FOCUS ON: Political Risks in a Commodity Downturn

Transcription

ENERGY
QUARTERLY NEWSLETTER | A JLT SPECIALTY LIMITED PUBLICATION | APRIL 2015
FOCUS ON:
Political Risks in a
Commodity Downturn
COMMODITY DOWNTURN MEANS POLITICAL RISKS UPTICK?
For developed and emerging economies alike, drops in energy capex have a severe
impact on economic stability.
20
15
17
18
JLTacademy Oil and
Gas Insurance and
Risk Management
Training Course
Oil Insurance Limited
(OIL) update
ISIL creates non-uniform
kidnap threat in Iraq
General State of the
MARKET OVERVIEW
We are pleased to provide our existing,
GENERAL BACKDROP
and potential, clients with our second
Energy insurance buyers entered the second quarter of 2015 with
the ability to mould their insurance spend to their budgetary aims.
Pricing has fallen across the board and the rating models which
underpin premium calculations, are having to be hastily re-engineered
to cope with the harsh new reality of extreme over capacity.
Energy Insurance quarterly newsletter
of 2015.
In addition to our regular features, in
this edition we have a focus on
Political Risks in a Commodity
Downturn (Political Risks Uptick?).
We hope that readers will find this
newsletter interesting and informative
and would welcome any feedback you
may have, positive or negative, which
you can email to:
john_cooper@jltgroup.com or pass on
to your usual JLT contacts.
We are now entering a period of insurer
speculation about small to medium sized
consolidation where the only strategy to
companies’ ability to survive without
selling an overly commoditised product is
M&A activity.
to reduce the number of access points
available to buyers in the hope that will
take away some of the excess heat from
the competitive environment. Catlin / XL,
These are in the main line of fire as the
surplus of capital tries to find a future
with decent returns.
Fairfax / BRIT and Partner Re / Axis with
The rapid scaling up of Berkshire
their announced hook-ups are, we
Hathaway Specialty Insurance around
If you are reading this in hard copy or
believe, the vanguard of this dash for
the globe probably best indicates the
have been forwarded it electronically,
enhanced critical mass.
major difficulty many insurers have, in
and would like to be added to our
mailing list, or you wish to unsubscribe
from our electronic mailing list, please
email: john_cooper@jltgroup.com.
Investment bankers who could make
nearly USD 50 million in fees from the
Axis / Partner Re merger alone will find it
in their own self-interest to encourage the
financial logic of mergers and buyouts.
Analysts are promoting the concept that
John Cooper
Senior Partner & Chief
Operating Officer, Energy
2 ENERGY | April 2015
to be relevant, insurers need to be of a
certain size, and that has created a lot of
that the previous market of last resort
has descended from its lofty perch to do
battle with them in the trenches of the
Specialty sector. The overwhelming
power and lack of emphasis on quarterly
reporting they bring makes this entry a
very dangerous new rival.
INSIDE...
UPSTREAM
The feast of upstream premium which
insurers have enjoyed up until the steep fall
2
GENERAL STATE
OF THE MARKET
OVERVIEW
5
RECENT QUOTES
6
MARKET MOVES/
PEOPLE IN
THE NEWS
7
WHAT’S NEW?
off in oil prices is now definitely turning into
a famine. The outlook is for a very parched
set of future results as drilling budgets,
sums insured, contractor day rates and
construction projects approvals are skittled
over by the reduction in oil price.
Hunkering down and protecting core
accounts has become the mantra of both
the dominant and run of the mill insurance
market players. In fact the only real
restraining factor in this particular insurance
theatre is the loyalty and long term
investment certain insureds’ have made in
their longstanding leaders and followers.
The sector continues to have a low level of
losses which is contributing to the
softening of terms and conditions.
Procurement cost saving pressures from
energy companies’ financial directors will
only intensify as the shake out from the
depressed oil price makes structural
changes in the exploration and production
sector imperative. Underwriters have
always been very keen to discuss the
concept of ‘payback’ post a claim with
their customers. Now they are forced to
have the inverse negotiation where energy
companies are grabbing a claw back
dividend (i.e. reduced prices) in light of the
highly profitable insurer results financed
through their premium outlays.
access to new income streams. Whilst the
underwriting community would no doubt
generally prefer the existing methods to
stay in place their over investment in
supplying insurance capital but retaining
growth targets has caused this threat to
the angst they produce will drive
substantial change in due course.
The brutal fight by insurers to not be a
clients even more leverage in securing a
of its long term insurers and instead
good deal in any transaction.
bespoke constructing of co-insurance
panels by the broker is beginning to fray
and could be in danger of being replaced
NEWS SNIPPETS
the status quo. Signing down issues and
major E&P company to drop the majority
telling dynamic. The long practised art of
8
BRIEFLY
conflicts plague the market right now and
loser in the Signing Down Wars will give
a smaller group of strategic carriers is a
MARKET DEVELOPMENTS
may find auctions are their only way to get
The very recent high profile decision of a
concentrate its risk transfer amongst
NEW PRODUCTS AND
The good times, for now, are definitely
over in the upstream sector for both
insureds and insurance capital providers.
10
UPDATE ON
LOSSES
11
SECURITY RATING
UPDATE
12
LEGAL ROUNDUP
We believe it will be a much changed
environment that will be reported in a
year’s time.
by a less personalized auction. If markets
hungry for premium income are shut out
from existing business they desire by the
current distribution model systems they
www.jltspecialty.com
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3
GENERAL STATE OF THE MARKET OVERVIEW
ENERGY CASUALTY
The casualty market continues to be
stable in terms of capacity but is now
starting to show signs of a pressure
building towards softening, as
packages markets are becoming
more flexible over casualty limits
within package, to maintain their
positions on the first party part of the
book where competition is fierce.
Insureds suffering a downturn in
activity due to oil prices can expect
some relief as casualty underwriters
accept that reduced exposures
warrant commensurate reductions
in premium. In the US market,
capacity is continuing to grow that
is willing to offer E&P operators
and their joint-venture partners
‘for interest’ limits, despite the
‘clash’ threat. We now estimate
there is around USD 200 million on
this basis.
