Smart Ways to Manage Insurance Costs

April 6, 2018

In this Issue: Risk Management
- Smart Ways to Manage Insurance Costs
- 2018 Presents New Risks for the Oil & Gas Industry
- Upstream Oil & Gas Insurance: A Look at 2018 … The Times … They are a Changin’

SMART WAYS TO MANAGE INSURANCE COSTS

 
Buying insurance is the “backstop” and the costliest way that all companies must employ to reduce risk. Contek’s Director of Risk Management, Mark Hansen, has the unique experience of having worked for insurance carriers and many different operating companies. Properly managing your insurance can save your company millions of dollars each year. Mark knows how to save on your insurance costs.


Companies buy insurance policies to cover the costs of all sorts of unfortunate incidents that could have huge financial impact on that company. Typically, companies will have general liability, property, automobile and worker’s compensation insurance. The cost of this insurance may run 5% or more of the
Company’s revenues. Even small companies doing $10M in business will easily spend $500,000 per year on insurance. Insurance is a huge cost of doing business.


Mark’s unique experience has enabled him to reduce policy premiums for companies to the tune of millions of dollars. What techniques does Mark employ to help curb these constantly rising prices? Here are a few things Mark likes to look at:


1) Advising companies regarding exposures and insurance needed or not needed
The first step is to examine the risks of the business and realistically determine coverage types, amounts and potential liability. There is no use in buying a policy with extremely high limits if the risks do not warrant it.


2) Defining Insurance Profiles for E&P and Midstream companies based on risk exposure
Many insurance companies are not very familiar with the exploration & production and midstream businesses. Consequently, your Company may be placed in a “pool” of high risk companies that increase your premiums unrealistically.


3) Managing claims
Proper management of claims is the very first step after something happens. Properly managing injured employees or an automobile crash victim is critical to keeping claim cost down.


4) Strategies for Risk Control-All coverages
Insurance policies may overlap and not be properly woven together. Consequently, you may be paying double for the same coverage.


5) Strategies for Risk Transfer
Companies should allocate appropriate risks to others when possible to keep insurance costs down. An example would be having a contractor indemnify an operator for the actions of the contractor’s employees. Even companies with excellent safety and insurance programs will need expert help if a case is ever litigated. Contek has numerous employees with a great deal of expert witness experience to help you manage the costs of legal settlements.


Would you like to save insurance costs while still preserving a high level of risk protection? Contact Mark Hansen at mhansen@contekllc.com for a complementary analysis of your business insurance policies to see how much money you can save.

2018 PRESENTS NEW RISKS FOR THE OIL & GAS INDUSTRY


Presently there are approximately, 4.3 million existing wells in the U.S. that have already been drilled and completed since the first commercial oil well was drilled in Pennsylvania in 1859.*

 

Non-Infinite Life Span
Everyone in the energy industry wishes that wells lasted forever. If that weren’t true, then why does it take an act of God to plug and abandon (P&A) wells. Energy companies simply abhor the loss of revenue, however small. This was particularly true during the last downturn. As a result, there are literally thousands of wells across the nation now over 150 years old. Now more than ever, the evolving risks that come from aging oil and gas wells failing are becoming more and more apparent.


Most energy companies worry the most about a “blowout” during the initial drilling and completions phase. However, a well can “blowout” in any phase of its life, even when it is producing, shut-in, or plugged and abandoned. Wells are equally at risk during workover operations. As well age, the casing and cementing deteriorate, the risk of failure increases even more. At some point in the near future, well failures from these older wells may become more commonplace and could have a major impact on energy company deductible / retention and renewal rates.


At Contek, we can partner with you to develop a P&A strategy and craft insurance coverage to match the exposure. We appreciate how hard it is to P&A aged producing wells. We understand that and we can help you prioritize the process to make it as painless as possible from a risk management perspective.

References
*Ray, P., Changing Oil & Gas Industry Delivers New Risks, New Challenges, January, 2016.
(https://www.insurancejournal.com/magazines/mag-feaures/2016/01/11/394051.htm)

UPSTREAM OIL & GAS INSURANCE: A LOOK AT 2018...THE TIMES...THEY ARE A CHANGIN'


For the first time in in twenty years, the energy insurance market cycle has not tracked with a depressed energy market. In 2018, that will all come to a grinding halt.


For the last several years, the energy insurance market has been rife with capacity. In short, this means that a surplus of capital has been committed to the energy industry, with investor expectations of a steady return on investment. The fact is however, that return on investment disappeared a couple years ago. Underwriters have been pricing energy accounts on a break even or marginal loss basis since 2015.


The resulting low rates have been driven by the excess of capital committed to the energy. Underwriters in the United States and in Lloyds of London have been maintaining loss leading rate levels to secure market share. This market share approach allows firms to be in position to benefit from increasing rates when the market begins to harden. Looking at the big picture, the energy insurance market is admittedly quite large. But it’s resilience is limited. Catastrophic losses in other areas impact all business sectors. Energy can’t escape this irrespective of its size. When hurricanes Harvey and Irma occurred, the impact reached all insurance markets, including energy. It is widely estimated throughout the insurance industry that the aggregate losses coming from these natural disasters last summer will ultimately outstrip $100 Billion.* In short, there is no way these losses will not influence virtually every segment of the insurance industry, oil and gas included. Perhaps it won’t be as pervasive as it was after the 911 catastrophe of 2001, but hurricanes Harvey and Irma will have a significant impact on 2018 renewals.


To put this all in perspective, just as it did in 2001, the impact of these catastrophic losses, the property market charged more money, much more, for property insurance related products. But, it won't stop there. Look for an increase across the board. It is simply a case of supply and demand. In 2018, the cost of capital will increase, and as demand increases, there will be a compounding effect on insurance product pricing. To be forewarned is to be forearmed. Brace yourself.


The energy insurance market has a long history of standing behind its energy clients. But this is only true when there are established relationships. In this hardening market, companies which have strong relationships will emerge better than those who have view insurance as a commodity. It would be wise for companies to approach their 2018 renewals by being proactive with their broker and carrier. The primary activity is to prepare all required materials before the renewal cycle begins. The earlier the better. There is nothing worse than reaching the renewal deadline ill-prepared, facing a large renewal fee with no options before you.


At Contek, we provide risk management services and we have these relationships already established. We can help ensure that you get the best value for your insurance dollar. We mold our solution specifically to your risk appetite. We will also help you manage your claims to closure. The more claims you close, the less impact on your renewal. We also help with broker selection tailored to your needs based on their market presence and demeanor in the marketplace. We partner with you providing in-house risk management services by retainer, so you always have someone to reach out to in the event of a significant loss.


It has been a long time since the insurance renewal process captured the attention of the CSuite. That time now approaches. At Contek, we can partner with you during the 2018 renewals so that, just like the Boy Scout motto states, you can, ”Be Prepared.”

References
*Rivas, T., $100 Billion in Industry Damage From Hurricane Harvey and Irma, September 12, 2017.
(https://www.barrons.com/articles/100-billion-in-insured-damages-from-hurricanes-harvey-irma-1505232822)

 

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