ESG: transforming energy’s risk landscape Energy Market Review 2020 Table of contents Energy Market Introduction ................................................................................................... 2 Review 2020 Part one – ESG risk management implications for the energy industry ESG, climate change and the energy risk landscape: a transformation in the making ...........................................................6 Enhancing your ESG response: the strategic role of the risk manager .......................................... 23 Market Capacity Figures ESG: an energy industry perspective The figures quoted in this Review are obtained from the Canadian oil sands ............................................................... 31 from individual insurers as part of an annual review conducted in January each year. They are solicited Part two – risk management issues from the insurance markets on the basis of securing Multi-risk optimisation: an approach their maximum theoretical capacity in US$ for any to hardening insurance markets ......................................................46 one risk. Although of course this capacity is offered to all buyers and their brokers, the individual capacity Geopolitical risk: dealing with Newton’s Third Law in the energy sector ......................................................... 51 figures for each insurer provided to us are confidential and remain the intellectual property of Willis Towers Drones: dangerous or beneficial? ....................................................57 Watson. Seeing the value: why accurate valuations are Willis Towers Watson Energy Loss Database critical for energy risk managers .....................................................61 All loss figures quoted are from our Willis Energy Loss Oil Insurance Limited: an excellent underwriting year ..........64 Database. We obtain loss figures for this database from a variety of market sources (including a range Part three – the Energy insurance markets in 2020 of loss adjusters), but we are unable to obtain final Convex’s Paul Brand: London’s still the place to adjusted claims figures due to client confidentiality. deal with complex energy risks........................................................68 The figures we therefore receive from our sources include both insured and uninsured losses. Zurich’s Ben Kinder: how to differentiate yourself in today’s Liability insurance market ...............................................73 Style Upstream: artificial management “floor” keeps Our Review uses a mixture of American and English rating levels stable .................................................................................. 78 spelling, depending on the nationality of the author concerned. We have used capital letters to describe Downstream: unenviable choices as various classes of insurance products and markets, the hardening continues .......................................................................91 but otherwise we have used lower case to describe Liabilities: the hard market has truly arrived ............................103 various parts of the energy industry itself. Construction & Engineering: unprecedented times ..............110 Abbreviations Terrorism & Political Violence: a shift in focus ......................... 113 The following abbreviations are used throughout this International round up: a centralisation Review: of underwriting authority .................................................................... 115 ESG Environmental Social Governance PD Physical Damage BI Business Interruption OEE Operators Extra Expense LNG Liquefied Natural Gas PMD Performance Management Directorate S&P Standard & Poor’s Introduction Welcome to our Energy Market Review for 2020 – and to could not be more significant, both now and in the future. Losses: the extraordinary run of benign loss years in a world that has seemingly been turned upside down. As I Upstream continues, with only three losses in excess write, the full impact of COVID-19 is now being felt across We have therefore dedicated the first part of the Review of US$100 million during 2019. Again, the Downstream the entire globe and all our thoughts are with our readers to the issue of Environmental Social Governance (ESG) market figures could hardly be more contrary; once again and their families as we collectively come to terms with and the risk management implications for the energy a significant number of losses over US$100 million were the full magnitude of what is upon us. industry. In my view, ESG is rapidly becoming the single recorded by our database for 2019, with one major loss most important business driver of the decade, not just significantly above US$1 billion. As societies adapt their ways of life to cope with this virus, for the energy industry but for business and commerce Rating levels: If it was not for the almost universal I’m sure you will understand that it is a little premature in general. Margaret-Ann Splawn, who is a climate policy insistence by insurer management that no reductions at this stage to comment on the long-term effects of finance and investment consultant, sets the scene with a can be countenanced by their underwriters, it is our view COVID-19 for either the insurance and energy industries. detailed analysis of how ESG is transforming the energy that the Upstream market would already be re-softening. However, I can advise that Willis Towers Watson has a industry risk landscape; our experts from the Willis As it is, rating increases are still very modest (2.5-5% on 1 special page on our website devoted to COVID-19 and I Research Network then show how energy risk managers average) compared to Downstream, with increases well would advise any of our readers to visit the site to find out have a vital strategic role to play in quantifying climate in excess of 20% for virtually every type of programme, all you need to know about our company’s position as the change risk, as well as improving their company’s ESG and significantly more for refinery and petrochemical weeks and months progress. footprint. Finally in this section we include an outstanding business. The Liability portfolios, both North America and article written by Michele Waters of Cenovus who sets International, have been similarly impacted. To cap it all, the energy industry is already reeling from an out how her company is responding to its own ESG oil price war which we very much hope will be short term challenges. Profitability: The Upstream market remains profitable in nature. The cost of crude has fallen to lows not seen for in overall terms, but we do have a couple of caveats: almost two decades as Russia and Saudi Arabia slashed From an energy insurance market perspective, there is premium income levels are still low by historical prices and ramped up production in a fight for market no denying that the last 12 months have been challenging standards, and certain sub-sectors of the Upstream share. There are now emerging signs of a price war ones for the energy industry and their brokers. The market such as Offshore Construction, have been hit by truce, as the OPEC+ producers agree to re-enter talks to underlying market dynamics which have led to today’s attritional losses. For Downstream and Liability insurers, stabilise production. hardening market conditions and which were outlined in their portfolios remain firmly in the red and the long road some detail in last year’s Review – a general centralisation back to profitability looks rocky indeed. Be that as it may, the effects of this price war on the of underwriting authority, a determination by senior insurer energy industry are obvious; reduced capital expenditure, management to generate change, significant loss levels – Finally, we are delighted that Convex’s Paul Brand and a reduction of exploration and production activities, lower have simply accentuated during the last 12 months. Zurich’s Ben Kinder have agreed to talk to us about refining margins, lower BI valuations. And, of course, this the challenges they both face in their respective senior will have a knock-on effect on premium income levels for However, it continues to be a tale of two markets. To sum underwriting roles and hope that their interviews in this an insurance market that remains unprofitable for most up: edition of the Review provide an opportunity for our lines of business other than Upstream, where even in this readers to gain a deeper insight into underwriters’ minds market premium income levels remain well below historic Capacity: once again the Upstream market has bucked at this challenging time in the market cycle. norms. the general market trend, as theoretical amounts are now at another record level, US$8.730 billion, from We hope you enjoy reading the Review, and as ever would This being said, there is no doubt the world will eventually US$8.100 billion in 2019. The reverse is true, however, welcome any feedback that you may have. recover from COVID-19 and the energy industry will for Downstream, where capacity has declined for the recover from the oil price war. But there is one issue that second successive year, down to US$5.978 billion from is here to stay on a permanent basis and that is climate last year’s US$6.428 billion. Moreover, these theoretical change, and the transformed risk landscape that now figures tell only half the story; insurers are increasingly confronts the energy industry. It’s our theme for this year, being forced to adhere to maximum percentage line because