MIDSTREAM / DOWNSTREAM ENERGY
As anticipated rates continue to be impacted by oversupply of capacity and recent
M&A activity indicates that further scaling and demand for market share will continue to
marginalise a number of smaller providers. The recent entry of fresh capacity into the
market facilitates the ability of brokers to restructure programs and deliver increased
value to customers. Current global capacity available to large risks stands well
beyond requirements on all but the most challenging Natural Catastrophe exposures.
Against this, buyer appetite for limits has been seen to be reducing as commodity
prices bite and earnings reduce.
Whilst Insurers are publishing impressive multi-line results for the 2014 fiscal period
the underlying results within Energy Downstream / Midstream are ordinary, which is
difficult for underwriters to make known to buyers. First Quarter market losses in the
sector are neutral at this time with insurable reserves currently running on top of
USD 500 million and subject to a narrow claim base. In terms of prospects for the year
the market is poorly positioned in premium cover to cope with any real frequency of
Natural Catastrophe losses above the expected level of standard peril losses.
As such individual strategies will be more important than ever to sustain portfolios.
It can also be expected that a spiking of large losses without frequency in 2015 will
not cause a material hardening of rates into 2016.
Resultant Physical Damage and Business Interruption from Cyber-attack remains
topical. In the current market environment there is a growing acceptance by insurers
that it is indefensible to seek exclusion of resultant damage from a peril covered by
an All Risk policy as a result of a Cyber event. Customers feel that purchasing an All
Risk policy with a CL380 clause potentially negates coverage that is fundamental to
the risk transfer proposition. Whereas the market is not there yet in terms of a durable
solution it has become clear that there is no appetite from customers for a
stand-alone product.
RECENT QUOTES
ENERGY MARINE
EXPOSURES
The offshore craft and work boat Hull
market remains generally very
competitive with no sign of market
conditions altering. The European
markets remain the predominant
underwriting sphere for this class whilst
the Far East markets focus on
RECENT
QUOTES
The following are ‘sound bites’ taken from speeches,
statements or articles by prominent market figures about the
insurance market and whilst we have tried not to take their
words out of context, the excerpt may not be the entire speech
or article.
aggressively chasing the more
‘traditional’ Blue water Hull business on
an increasingly commoditised basis.
This means that service levels remain
high for offshore / Brown and Green
water business and increasingly
competitive deals can be sought from
first class underwriting providers, at a
time when charter rates are going
through significant downward fluctuations.
Where previously most fleets were
placed on a ‘cancelling returns only’
basis, Underwriters are now far more
sympathetic to pre-agreed lay-up rating
and / or overall increased fleet reductions
based on vessel utilisation.
Marine liability markets are continuing to
show an overall softening simply due to
the slow transfer of capacity from the
Hull market to the liability sector,
ANDREW HORTON, CHIEF EXECUTIVE
OF BEAZLEY
I’ve heard people talk about this prolonged soft market,
but we had our best results ever in 2013, an excellent
result in 2012 and the market is projecting very good
results for 2014 as well. That doesn’t feel like a soft
market. If it is, I’m happy to stay in it forever. I’m not a
great believer in the idea the industry will make a loss,
everything will be rosy again and rates will go up. The
industry is in great health, with very strong balance
sheets and good profitability, so it’s not surprising the
rating environment is on its way down. In the absence of
major industry losses, it may not be until carriers start to
fail that the pricing environment turns the corner. The
insurance industry knows it is driving into a wall but
doesn’t do anything about it; everyone knows profit is
going down, but we don’t move until we hit the wall.
Perhaps we need a few carriers to incur losses and for
capacity to withdraw from the market for it to move.
however, the trend suggests that this
combined competitiveness and larger
available capacity is being used by many
clients to obtain significantly higher limits
and / or increased breadth of coverage
for the same premium spend. 
STEPHEN CATLIN, CHIEF EXECUTIVE
OF CATLIN
I’ve been through a number of cycles. While there are
definite headwinds, this is not a free fall situation. The oil
price situation has not yet impacted the energy market
but we are bound to feel it. If oil prices stay where they
are today, it will impact the market negatively. This is not
an area of potential growth for the foreseeable future.
If there isn’t further consolidation, there are some people
who are going die on the vine because they’re going to
get too small... they won't be able to cover their
expenses and they’ll cease to be relevant. 
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5
MARKET MOVES / PEOPLE IN THE NEWS
MARKET MOVES /
PEOPLE IN THE NEWS
Nick Wootton has left Amlin and
joined HCC.
Simon Swallow is to replace Charles Hume as
Chief Executive of the Shipowners’ P&I Club.
James Langdon has been promoted to global
head of upstream energy at Ace.
Zoe Thompson has joined QBE’s onshore Energy
team from CV Starr.
Vicky Kent has left Arch and joined Mitsui.
The energy, property and construction segment will
be headed by Doug Howat.
Dorian Grey has been appointed permanent
chairman of AIG Oil Rig.
Tim Burrows has been employed as a consultant
by Apollo to advise on their plans and strategies.
Simon Neale has left Guy Carpenter and joined
Skuld’s Lloyd’s Syndicate as class underwriter for
offshore energy. After a transition period he will
Suzanne Pardesi has now started at Millennium
replace James Leeper, who stepped in as interim
(previously XL).
head of offshore energy in October.
Jo Smart is leaving Torus to join Millennium
Peta Killian, Hull Underwriter from Brit, has left to
(expected to start early April).
re-join Amlin where she started her career.
Chris Walker of W. R. Berkley has been voted the
Martin Clarke, head of Energy Claims at Catlin, has
Chairman of the Joint Rig Committee replacing Paul
resigned to go back to Zurich where he was before
Dawson who has stood down from the committee.
a stint at Marsh.
Dawson’s committee place is taken up by
Richard Fricker of Axis.
Gregory Thomas is taking a new role with Skuld’s
Executive Management with Christofer Kobro,
taking over full responsibility for running
Skuld Offshore.
Paul Kelley previously of AIG has joined
Berkshire Hathaway.
