ENERGY LIABILITY INSURANCE Mike Newsom Davis Head of International Liability Willis London
ENERGY LIABILITY INSURANCE Mike Newsom Davis Head of International Liability Willis London
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CONTENTS
Why is Liability important ?
Key Energy Liability Exposures
How much limit should I buy ?
Latin American Liability issues
State of the Liability Market
Conclusion
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WHY IS LIABILITY IMPORTANT ?
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ENERGY INSURANCE BY CLASS
Upstream Downstream Liability
Prem
ium
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ENERGY INSURANCE BY CLASS
Upstream Downstream Liability
Prem
ium
Justin Blackmore
Chris Dear
Mike Newsom Davis
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LIABILITY LOSSES CAN BE LARGER THAN PROPERTY LOSSES…
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MACONDO OIL WELL BLOWOUT
POTENTIAL LOSS AMOUNT Property Value of Transocean Rig : USD 560 m Potential Liability: USD 40 Billion est. Date of Loss: 20 April 2010
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AZF PLANT, TOULOUSE, FRANCE
LOSS AMOUNT Property/BI: USD 492 m Liability: USD 2,700 m est. (Liability policy limit: USD 700 m) • Insured: Total Elf Fina • Date: 21 Sept 2001 • Explosion of Ammonium Nitrate 30 people killed 2,240 wounded Extensive third party property damage
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LOSS AMOUNT
Property/BI: £ 208m (USD 0. 335 bln) Liability: £ 700m (USD 1.12 bln) • Insured: Total, Chevron/Texaco JV
• Date: 11 December 2005 • Vapour Cloud Explosion at Oil Storage depot
Extensive third party property damage and business interruption.
• 43 injured. No fatalities
BUNCEFIELD OIL TERMINAL, UK
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WHAT ARE MY KEY ENERGY LIABILITY EXPOSURES?
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POTENTIAL CATASTROPHE LIABILITY EXPOSURES
Public: • Explosion at Refinery or Storage facilities • Pollution from pipelines / wells • Gas pipeline explosion • Vessel damage at marine terminal Products: • Defective Fuel / Petrochem products Employers Liability: • Aggregation of employees on Oil Rigs / Mines Charterers Liability: • Unsafe port
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EXAMPLES OF MAJOR LIABILITY EXPOSURES:
PUBLIC LIABILITY
REFINERY EXPLOSION AMUAY, VENEZUELA
Insured: PDVSA
Loss Date: 25th August 2012
Retention: USD 30m
Potential Loss: USD 40m - 70m
Event details:
• UVCE event at Venezuela’s largest refinery
• Build-up of Olefins from a leaking pump created a vapour cloud that ignited.
• 48 people killed. More than 200 injured. More than 200 homes damaged
• Most of the dead were in buildings located outside the perimeter of the refinery but still within blast radius of liquefied-gas tanks
• Raises plant maintenance & design issues
LOSS AMOUNT Liability: USD 2 billion + • Insured: BP
• Date: 23 March 2005
• Vapour Cloud Explosion at the second
largest refinery in Texas.
• Overfilling of the raffinate splitter lead to vapour cloud, which was ignited by a contractors truck leading to extensive third party property damage and business interruption.
• 15 fatalities. 170 injured.
TEXAS CITY REFINERY TEXAS, USA
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PRODUCTS LIABILITY • Petrochemical company
manufactured Polyethylene pellets for blow moulding plastic containers
• Cracks found in storage tanks
made from the plastic
• Legal action lasting 6 years
• Potential products liability claim of USD 320m
POLLUTION LIABILITY: OIL PIPELINE
Insured: Enbridge Energy Partners
Date: 26 July 2010
Pipeline ruptured releasing 890,000 gallons of crude oil into the Kalamazoo river in Michigan, USA
Pollution Loss: USD 700 - 800 million
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EMPLOYERS LIABILITY
• Offshore Rigs are a classic Employers Liability aggregation exposure
• A total of 167 workers
died in the Piper Alpha disaster in 1988
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CHARTERERS LIABILITY
• Vessel Chartered to unload fuel at client’s terminal
• Fire occurred at terminal
during unloading process • Claim subject to US jurisdiction
• Charter party being sued for
USD 1 billion
• Even if not liable, potential to incur significant legal defence costs
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TERMINAL OPERATORS LIABILITY
• Potential for damage to a vessel during loading and unloading
• This is often the highest Liability exposure for an LNG operation
• Vessel values can reach USD 400m - USD 500m
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SOME LIABILITY LOSSES ARE LESS OBVIOUS..
