate for products, Advertising Injury/Personal Injury and Coverage B apply
Commercial Automobile - includes non-owned and hired cars
Executive Protection Liability - includes Crime, Directors & Officers, Fiduciary, Employment Practices,
Kidnap/Ransom and Extortion
Multinational - global extension to expand property, liability protection worldwide, foreign voluntary
workers compensation, employers liability and international auto
USA Workers Compensation
Political Risk
Surety
Thus having a look at the above two examples helps us have a better understanding of the Insurable risks which the companies are covering in Exploration & production Sector.
It is up to the insurer and the insured to get the best possible array of Insurance Cover after having an understanding of the Insurable & Non Insurable Risks and also the extent to which they can be covered.
Conclusion:
The chance that an investment actual return will be different than expected. Risk includes the possibility of losing some or all of the initial investment. Different versions of risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. A high standard deviation indicates a high degree of risk.
Many companies now devote large amounts of time and money in developing risk management strategies to help manage the risks associated with their business and investment transactions. A key element of the risk management process is risk assessment, involving the determination of the risks a company or investment.
Some of the key points to be kept in mind:
The underwriters must know the highly specialized market and have extensive experience for insuring E&P risk.
The Claims department of Insurance companies should not be a separate group, but must function as an integrated part of the team unit.
The insured should get the full advantage of the technical expertise and understanding of the E&P industry. And most importantly, differentiation of risk and thereby deciding insurance covers should be done carefully.
Always the Company seeking insurance must have a sound knowledge about the Insurable/Non-Insurable Risks in order to get the best possible cover for the asset.