Jeremy Smart of Aegis’ International Casualty team
is moving to Hardy.
Holley Pizzey has left R & Q Marine Services Ltd to
join the Royal Sun Alliance Marine Team.
It has been confirmed XL / Catlin senior
management will include the following
appointments: Mike McGavick (XL) CEO,
Stephen Catlin (Catlin) Executive Deputy Chairman
(who has made a three-year hard commitment to
this role and a soft commitment for a further two
years), Paul Brand (Catlin) Head of the Insurance
business, Greg Hendrick (XL) CEO of Reinsurance
and Paul Jardine (Catlin) Chief Experience Officer.
Paul Latimer, Construction underwriter at Catlin,
has resigned to go to Travelers syndicate to start a
new construction book.
Paula Mackenzie has left Aegis to join QBE’s
international Casualty team. 
WHAT’S NEW?
WHAT’S NEW?
NEW PRODUCTS AND MARKET DEVELOPMENTS
Global Special Risks (GSR) have a
Underwriters at Lloyd's of London.
Axis Capital and PartnerRe have
new binding authority for the
The package will be underwritten in
announced a USD 11 billion
Upstream Solutions Energy Package,
Houston, Texas by GSR's Chief
“merger of equals” to create a
which provides products for oil and
Underwriting Officer, Thomas Morelli.
company with combined gross
gas operators and non-operators of
Lines of coverage available in the new
premiums in excess of
North American-based exploration
package include Control of Well (limits
USD 10 billion and total capital of
and production companies. This new
up to USD 50 million), Primary General
more than USD 14 billion. It will also
authority is the result of GSR's long-
Liability (limits up to USD 1 million,
create a top-five ranking global
standing relationships with the
USD 2 million aggregate), Umbrella
reinsurer with a combined top line
London insurance market and is
(limits up to USD 10 million) and
of USD 7 billion.
backed by some of the most
Property (limits up to USD 20 million).
experienced oil, gas and energy
Fairfax Financial Holdings, the
Japan’s Sompo Japan Nipponkoa is planning to become the largest shareholder
Canadian owner of Advent and
in Scor, by building a 15% stake in the French insurer. It is understood Sompo
Newline, has agreed a deal to buy
made an attempt to acquire Brit, but was outbid by Canadian insurance holdings
the Lloyd’s insurer Brit for
company Fairfax Financial.
GBP 1.22 billion. Fairfax Financial
CEO Prem Watsa however explicitly
GCube initially advised they would be pulling out of biofuels, since then however
ruled out merging Brit Insurance
we have worked with supporting insurers to demonstrate there is a viable way of
with the company’s existing Lloyd’s
writing this business both through selective underwriting and improved terms for
syndicate saying “Both Advent and
the market. Key markets have now accepted this and supported a new GCube
Newline will continue to be run
Biofuels facility allowing them to stay in this sector.
independently of Brit,” on an
analysts conference call.
Echelon Claims Consultants has changed its regulatory status and is no longer
operating as a separate limited company, but as a brand of JLT Specialty Limited.
|
7
BRIEFLY
BRIEFLY
Allianz’s fourth Risk Barometer report shows
Business interruption (BI) and supply chain,
natural catastrophes and fire / explosion as the
major risks which occupy the attention of
companies at the start of 2015. The report
surveys over 500 risk managers and corporate
insurance experts from more than 40 countries.
The top 10 risks are as follows:
What’S neW?
2014
Rank
Trend
1
Business interruption and supply chain
46%
1 (43%)
–
2
Natural catastrophes
30%
2 (33%)
–
Pool Re, the UK government-
3
Fire / explosion
27%
3 (24%)
–
backed terrorism mutual, has
4
Changes in legislation and regulation
18%
4 (21%)
–
bought its first ever private
5
Cyber crime, IT failures, espionage, data breaches
17%
8 (12%)
▲
6
Loss of reputation or brand value (e.g. from social media)
16%
6 (15%)
–
7
Market stagnation or decline
15%
5 (19%)
▼
year deal is said to have been
8
Intensified competition
13%
7 (14%)
placed in a single layer lead by
9
Political / social upheaval, war
11%
18 (4%)
Munich Re and is written on the
10
Theft, fraud and corruption
9%
9 (10%)
retrocessional protection providing
GBP 1.8 billion of cover excess of a
GBP 500 million retention. The three
▼
▲
▼
same terms and conditions as the
underlying Pool Re policies,
Source: Allianz Risk Barometer 2015, Allianz Global Corporate & Specialty
including nuclear, chemical,
biological and radiological risk.
The full report can be downloaded from: www.agcs.allianz.com/insights/white-
Whilst it is standard government
papers-and-case-studies/risk-barometer-2015/
policy not to purchase
(re)insurance, the terrorism mutual
is said to have presented such a
A World Economic Forum
strong case that an exception could
report identifies the biggest
be made.
risks facing the world, and
the important role insurance
can play in mitigating them.
International conflict is the
Charles Taylor has now secured
biggest threat to world
the necessary approvals from the
stability in the next ten
Financial Conduct Authority and the
years, according to the
Prudential Regulation Authority for
2015 edition of the Global
the launch of its Lloyd’s managing
Risks report published by
agency, Charles Taylor Managing
the World Economic Forum (WEF). The annual report, which condenses the views of
Agency, which went life with the
900 experts, was released in advance of the World Economic Forum meeting in Davos
Standard Club Syndicate 1884 from
in January.
1 April. 
BRIEFLY
Interstate conflict
with regional
consequences –
Munich Re’s review of 2104 Natural Catastrophe losses concluded the following:
•
or asymmetric
was insured.
war – is the
number one
Overall losses from natural catastrophes totalled USD 110 billion (previous year
USD 140 billion), of which roughly USD 31 billion (previous year USD 39 billion)
•
The loss amounts were well below the inflation-adjusted average values of the
most likely risk
past ten years (overall losses: USD 190 billion, insured losses: USD 58 billion),
and the fourth
and also below the average values of the past 30 years (USD 130 billion /
most serious in
USD 33 billion).
terms of impact. Extreme weather events
and climate change is ranked in second
•
place in terms of likelihood, followed by
56,000 respectively). The figure was roughly on par with that of 1984. The most
failure of national governance systems,
severe natural catastrophe in these terms was the flooding in India and Pakistan
state collapse and high unemployment.
in September, which caused 665 deaths.