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POLLUTION RESULTING FROM PIG STUCK IN PIPELINE
Standard Pig Intelligent Pig
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LESSONS?
Cover should be as wide as possible not just for key exposures Jurisdiction: Worldwide (To protect against US lawsuits) Geographical Limits: Worldwide (To cover exports, visits etc) Broad policy definitions (Personal Injury, Not Bodily injury) Purchase Sufficient Limit
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UMBRELLA Difference in Limits
Difference in Conditions
LIABILITY PROGRAM DESIGN
Marine Liability Offshore
E&P
Onshore Liability Employers
Liability Auto
Liability
Aviation Fuelling
Self Insured Retention
Lim
it of
Inde
mni
ty
Type of Cover
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BENCHMARKING BY REFINING CAPACITY
200
800
600
400
1000
<150k 150-300k 300-500k 500-1,000k >1,000k
Refining Capacity (BPD)
USD m
Liability Limit
Source: Ace Bermuda
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BENCHMARKING BY TURNOVER Account Situation Activity Business Description Turnover Limit (USD) Insured 1 Europe Utility Power 65,345,280,000 1,280,000,000 Insured 2 Europe Utility Power/Water 53,120,000,000 640,000,000 Insured 3 Europe / Worldwide Energy Petrochemical 8,611,840,000 640,000,000 Insured 4 South Africa Energy Petrochemical 8,291,700,000 600,000,000 Insured 5 Europe Energy Petrochemical 17,787,179,487 512,820,513 Insured 6 South America Energy Petrochemical 50,000,000,000 350,000,000 Insured 7 Australia Utility Power 357,000,000 300,000,000 Insured 8 South America Energy Petrochemical 6,243,000,000 250,000,000 Insured 9 Far East Energy LNG 2,200,000,000 247,500,000 Insured 10 Africa Energy LNG 2,090,000,000 200,000,000 Insured 11 Middle East Energy Petrochemical 477,287,000 200,000,000 Insured 12 Europe Energy Petrochemical 13,547,100,000 192,307,692 Insured 13 Middle East Energy Chemicals 422,488,000 150,000,000 Insured 14 Far East Utility Power 5,015,920,000 149,500,000 Insured 15 Europe Utility Power 241,999,770 127,000,000 Insured 16 Carribean Energy Petrochemical 3,462,853,000 125,000,000 Insured 17 Europe Energy Petrochemical 7,742,170,328 120,000,000 Insured 18 Middle East Energy Petrochemical 3,588,000,000 100,000,000 Insured 19 Middle East Energy Petrochemical 2,072,000,000 100,000,000 Insured 20 South America Energy Petrochemical 1,490,000,000 100,000,000 Insured 21 Middle East Energy Petrochemical 593,000,000 100,000,000 Insured 22 UK Utility Power 31,290,100,000 93,000,000 Insured 23 UK Utility Power 317,896,320 93,000,000 Insured 24 UK Utility Power 295,304,760 93,000,000 Insured 25 UK Utility Power 227,504,040 93,000,000 Insured 26 Russia Energy Petrochemical 1,500,000,000 75,000,000 Insured 27 Australia Utility Power 164,169,000 56,250,000 Insured 28 Middle East Energy Petrochemical 869,843,874 50,000,000 Insured 29 Phillipines Utility Power 227,678,000 50,000,000 Insured 30 Carribean Energy Chemicals 191,000,000 50,000,000 Insured 31 South America Energy Petrochemical 69,748,070 50,000,000 Insured 32 South America Utility Power 655,143,229 30,000,000 Insured 33 Romania Energy Petrochemical 1,355,000,000 25,000,000 Insured 34 Caribbean Utility Power 1,173,000,000 15,000,000
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LATIN AMERICAN LIABILITY ISSUES
Strict Liability (The Polluter Pays) eg: Force Majeur Liability in Bolivia
Daňos “Moral”/ Mental Anguish (Brazil, Chile)
Nationalisation of assets (Venezuela, Argentina)
Increasing Employers Liability (Chile)
Protectionist policies eg: local quotas, currency restrictions (Argentina, Brazil)
Recent Energy Losses
LATIN AMERICAN LIABILITY ISSUES A series of Latin American Energy Losses:
PDVSA: 2 losses in past year • Pollution from Parallel pipe break. Liability loss est: USD 60m • Amuay Refinery explosion. Liability Loss est: USD 40m - 70m
PEMEX: 3 explosions in the past month
= Increased underwriting focus on Maintenance Issues and Pipelines
= Aegis totally re-evaluating all Latin American pipeline exposures
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“LATIN LITIGATION OLYMPICS”
SILVER (MEDIUM) Colombia, Brazil, Mexico,
BRONZE (LOW) Peru, Bolivia, Uruguay, Paraguay
GOLD (HIGH) Argentina, Puerto Rico, Chile, Venezuela
LIABILITY MARKET REVIEW
Global Liability Capacity
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
US
D b
illion
s
1994199519961997199819992000200120022003200420052006200720082009201020112012
THEORY, REALISTIC, REALLY…
Onshore/Offshore Follow form
Capacity: $ 500 m
Realistic Onshore/Offshore
Capacity:
$ 800 million – $ 1.0 billion
Realistic Onshore Capacity:
$1.2 - 1.5 billion
Theoretical Capacity:
$ 2.5 billion
NB: Supply and Demand conditions operate: The greater the limit required, the greater the pressure on price, as the most economic capacity used up first.
