Hydrocarbon Processing - January 2021 - 21

Risk

D. H. PURO
ProSight, New York, New York

Escaping the " cyclone market " in downstream energy
To say that the downstream energy
sector is facing a time of unprecedented
challenge would be the understatement
of the decade. What began with a market
shift coupled with the oil and gas crisis
has morphed into a pandemic-driven economic standstill with fewer planes flying,
fewer cars driving and overall energy consumption plummeting.
As if those issues were not enough of
a concern for the industry, refining and
petrochemicals are feeling the squeeze
from insurance companies, which-facing their own challenges-are beginning
to offer less capacity (coverage limits)
while increasing rates on the coverage
they do offer, and perhaps even reducing the breadth of coverage. We call this
a " hardening market " in insurance terms,
and this unprecedented market is one of
the hardest in recent memory.
Having underwritten downstream
energy risks for the better part of two decades, I could sit here and tell you why
insurance carriers are pulling back on capacity in the refining and petrochemicals
sectors or pushing rate increases (due to
things like reinsurance costs and underperforming coverage lines), but I also
know that the reasons why probably do
not matter to insureds who need affordable coverage to keep their operations
afloat. Insurance customers in this sector
need solutions. These insurance market challenges have created a significant
problem-one I have dubbed the " cyclone " market.
The challenges facing the refining
and petrochemicals sectors are daunting
enough on their own. When these challenges are combined with the oil and gas
crisis, the COVID-19 pandemic, and reduced insurance limits/coverages at significantly higher prices, a self-sustaining
whirlwind starts to form around companies-a seemingly inescapable cyclone
that sucks them in and closes around
them. Worse, this cyclone market is not
going away anytime soon-not for at least

another 12 mos-18 mos. Fortunately, this
is not where the story ends.
A way out of the cyclone market. The

good news is that refining and petrochemicals companies can emerge from this cyclone with both adequate and affordable
insurance coverage. Navigating this path
may be different than what energy companies have done historically to obtain
insurance, but these unique circumstances
require unique action. For insureds to successfully navigate this cyclone market will
require a new level of engagement between
the insurance buyer(s) and their insurance
partners (their broker and carrier), as well
as creativity and innovation by all parties
to find the right insurance solution.
An active engagement approach will
lead to the creativity and innovation needed to craft an insurance policy customized
to each company's specific needs. It is critical that each company plays an active role
in its insurance purchase process. Companies must come to the table alongside their
brokers to meet with prospective carriers.
There is power in these face-to-face (even
if virtual) engagements-not only do they
show brokers and carriers that companies
are invested in their decisions, but they
also give companies the opportunity to
ensure that their needs are met.
An interactive dialogue with a broker and carrier gives a company a more
prominent seat at the table during these
negotiations, while further strengthening
a long-term partnership. It also serves as
a strategic blueprint to help craft the right
insurance plan for each company. Fortunately, a number of options are available
for downstream energy companies to consider, with a range of limit profiles at reasonable premiums.

Tailored approaches to insurance
for the downstream. One plan option

is to analyze exactly how much risk a company is comfortable taking on vs. transferring to the insurance carrier-e.g., utiliz-

ing deductibles or self-insured retentions
(SIRs). Not paying for what is not needed
is a great way to lower premium costs to a
more affordable level.
Another " outside-the-box " option to
consider is a captive. A " captive " is a company or organization that insures itself
(usually by partnering with an existing
insurance company) to stabilize its rates.
While forming a captive is not an option
for every refining or petrochemicals operation, it does decrease volatility in insurance rates compared to what is available
on the open market. A captive could be an
attractive long-term solution to navigating out of the cyclone market.
Finally, a simple, yet often overlooked,
solution is to evaluate all of the terms and
conditions in a company's insurance policy to understand exactly what and how
the company is covered and the premium
commensurate with those coverage grants.
This process can be tedious, but taking this
step with a broker and carrier can bring
a much clearer understanding of how a
policy works and what can be added or
removed to make it a better fit for a company's specific needs and requirements.
By increasing engagement with the
insurance supply chain and exploring
creative ways to craft insurance coverage,
refineries and petrochemicals companies
can take critical steps to navigate the cyclone market. While this does not solve
every challenge facing the industry, it is
an important step to get energy customers back on solid footing.
DAWN H. PURO is Program Executive
for ProSight's Energy niches:
Petrosure, Downstream Energy
Contractors, and Propane and Fuel
Oil Delivery. She brings with her more
than 20 yr of property and casualty
expertise in energy, product liability,
transportation, public entity, construction, healthcare,
product recall and crisis management. She has been
featured as a panelist, speaker and moderator at various
industry conferences including PLRB and Advisen
Insights. Ms. Puro graduated from Fairleigh Dickinson
University with a BA degree and received further
executive leadership training from Harvard University
and Columbia University's Graduate School of Business.
Hydrocarbon Processing | JANUARY 2021 21

Hydrocarbon Processing - January 2021

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