In terms of potential impact, water crises
is rated the greatest risk facing the world.
At 7,700, the number of fatalities was much lower than in 2013 (21,000) and
also well below the average figures of the past ten and 30 years (97,000 and
•
The other high impact risks include
In total, 980 loss-related natural catastrophes were registered, a much higher
number than the average of the last ten and 30 years (830 and 640). Broader
disease pandemics, weapons of mass
documentation is likely to play an important role in this context, since, particularly
destruction and failure of climate
in years with low losses; small events receive greater attention than was usual in
change adaptation.
the past.
Three of the top ten risks in terms of
impact over the next ten years are
•
The costliest natural catastrophe of the year was Cyclone Hudhud, with an overall
loss of USD 7 billion. The costliest natural catastrophe for the insurance industry
environmental risks: water crises, failure
was a winter storm with heavy snowfalls in Japan, which caused insured losses of
of climate-change adaptation as well as
USD 3.1 billion.
biodiversity loss. The WEF report
stresses the cascading effects that could
The full report can be downloaded from www.Munichre.com. 
result from the interconnection of risks.
Increasing urbanisation is a danger for
different reasons, for example, the report
says, noting that by 2025 two-thirds of
the world’s population will live in cities.
Too rapid urbanisation will touch all
risks, exposing vulnerabilities to do
with pandemic disease, infrastructure
and utilities. Also, many of tomorrow’s
mega cities will be located in coastal
areas that are prone to flooding and in
the so called ‘ring of fire’ belt of
earthquake epicentres. The full report can
be downloaded from
www.weforum.org/reports/global-risksreport-2015
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9
UPDATE ON LOSSES
UPDATE ON LOSSES
2015 Energy losses of USD 10 million or more that we are aware of
at the time of writing are as follows.
We also show the total of all claims under USD 10 million (with a
minimum claim USD 1 million) to give an overall total for the year
so far.
2015 Major Upstream Energy Losses (In Excess of USD 10 million Ground-Up)
January
Blowout
Russian Land Rig
USD 11,540,000
February
Fire
Gulf Of Mexico Semi-sub Rig
USD 20,000,000
To Date
Total under USD 10,000,000
USD 11,500,000
Total (known) for year (excess of USD 1 million)
USD 43,040,000
Source: Willis Energy Loss Database / JLT market knowledge (as of 18 March 2015)
Figures shown as “(est)” are estimates from various press or market sources.
Figures do not take into account the effect of any self-insured retention, deductible or policy limit and therefore losses are not necessarily those which insurance
markets have actually suffered but give a rough guide to the overall magnitude of industry loss.
*Reports would suggest in excess of USD 10 million
2015 Major Downstream / Midstream Energy Losses (In Excess of USD 10 million Ground-Up)
February
Fire & Explosion
To Date
Californian Refinery
*
USD 1,500,000
USD 1,500,000
Figures shown as “(est)” are estimates from various press or market sources.
2015 Major Power Losses (In Excess of USD 10 million Ground-Up)
January
Faulty work / operator error
To Date
Utah Gas Power Plant
USD 30,000,000
USD NIL
USD 30,00,000
Figures shown as "(est)" are estimates from various press or market sources.
SECURITY RATING CHANGES
SECURITY RATING CHANGES
The following rating changes affecting Insurers
writing Energy business have occurred in the
past three months or so.
Insurers Name
Previous Rating
FM Insurance
Company
S&P BBB
Generali
S&P BBB+
Ingosstrakh Insurance
S&P BBBCompany (Russia)
Up/Downgrade
▲
Withdrawn
(at their request)*
▼
New Rating
Effective Date
S&P A+
20 January 2015
Not Rated
13 February 2015
S&P BB+
6 March 2015
*Generali retain their AM Best ‘A’ Rating
Note: The above are rating moves we thought warrant mention but are not necessarily all rating
changes that have occurred in the past three months effecting Insurers that write Energy business and
do not include changes in individual Lloyd’s syndicate’s rating (as Lloyd’s as a whole continues to be
rated as an overall entity). 
|
11
LEGAL ROUNDUP
ENGLISH COMMERCIAL
COURT RULES IN FAVOUR
OF VESSEL OWNERS ON
THE CONSTRUCTION OF
AN EXCLUSION CLAUSE
IN THE INSTITUTE WAR
AND STRIKES CLAUSES
HULL 1/10/1983
In 2007, after the B Atlantic
underwriters accepted the vessel was
instead asserted that the proximate
a constructive total loss, they rejected
cause of the vessel’s detention was the
the claim on the basis that the loss
infringement of customs regulations, an
arose “by reason of infringement of
express excluded peril.
any customs...regulations reason”,
an express excluded peril under
clause 4.1.5 of the Institute War &
Strikes Clauses.
Persuaded by the Court of Appeal’s
approach in Handelsbanken v
Dandridge [2002] (“The Aliza Glacial”),
when interpreting a different exclusion
Although the master and second officer
in the Institute War & Strikes Clauses,
were convicted, it was accepted by
the court held that to apply clause
had completed loading of
underwriters that the owners and crew
4.1.5 to every claim in which a
a cargo of coal in
were not, in fact, involved in the attempt
customs infringement arose “would not
Venezuela for discharge in
Italy, a customary underwater
to smuggle drugs out of Venezuela.
accord with the spirit of the policy”,
Further, underwriters accepted that the
and concluded that as a matter of
inspection of its hull was undertaken.
acts of drug smugglers could, in
construction, the customs infringement
Three bags strapped to the hull
principle, fall within the scope of clause
exclusion could not be applied where it
containing 132kg of cocaine were
1.5 of Institute War & Strikes Clauses,
is brought about by the malicious act of
discovered and the vessel was
which provides that “loss or damage to
a third party. Accordingly, underwriters
immediately detained by the authorities
the Vessel caused by...any person
were not therefore entitled to reject the
and the crew arrested. The court in
acting maliciously” is covered.
vessel's owner's claim under the policy.
