American Oil and Gas Reporter - December 2018 - 76

SpecialReport: Insurance Update
But, of course, there is another group:
the oddballs in the business of insurance
and risk management, who somehow find
the marriage of quantifying exposures to
various risks, qualifying those exposures
in a sprawling and ultracompetitive global
marketplace, and engaging in the transfer
of that risk through a complex contract
of adhesion (the insurance policy).
These are the insurance agents, brokers,
wholesalers and underwriters who engage
in the business of transferring risk through
the payment of premiums in exchange of
a promise to pay from an unrelated entity.
Others thrive in the arena of interpreting
and enforcing these contracts. These are
the claims advocates, loss adjusters, claims
underwriters and sometimes insurance
coverage attorneys who really determine
exactly how insurance works. It is an
odd group indeed.
The risk exposures in the upstream
and midstream sectors are substantial,
yet the oil and gas market-while healthy,
full of optionality and ultracompetitive-
is miniscule compared with so-called
standard insurance lines, especially in
the United States and Canada. To those
in the energy business seeking to buy insurance products to mitigate very serious
exposures to potentially catastrophic
losses, the world in which the brokers,
agents, wholesalers, underwriters, claims
professionals and coverage attorneys live
is often seen as one of complete chaos.
To help rein in some of that chaos, and
provide a clearer view of what lies ahead
in the oil and gas insurance market in
2019, it is first necessary to take a quick
look back. The onshore remains the driver
of North American oil and gas insurance
trends, as has been the case for some time.
As the shale revolution took hold and
economies of scale created unprecedented
economic efficiencies, many operating
companies and contractors barely noticed
insurance pricing. Of course, premium
payments are always important, but there
was good money to be made in resource
plays from the Marcellus and Bakken, to
the Eagle Ford and Permian Basin.
Stakeholders from all corners of the
insurance and risk management sector
were ready, willing and able to assist in
transferring risks during the shale activity
heyday, and many made modest profits
as well. Robust competition and an abundance of insurance capacity kept the
profits from running away with themselves,
resulting in a prolonged period of soft
insurance pricing.
Of course, the crash in global oil
76 THE AMERICAN OIL & GAS REPORTER

pricing in late 2014, followed by a prolonged period of low oil and natural gas
prices, put a significant damper on the
business for insurers. Fortunately for the
upstream sector, however, insurance capacity did not contract. Instead, insurance
providers began to compete ever-more
vigorously to maintain relevant shares of
a dwindling market.
Then came 2017, which was the absolute worst year of insured losses in
history. Hurricanes Harvey, Irma and
Maria battered the United States and
Caribbean, causing unprecedented damage.
They soon were followed by several massive wildfires in California. Most of the
losses were not related to oil and gas, although the sector certainly was impacted
by Hurricane Harvey.
Insurance Capacity
A year ago, many insurance experts
around the world were anticipating a
global retraction of insurance capacity
due to the record insured losses of 2017.
In insurance and risk management parlance,
this is often referred to as a "hard market,"
meaning that insurance pricing swings
the other way as insurance providers seek
to recuperate some of the losses suffered
in the previous year. This has happened
many times, with recent examples including
the hard market immediately following
the Sept. 11, 2001, terrorist attacks (and
subsequent recession) and the 2008 financial crisis (and subsequent recession).
However, as 2018 matured into its
second quarter, it became apparent that
the capital markets still saw insurance as
a safe bet, so insurance capacity was
recharged at lightning speed. The first
half of 2018 has been dubbed by many
as "the hard market that wasn't." There
are a lot of opinions as to how or why
the insurance market-and by extension,
the global reinsurance market-did not
harden in early 2018. These range from
the general health of the global economy
to the increased efficiencies of global
capital markets.
Regardless, as 2018 progressed, it became apparent that an insurance market
correction was already under way. Some
of this was engineered by major global insurance players for various specialty lines
of business, including energy, with Lloyd's
of London being the most obvious example.
Other aspects of the hardening of the insurance market have to do with widespread
consolidation across the global market.
While not as bad as 2017, the 2018
hurricane season certainly has not been a

gentle summer breeze. Hurricanes Florence
and Michael caused significant damage
in the Carolinas, Georgia and Florida.
Meanwhile, the wildfires in California
continued to rage in mid-November with
devastating results. Of course, very little
(if any) of this has had much of an impact
on the North American upstream or midstream sectors. However, drilling activity
has increased throughout 2018 with stabilizing commodity prices, resulting in a
spike of operational losses arising from
all manner of issues, ranging from green
crews to resurrecting laid up equipment.
Although anticipated, the losses are
happening in the field and they are impacting the performance of the insurance
segment that services the upstream and
midstream sectors. So while 2018 started
off as the hard market that wasn't, 2019
looks to be a hard market indeed.
So what can companies with upstream
and midstream assets and operations expect
next year? Of course, pricing, terms and
conditions will vary. Loss-free companies
with assets/operations well away from
exposure to coastal windstorms or prolific
wildfire perils may hardly notice a hardening of the insurance market. Others
may feel it right away. Someone somewhere will get a great deal, while someone
else may get hammered. But insurance is
much like any other market in that a
variety of potential results are possible
depending on overall market conditions
as well as the specific risks associated
with an individual company's business.
OEE And Excess Wind
In December 2017, renewals for onshore
North American property, oil field equipment
and control of well insurance were projected
to see increases of 5.0-7.5 percent with essentially the same activity level. However,
the efficiency and speed with which capacity
has been "reloaded" from the capital markets
has been nothing short of astonishing.
While insurance pricing is somewhat stabilized (premiums are no longer in free
fall), there are more than 50 insurance
products related to control of well or operator's extra expense (OEE) coverage. This
includes coverage for blowouts, underground
blowouts and resultant damages/expenses.
Therefore, if an oil and gas operator
is more or less loss-free, there are still
plenty of deals to be had. On the other
hand, onshore operators/nonoperators
with claims can expect an increase at renewal ranging from 7.5 to 20.0 percent
or more depending on the severity and



American Oil and Gas Reporter - December 2018

Table of Contents for the Digital Edition of American Oil and Gas Reporter - December 2018

Contents
American Oil and Gas Reporter - December 2018 - Intro
American Oil and Gas Reporter - December 2018 - 1
American Oil and Gas Reporter - December 2018 - 2
American Oil and Gas Reporter - December 2018 - 3
American Oil and Gas Reporter - December 2018 - 4
American Oil and Gas Reporter - December 2018 - Contents
American Oil and Gas Reporter - December 2018 - 6
American Oil and Gas Reporter - December 2018 - 7
American Oil and Gas Reporter - December 2018 - 8
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