LIABILITY MARKET OVERVIEW Total market capacity remains stable at USD 2.5 bln
This disguises significant capacity movements: • Excess Liability markets cutting back on line sizes significantly • A number of new entrants (Amlin, Catlin, WR Berkley, Mitsui)
No market changing liability losses
Market is still strongly segmented
Strong focus on quality of risk management information, particularly Pipelines and Fracking
Markets are watching aggregations much more closely
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WORLDS APART
Liability market conditions for International Onshore, North American and Offshore sectors
International Onshore Liability
North American Liability
Offshore Liability
ONSHORE LIABILITY
Market condition hard to generalise: Very much dependent on size and complexity of risk
Strong competition exists for small limit, non-complex business Complex and capacity driven risks have a different market dynamic:
• Some premium increases where exposures/throughputs have
significantly grown • Excess Bermuda/Dublin “Capacity Markets” seeking to drive price
increases
= Upwards price pressure for buyers of large limits
But generally relatively benign conditions (for Non US risks)
OFFSHORE LIABILITY
Offshore Energy Liability Rates continue to harden
Why?? Macondo was in April 2010
Full extent of losses from Macondo slow to feed through to the market Eg: Transocean’s full liability tower now likely to be blown (USD 1 bln)
Tom Bolt’s review of the Lloyds Energy liability market highlighted the “inadequacy” of Liability priced in Energy package programmes
Market capacity reduced: Aggregation with P&I clubs/Contractors/Other parties
Terms tightened (eg: First party removal of wreck, Scaling for interest)
CURRENT LIABILITY MARKET ISSUES
FRACKING
Fracking operations remain a market concern due to pollution and alleged earthquake causation issues
Liability markets are underwriting the risk rather than applying blanket exclusions
Coverage depends on quality of risk management: • How is waste water disposed of? • Quality of pipe casings • How many times is the well fracked? • New well or redrilling old well? • Nature and concentration of fracking fluid used
Hydraulic fracturing or “fracking” is a method of extracting natural gas that involves blasting underground shale rock with a cocktail of sand, water and chemicals
PIPELINES
Major losses have focused liability insurers on integrity issues: • Enbridge: Operational issues, pipeline integrity • PG&E: High Consequence Areas (HCA’s)
Scrutiny on:
• Age • Integrity • Risk mitigation measures • High Consequence Areas, Water crossings, environmentally
sensitive areas
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IN SUMMARY.. Liability catastrophe losses can be greater than property losses Liability losses are not always predictable Liability awards are growing Insurers placing greater focus on pipelines and maintenance issues in Latin America
Conclusions: • Ensure Limits and Coverage are sufficient (Benchmarking, Wording
analysis) • Comprehensive renewal information will pay dividends
BRAZILIAN PORTUGESE PROVERB:
“Um porco de crédito faz um bom inverno e uma mola ruim”
English translation:
A pig on credit makes a good winter and a bad spring
Risk managers translation:
Short terms savings lead to long term costs
Moral:
Never economise on Maintenance, Limits or Coverage
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MUITO OBRIGADO
MUCHAS GRACIAS