Venezuela proceeded to charge the
However, underwriters argued that the
Master and Second Officer with
actions of the drug traffickers were not
complicity in the drug smuggling and,
the proximate cause of the loss and
pursuant to local law, ordered the
It remains to be seen whether
underwriters will seek to appeal
the judgment.
continuation of the vessel’s detention
for an unspecified period. The vessel
was abandoned by its owners two
years later and was confiscated by the
Venezuelan authorities pursuant to a
court order. The vessel’s owners
proceeded to claim against their war
risks insurance policy, which
incorporated the Institute War & Strikes
Clauses as amended. However, while
LEGAL ROUNDUP
LEGAL ROUNDUP
UK INSURANCE ACT
RECEIVES ROYAL ASSENT
The UK Insurance Act,
which received royal
assent in January, signals
the most significant change
to English insurance contract law in
over 100 years. The Act, which will
come into force in August 2016
following an 18-month lead in period,
aims to address the perceived
current imbalance in the law in favour
of insurers.
Under the new Act, the insured has a
duty to make a “fair presentation of the
risk” to the insurer. The insured must
the insurer will still be entitled to
not rely on the insured’s breach of a
either (i) disclose every material
avoid the policy if it can show that
term to avoid paying that claim if the
circumstance which it knows or ought
had it received a fair presentation of
breach could not have increased the
•
to know (which is based on the legal
the risk, it would not have entered
risk of the loss. This applies to
position as codified in the Marine
into the contract; but
breaches of warranties and other terms
Insurance Act 1906 (MIA 1906); or (ii)
failing that, give the insurer sufficient
•
if the insurer shows that it would
which would tend to reduce the risk of
loss of a particular kind or loss at a
information to put a prudent insurer
have entered into the contract but
on notice that it needs to make further
on different terms, then the insurer
enquiries for the purpose of revealing
may treat the policy as having
It was recognised that some provisions
those material circumstances.
included those different terms from
of the Act may not be suitable for all
particular location or time.
Another change from the existing law
the outset. This could result in the
markets and commercial parties. The Act,
is intended to combat the perceived
addition of warranties or exclusions
therefore, allows parties to non-
risk of an insurer taking a passive role
which affect the recoverability of
consumer insurance contracts to
in the disclosure process and only
claims; or
contract out of the default regime (with
asking questions when the insured
makes a claim under the policy.
Under the MIA 1906, the sole remedy
•
if the insurer would have entered
into the contract but only at a
higher premium, the insurer may
for a breach of the duty of good faith
reduce the amount to be paid on a
is avoidance of the policy. It was
claim proportionately (proportionate
recognised that in most instances this
to the percentage of under charged
was a draconian remedy which did not
premium not by the under charged
adequately distinguish between
premium amount).
innocent and deliberate or reckless
mistakes. The new Act provides for a
range of proportionate remedies.
Unless the breach is deliberate or
reckless (in which case the remedy of
avoidance would still be available), the
onus is on the insurer to show what it
would have done had it received a fair
presentation of the risk:
Under the MIA1906 Act, a breach of
warranty discharges the insurer’s
liability under the contract in its entirety,
even if the breach is trivial or does not
in any way relate to the insured's loss.
Under the new Act, insurers must show a
breach of warranty is related to the loss.
The Act provides that an insurer may
the exception of the prohibition on
“basis of the contract” clauses) as long
as any “disadvantageous term” (which
puts an insured in a worse position
than that under the default regime)
meets the “transparency requirements”.
Insureds will need to consider how best
to structure underwriting presentations
going forward so that they provide a
“fair presentation of the risk”. The Law
Commission’s guidance notes
encourage the use of structuring,
indexing and signposting in order to
highlight the key information to
underwriters, which will be particularly
important when a large volume of data is
provided in support of the submission.
|
13
LEGAL ROUNDUP
THE NAIROBI
INTERNATIONAL
CONVENTION ON THE
REMOVAL OF WRECKS
The Nairobi International
Convention on the
Removal of Wrecks, 2007
will enter into force on
14 April 2015. Registered owners of
ships of 300 gross tonnage and over
registered in a state party or leaving /
entering a port in the territory of a State
The Wreck Removal Convention closely
Cards”; to enable Members to obtain
follows the strict liability and insurance
Certificates from States Parties.
provisions which currently apply to oil
Some Lloyd’s syndicates are now also
tankers under the Civil Liability
signing certificates.
Convention (CLC) and ships of 1,000
gross tonnage and over under the
Bunker Convention.
Following decisions taken by all Club
States party to the Convention (as at
31 March 2015) are: Antigua and
Barbuda ,Bulgaria, Congo, Cook
Islands, Denmark, Germany, India, Iran
Boards in the International Group, it
(Islamic Republic of), Liberia, Malaysia,
has been agreed that International
Marshall Islands, Morocco, Nigeria,
Group Clubs will issue the required
Palau, Tuvalu and the United Kingdom
Wreck Removal Convention “Blue
(plus Malta from 18 April).
UK COURT RULES ON
‘PRODUCT’ DEFINITION
UNDER A GENERAL
LIABILITY POLICY
the claim because the foundations for
party will need insurance cover
arrangements which meet the
requirements of the Convention.
The Convention provides a strict
liability, compensation and compulsory
insurance regime for States affected by
a maritime casualty. It makes the
registered owner of a ship liable for
locating, marking and removing a
wreck deemed to be a hazard in a
State’s Convention area.
A UK Court of Appeal
case (Aspen v Adana),
over a crane tower that
toppled over causing
damage in the region of GBP 23 million,
has ruled that concrete foundations
are a “product”.
The policy wording said: ‘Underwriters
will indemnify the insured against all
sums which the insured becomes
legally liable to pay for damages and
claimants’ costs and expenses arising
out of during the period of insurance in
connection with the business and
caused by any product.’
Aspen claimed that under the public
liability policy it was not required to pay
the crane that Adana had constructed
could not be considered a ‘product’.
