Energy firms turn to captives, over complicated covers

Insurance buyers at onshore energy firms issued a warning to the London market insurance community that risk transfer products are “overly complex”, and can fail to offer relevance or value for money.

That was the conclusion of a panel discussion at this month’s Onshore Energy Conference in London.

“The insurance industry is not ticking the boxes for us in terms of relevance to our risks. Our exposures are massive but the market is not here for us,” said Gustavo Penas, Shell’s vice president for risk and insurance.

“We had the choice of only transferring a small part of our risk in return for an expensive premium or keeping the lot. We chose the latter – and the last ten years have shown our decision was the right one,” said Penas.

An audience of risk managers and insurance professionals voted by 75% to agree that “the insurance industry is full of complicators and not simplifiers”.

Asked whether the London market’s claims process was ‘fit for purpose’, 60% of the audience either agreed or partly agreed that it was.

“The level of risk we face is no less than 20-30 years ago but it has become more complex to understand. The insurance market helps us to assess, understand and quantify that risk,” said Penas.

Penas noted the energy firm does not buy commercial insurance, preferring to self-insure via its own captive insurer.

“Then it helps to transfer the risk if the owner doesn’t want it. While the first part of that process is still relevant, the second part is fading away as energy firms have large balance sheets so can retain the risk,” he said.

“Some ten years ago, we at Shell concluded there was not enough value in transferring risk to the insurance industry. It was too complex and too costly,” Penas added.

Disruption to the insurance sector is both needed and desirable, to solve products’ complexity, the panel suggested.

Joe Meaney, vice president of global insurance and risk engineering for energy firm AES, warned that unless insurance gets better, would-be disruptors, such as Google and Amazon, would not need commercial insurance because their balance sheets were too strong.

Meaney’s firm also operates its own captive insurer.

“Our captive has functioned well, which is sad because I would have hoped that the insurance market could produce a better solution. If insurers help me to be the solutions person, we’ll always do business,” he said.

“The good news is that risk is not going away. The bad news is that insurers need to stop complaining about price and change – about how things aren’t what they used to be,” he added.

The panel discussed unbundling energy insurance products to separate risk management and risk engineering from the core insurance policy.

Andrew George, Marsh’s global chairman for energy and power, said: “I don’t think we should necessarily separate out our products. It’s different for each client and class.

“We are an industry of complicators,” he admitted.

“We like making things more complex and we like telling people how clever we are. We have to stop doing that…We need to get on with what we’re supposed to be doing,” George added.