Energy claims trends 2018

Claims frequency in the oil and gas sector has been relatively consistent of late.  However, a number of large fire and explosion incidents, the return of powerful windstorms and the potential for cyber incidents continue to occupy companies' thoughts.

Recent storms in the US are a reminder of the sizable risk of natural catastrophe claims for the energy industry. Such events account for some of the sector’s largest exposures.

In September 2018, Hurricane Florence, for example, threatened gas producers and pipelines in the mid-Atlantic US states, as well as terminals on the east coast and oil and gas construction projects. On the other side of the world Chinese offshore oil and gas operations were forced to shut down and evacuate staff as Typhoon Mangkhut approached, while Typhoon Jebi disrupted oil shipments from refineries in Japan.

Up until 2017, severe storm activity had been somewhat subdued for a number of years. That benign period came to an end when Harvey, Irma and Maria (HIM) caused massive damage in the US and Caribbean, generating insured losses in excess of US$90bn. However, HIM turned out to be a near miss for the energy market, with claims not as significant as first feared. The upstream market suffered no large losses as the paths of the three storms avoided key offshore oil fields. On the flip side, the storms did affect the downstream market, causing damage to oil refineries in Texas, as well as terminal losses in the Caribbean.

The upstream market actually witnessed one of the most benign years for losses on record in 2017 (according to Willis1), with only a small number of operational large losses, including a significant offshore business interruption (BI) loss in Africa. In contrast, the downstream market experienced one of its worst years for claims in almost a decade. According to Willis, there were 13 losses in excess of US$100mn, of which four were Gulf of Mexico windstorm losses. While notable, hurricane losses were not among the largest claims of the year. A large refinery fire in the Middle East is expected to cost around $800mn, while fires at a North American oil sands facility and a European chemical plant are also expected to generate claims of around US$750mn and US$570mn.

2017 was also notable for the wide geographical spread of downstream losses, with major claims in the US, Europe and Africa. Given the global nature of the energy business and its exposure to natural catastrophes, claims from emerging markets are not unusual. However, there is a growing potential for large claims in emerging markets, with the increased investment in newer assets and the higher cost of repair in remote areas and in the absence of extensive infrastructure.

The trend of large losses in the downstream market continued in 2018, notably with a fire at a refinery in Wisconsin and an earthquake at a drilling facility in Papua New Guinea, some 560km north-west of the capital, Port Moresby. The loss is expected to result in a US$500mn+ claim for the insurance market. As the year progressed, there were also further large fire/explosion incidents at refineries in Canada, Germany and Saudi Arabia, meaning 2018 is expected to be another heavy loss year for the insurance market.

The competitive insurance market and the effect of the lower oil price have seen a gradual erosion of energy premiums, making large and mid-sized losses more material for insurers. Premiums in the downstream market in 2017, for example, were a little over US$2bn, dwarfed by losses in excess of US$5.5bn.

“The effect of market softening is now being felt by insurers. Up until last year, a number of relatively benign years for losses concealed the reductions in premium. What should be profitable years for insurers can easily mean large losses for the market,” says David Wilson, Energy Claims Specialist at AGCS.

The competitive market has also resulted in the negotiation of broader terms over the past five years, with implications for claims, explains Wilson. “Energy wordings are bespoke and the increase in requests for wider terms has had a direct impact on the size and frequency of claims. There has also been increasing pressure on insurers to pay claims with coverage issues.”

BI claims continue to increase relative to property damage losses, in part due to the increased purchasing of BI cover, which is more cost effective in current market conditions. As a result, energy insurers continue to see higher value BI claims, which are typically more complex to handle and by their nature can sometime take several years to settle.

Overall, the price of oil more than doubled between 2016 and 2018, albeit still well below its peak in 2014. Drilling and exploration activity has been depressed in recent years, however offshore construction activity is beginnng to pick up. The rise in activity is also likely to result in an increase in offshore construction property damage claims in around two to five years' time when projects reach the installation phase.

A higher oil price also has other implications, such as larger BI claims for oil producers in the upstream market. Conversely, higher prices translate to lower profits for refiners, which can mean lower value BI claims in the downstream market. 



As yet, the energy insurance market has not seen any significant losses triggered by a cyber event. However, the potential for cyber claims in the energy market is growing with changes to coverage, buying trends and the growing relevance of connected technology to energy companies.

And while the energy market may not have seen any reported significant cyber claims to date, other sectors have. For example, the WannaCry and NotPetya ransom malware attacks in 2017 caused widespread disruption for companies in the pharmaceutical, logistics, ports, shipping and manufacturing sectors.

Energy companies could suffer physical damage and BI from technical faults and cyber-attacks, as well as potential extortion and theft of intellectual property. Concern is greatest for systemic risks, where a cyber threat impacts multiple facilities and/or companies, such as a contagious malware attack that disrupts sites, rigs or refineries.

Cyber risks are likely to give rise to new types of claims while losses will test energy policies and claims handling. Cyber exclusions used in some energy markets have yet to be tested in the courts, while there are questions around how policies might respond to non-damage BI claims, much like last year’s global malware attacks. A cyber incident could shut down at a refinery for days, costing tens of millions of dollars in lost profits. However, BI insurance retentions and waiting periods may currently not capture such claims.

Insurers are running cyber loss scenarios and testing how policies might respond to cyber events. Cyber claims are likely to be complex and will require new claims handling and loss adjusting skills, in particular to investigate the cause of loss and understand the impact, explains Wilson.

“Cyber will be an increasing factor in energy claims. It’s only a matter of time,” says Wilson. “There is an increased risk with the potential for large claims and industry-wide loss events. Cover will develop as insurers respond to the changing risk profiles of energy companies and offer a wider range of cyber coverages, which will undoubtedly result in claims.”

Claims response and performance has become a much bigger focus for energy companies, who are now better able to monitor insurers’ claims efforts in this area. However, the energy insurance market has a good record of responding to claims, says Wilson.

“Energy companies are under financial pressure and firms are now more highly-leveraged. They require a quick response from insurers – we now see more demand for faster confirmation of cover. Insurers always work to settle and finalize claims quickly. We are constantly looking at how we can use new technology, such as drones and scanning equipment, to expedite the claims process and quantification of damage,” says Wilson.

“Transparency and access to information are essential to improving the claims process. With some clients, it is still the case that the first we know of an incident is when we read about it in the media.”


1. Energy Market Review 2018, Willis Towers Watson

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