The Court of Appeal however found
that Adana had provided and installed
a product in the form of metal bars that
were used to strengthen the
foundations for the crane. The Court of
Appeal judge found that it did not
make commercial sense to rule that
Adana had not provided a product.
The law firm representing the claimant
commented that this ruling demonstrates
that the courts are prepared to construe
‘product’ so as to give it commercial
sense, even if it is defined in the policy
and are reluctant to construe
exclusions in a way that would lead to
a commercial nonsense and not reflect
the parties’ intentions. 
JLTACADEMY
JLTACADEMY
OIL AND GAS INSURANCE
AND RISK MANAGEMENT
TRAINING COURSE
JLT has been delivering Energy Insurance and Risk Management
Training Courses since 2001.
This summer, they are offering two courses focussing on:
•
Upstream Oil & Gas
•
Downstream Oil & Gas
The courses include presentations from JLT experts as well as from specialist guest
speakers representing underwriters, loss adjusters, risk engineers, lawyers and risk /
insurance managers.
In addition to informative presentations, delegates will participate in workshops and
tasks, enabling them to apply newly gained knowledge to potential risk scenarios.
In order to allow the most interactive environment for discussion and debate,
there is a strict limit on the number of delegates on each course.
By attending either course delegates will:
•
Gain a deeper understanding of Upstream or Downstream
Oil & Gas insurances
•
Learn about the role of the broker in structuring and placing
energy insurance risks
•
Increase their understanding of the international energy
insurance market
•
Gain knowledge on how an energy risk is underwritten and
the background to brokers’ requests and advice
•
Become more familiar with:
–
specific wordings
–
the claims handling process
In construction and operational energy risks
•
•
Hear first-hand experiences from JLT and external energy insurance specialists
Have the opportunity to network with peers from around the world, exchanging
knowledge and experience.
|
15
JLTACADEMY
20
15
JLTA
CAD
E MY
UPSTREAM COURSE CONTENT
Upstream operating insurances including property, control
FEE
P RO
SPE
CTU
S
Upstr
ea
Down m Oil &
Gas
strea
and
m Oi
Risk
l&
Mana
geme Gas Ins
uranc
nt Tra
e an
ining
LOND
d
Cours
ON
SUMM
es
ER CO
6 – 10
URSE
July
S
2015
1 Week – GBP 1,950 (+ VAT
of well, third party liabilities and package insurances
•
•
where applicable).
This charge covers all course
Offshore construction insurances
material, refreshments on each of
Role of the Marine Warranty Surveyor
•
Global insurance markets for upstream risks
•
Claims handling, procedures and case studies
the course days and lunches
Monday to Thursday.
Travel, accommodation and other
expenses are borne by the delegates.
•
Interactive claims exercise
•
Interactive course overview task.
WHO SHOULD ATTEND?
Our courses are designed for those working within risk and
DOWNSTREAM COURSE CONTENT
insurance in Upstream and Downstream oil and gas companies,
Operating insurances of refining and petrochemical operations
brokers, insurers or reinsurers involved in the handling of oil and
including property damage, machinery breakdown, business
gas risks, and anyone involved in the insurance aspects of oil &
interruption and third-party liabilities
gas projects.
•
The structure of a policy wording
Delegates require a good understanding of English in order to
participate in the lectures and interactive sessions.
•
Global insurance markets for refining and petrochemical
operations
•
Risk engineering, practice the approach from insurance
perspective and case studies
•
Onshore construction insurances
•
Claims handling, procedures and case studies
•
Interactive claims exercise
•
Interactive course overview task.
Both courses includes an overview of the regulatory framework
in which insurance placements are effected in the London
market, plus a tour of Lloyd’s of London.
Where appropriate, some sessions will be run jointly across the
Upstream and Downstream course.
COURSE DATES
Monday 6 July 2015 at 08:30 to Friday 10 July 2015 at 13:30.
Apart from the above, daily sessions will usually start at 09:30
and end at 17:30.
There will be a welcome reception after the session ends on
Monday and a course dinner on Wednesday.
VENUE
The course will be held in the heart of the insurance district in
the City of London’s ‘Square Mile’. This allows access to
experts in JLT and the wider insurance community.
HOW TO APPLY
Participation in either course is by invitation only and places
are limited.
Register your interest online at
www.jltgroup.com/energyacademy15/ 
OIL INSURANCE LIMITED (OIL) UPDATE
OIL INSURANCE LIMITED (OIL)
UPDATE
JLT Specialty has produced a new guide to
Oil Insurance Limited (OIL). Please contact your usual
JLT contact for a copy, or visit www.jltspecialty.com.
to download a copy.
OIL TECHNICAL
ACCREDITATION NOW
OPEN TO OIL WRAP /
EXCESS INSURERS
For those that work on OIL on a regular
basis and want to further understand
the workings of OIL and its rating
About OIL
model, they could sit the Advanced
OIL is a Bermuda based Energy
exam (in addition to the Basic exam).
Industry Mutual that insures over
In an effort to advance the knowledge of
The Advanced exam includes six case
USD 2.8 trillion dollars of global
OIL amongst the insurers who provide
study questions. The final advanced
energy assets for more than fifty
wrap coverages and / or other follow
exam should take one to two hours to
members with property limits up to
form capacity to its members, OIL have
complete. (Completion of the advanced
USD 400 million totalling more than
opened its online training course ‘OIL
version is the only way a person can be
USD 19 billion in total A- rated
Technical Accreditation’ (OTA) to such
certified to have passed the OTA and to
property capacity. Members are
insurers (visit www.OIL.bm to register).
receive their OTA Certificate.)
medium to large sized public and
private energy companies with at
The OTA is comprised of four separate
least USD 1 billion in physical
and distinct learning modules with
OTA SITE UPGRADE
embedded videos to support this unique
OIL have advised their OTA website is
learning experience along with a final
grade rating or equivalent.
being upgraded to reflect a new look
Products offered include Property
property assets and an investment
exam to attain a professional
and feel. All current user information will
accreditation (and OTA certificate).
(Physical Damage), Windstorm,
be maintained and carried over to the
Non Gradual Pollution, Control of
Registrants are now able to choose
new site. During this process, users can
between a Basic or Advanced exam, a
Well, Terrorism (including Cyber
continue to log into the existing OTA
new feature in the OTA. This site will also
Terrorism), Construction and Cargo.
portal (via the OIL website) and register,
serve as a permanent reference point
The industry sectors that OIL
take exams etc. OIL have said they will
enabling graduates the opportunity to
protects include Offshore and
keep users informed of the progress
access relevant OIL materials for their
Onshore Exploration & Production,
and any planned ‘down times’, if any.
continued use.
Refining and Marketing,
OIL are aiming to have the new site up
Petrochemicals, Mining, Pipelines,
and running during the first week of
Electric Utilities and other related
April 2015.
energy business sectors.
To date, over 100 member employees,
close to 500 energy insurance brokers,
several insurers and several dozen
prospects and consultants have
2015 AGM
successfully completed the OTA.
At their March AGM OIL declared a
The final exam is structured into a ‘Basic’
dividend in an aggregate amount of
solid financial condition. After the AGM
or ‘Advanced’ exam. The Basic exam is
USD 400 million to all shareholders on
adjourned, the Board of Directors met
required for all registrants and provides
record as of 1 January 2015 payable in
and elected Gerard Naisse as Chairman
two equal amounts on 15 June 2015
of the Board and Roberto Benzan as
a general working knowledge of OIL.
and 15 December 2015 in recognition
of OIL’s continued financial success and
Deputy Chairman. 
|
17
ISIL CREATES NON-UNIFORM KIDNAP THREAT IN IRAQ
ISIL CREATES
NON-UNIFORM
KIDNAP THREAT
IN IRAQ
Since their proclamation of the ‘Worldwide Caliphate’ in June 2014, Islamic State of Iraq and the Levant
(ISIL, or IS) have posed an extreme kidnapping threat in Iraq to both local and foreign nationals. The map
visible opposite, however, proves that the country is a patchwork of areas, of differing kidnapping risk.
ISIL’s presence in the federal areas of the north-west leaves leading response consultants Control Risks
to rate the kidnap threat as extreme, with the business environment untenable. High profile kidnappings
of foreign nationals in the area after IS took control were used to spread fear and extort the local
population, and led nearly all foreign business operations to leave the area.
The kidnapping situation in other parts of the country remains
more stable. Indeed, in the Kurdistan region of the north east,
few kidnappings are recorded where the local Kurdish
administration has a greater level of control. The risk is elevated
close to the trigger line with Federal Iraq, as there is a risk of
‘smash and grab’ operations whereby members of Islamic
State, who control the neighbouring territory, could cross the
trigger line and abduct a high-value victim and take them back
to the federal areas. However, most foreign nationals do not
travel unprotected that close to the trigger line and the
Peshmerga force is expending significant resource defending
the territory, making that type of operation high risk for potential
IS kidnappers.
In other parts of the country, including Baghdad and Basra, the
kidnapping trends remain driven mainly by criminality. Whilst the
majority of victims are local Iraqis, foreigners remain highly
sought after targets. One key risk mitigation tactic is to employ
adequate journey management security protocols as
abductions often take place whilst the employee is in transit.
Given the number of energy interests in these areas, it is highly
advisable for any business operating in Iraq to carefully plan
their routes and travel security arrangements to reduce this
particular risk.
ISIL CREATES NON-UNIFORM KIDNAP THREAT IN IRAQ
Despite the highly volatile nature of IS actions, the
Kurdish businesswoman in Basra. One final area of
Kidnap and Ransom threat in Iraq is unlikely to
consideration should be whether western forces
subject to rapid change over the next six months.
take a greater role in anti-IS conflict. Any greater
Whilst IS are losing some of their ground to Iraqi
involvement may see a diversification of targeting
security forces, a reversal of their tactical gains is
foreign nationals in protest at perceived western
unlikely in the short term. However, if given the
interference.
chance, IS are likely to continue to use kidnap as a
method of fear and extortion, with western visitors
highly sought-after victims. Kidnaps by Shia militias
For more information on JLT’s Kidnap and
Ransom Solutions, please contact:
in the south are on the increase as many groups
Will Miller (Head of K&R)
have re-emerged following the IS threat to the north.
William_Miller@jltgroup.com
Shia groups mainly target local Sunni Iraqis as a
T: +44 (0) 2075284177 
means to extort them, and they have so far carried
out at least one high-profile incident involving a
|
19
POLITICAL RISKS IN A COMMODITY DOWNTURN
foCUS on
POLITICAL RISKS
In a CoMMoDItY
DoWntUrn
Commodity Downturn means
Political Risks uptick?
During the commodities supercycle, a number of
countries benefitted from the export of metals and
oil, as high international demand continued to be
coupled with long-term supply availability.
Across emerging markets in particular, foreign investment
increased as high prices encouraged boosts in capex.
The Commodity Metals Price Index increased nearly 223%
between 1998 and 2008, and those countries with metals
and minerals wealth enjoyed steady foreign investment inflows.
Over the same period, oil prices rose gradually until 2008,
when a leap in prices led to a price peak of USD 133 per
barrel (pb) in July 2008.
The end of the supercycle now places those countries with
an over-reliance on extractive industries under immense
strain as reduced revenues have left holes in public finances.
Already those governments that underpin their budgets with
oil or metals have seen currency values plummet, FX reserves
erode or current account deficits rise.
2014’s dramatic fall in oil prices will now see oil firms cut
Fiscal consolidation and structural reforms had only tentatively
investment, as it is estimated that around USD 250 billion of
begun in many emerging markets as the immediate aftermath of
capex may be frozen annually until 2018 if the price per barrel
the financial crisis faded. This progress will stall as governments
hovers around USD 70. With the oil price already falling well
are forced to confront a new reality where revenues are far
below that mark in late 2014, a number of projects, particularly
below expectations.
those requiring expensive technological investments such as
deep water drilling, become uneconomical. Falls or freezes in
capex and asset sell-offs are to be expected.
When considering the fiscal breakeven points of the global oil
producers, it is clear which countries will particularly be
impacted as oil prices slip. Saudi Arabia requires a production
For developed and emerging economies alike, drops in
breakeven point of USD 60-85pb, Iran requires USD 80-120pb,
energy capex have a severe impact on economic stability.
Iraq needs USD 90-110pb and Venezuela requires
Those countries lacking economic diversification are
USD 140-175pb. OPEC members of course will experience
particularly vulnerable and prolonged price dips can spell
greater economic volatility if low prices persist.
mediocre economic performance, downturn or recession.
|
21
In addition, there are a number of countries that are neither top
considering lifting government subsidies on petrol and electricity.
oil producers nor members of OPEC, yet on account of lack of
In the UAE, the emirate of Dubai has set out plans to raise
economic diversification, are expected to experience volatility
electricity and water charges.
in 2015. Argentina, Azerbaijan, Bolivia, Brazil, Chad, Equatorial
Guinea, Gabon, Kazakhstan, Malaysia, Turkmenistan, Republic
of Congo, and Russia are amongst these countries that will be
most affected.
Saudi Arabia, in the event of a prolonged dip in prices, could
After a decade of strong revenues during the supercycle, public
expectations have been lifted. Governments must now rethink
their strategies towards foreign investment if they are to avoid
mediocre economic performance. The cycle has been broken:
resource nationalism is no longer a cyclical occurrence linked to
experience a fiscal deficit of 14% of GDP in 2015. Saudi’s large
periods of high prices .The global risk environment is set to
FX reserves, estimated at USD 740 billion, will offset lower
become more volatile.
revenues in the medium term, and the world’s leading oil
producer will battle to retain market share in the face of the
threat from the US shale boom, but a prolongation of low oil
prices could signify a decrease in public spending. This in turn
could have repercussions for political stability and civil unrest.
The other members of the Gulf Cooperation Council (GCC),
Bahrain, Kuwait, Oman, Qatar, and UAE, must also brace
themselves, as oil typically accounts for around 90% of income.
Again, FX reserves can provide an initial buffer, but cuts may
need to follow. Kuwait has ordered major spending cuts and is
While governments recognise that they need to still seek to
attract foreign investment, pressures on finances mean
heightened risks of government interference in strategic
sectors, such as mining, oil and gas, or infrastructure.
The renegotiation of an operating agreement by the host
government, expropriation, licence cancellation and even
changes to the project ownership structure that can deprive
the investor of a majority stake are all risks to consider.
Acts of ‘creeping’ expropriation, where host government action
gradually erodes the investment return over time, to the point
where a project becomes unviable are also more likely in 2015.
Such action could include changes to the tax code, such as
the implementation of a windfall tax, changes to labour law,
export embargoes, changes to local banking law that leads to
risks of currency inconvertibility and an inability to transfer or
repatriate funds.
A further consideration is politically enforceable
environmentalism; some emerging markets are recognising
the environmental cost of large-scale oil and mining operations
and are turning away from the ‘growth at any cost’ mantra.
Expect non-compliance with environmental law to be met
with steep fines and a political backlash. 
JLT has been a leader in political risk insurance since the
advent of the market in the early 1980s and enjoy strong
relationships with all insurers in this sector. At any one time
we manage upwards of USD 60 billion of insurance capacity
and we have had extensive success in collecting claims on
our clients' behalf. The insurance contracts we arrange
relate to a wide variety of transactions brought about by
our diverse client base and we also offer a range of risk
consulting services.
For further information please contact Amy Gibbs
(amy_gibbs@jltgroup.com) or your usual JLT
Account Executive.
|
23
ABOUT JLT SPECIALTY
JLT Specialty Limited provides insurance
broking, risk management and claims consulting
services to large and international companies.
Our success comes from focusing on sectors
where we know we can make the greatest
difference – using insight, intelligence and
imagination to provide expert advice and
robust – often unique – solutions. We build
partner teams to work side-by-side with you,
our network and the market to deliver responses
which are carefully considered from all angles.
It’s this approach that inspires our clients’ trust
and confidence, which has led us to provide
broking services for eight of the world’s top 10
oil companies and for JLT Group to become the
largest broker of Energy insurance business
into Lloyd’s. JLT Specialty Limited is a member
of Jardine Lloyd Thompson Group plc, a
company listed on the FTSE250 index of the
London Stock Exchange and one of the world’s
largest providers of insurance and employee
benefits related advice, brokerage and
associated services.
CONTACT
If you require any further information or have
any feedback on this edition, please email
john_cooper@jltgroup.com
This newsletter is compiled and published for the benefit of
clients of JLT Specialty Limited. It is intended only to
highlight general issues relating to the subject matter which
may be of interest and does not necessarily deal with every
important topic nor cover every aspect of the topics with
which it deals. It is not designed to provide specific advice
on the subject matter.
Views and opinions expressed in this newsletter are those
of JLT Speciality Limited unless specifically stated otherwise.
Whilst every effort has been made to ensure the accuracy
of the content of this newsletter, neither JLT Specialty
Limited nor its parent or affiliated or subsidiary companies
accept any responsibility for any error, omission or deficiency.
If you intend to take any action or make any decision on the
basis of the content of this newsletter, you should first seek
specific professional advice and verify its content.
If you are interested in utilising the services of JLT Speciality
Limited provide you may be required by your local
regulatory requirements to obtain the services of a local
insurance intermediary in your territory to export insurance
and (re)insurance to us unless you have an exemption and
should take advice in this regard..
JLT Specialty Limited
The St Botolph Building
138 Houndsditch
London EC3A 7AW
Lloyd’s Broker. Authorised and regulated by the Financial
Conduct Authority. A member of the Jardine Lloyd
Thompson Group. Registered Office: The St Botolph
Building, 138 Houndsditch, London EC3A 7AW. Registered
in England No. 01536540. VAT No. 244 2321 96.
© April 2015 269644

FOCUS ON: Political Risks in a Commodity Downturn

Transcription

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