Magazine article Risk Management

Pure Energy: Transparency and Energy Risk Management

Magazine article Risk Management

Pure Energy: Transparency and Energy Risk Management

Article excerpt

Greater transparency, the new mantra in corporate boardrooms nationwide, is transforming the way risk is managed in the energy industry. Facing greater scrutiny and accountability, today's energy risk managers are working more closely than ever with their company's CEO, CFO and treasurer to dig ever deeper into their organization's exposures. They are asking more questions than ever before about the pricing, terms and conditions of their company's insurance policies and the security of the carriers that stand behind them. They are pursuing a higher degree of transparency and they are achieving it, in everything from policy underwriting to claims services, for several reasons.

A Clearer View of Risk

One reason that risk information has become more abundant is that technical engineering expertise is being used more frequently. Non-major energy companies, which often do not have the in-house army of energy engineers and corporate safety resources that the largest companies do, are welcoming the expertise an energy insurer's risk engineers can offer to expand their understanding of exposures and the means to mitigate risk and prevent losses.

These risk engineers typically provide a combination of "hard" and "soft" engineering services. Softer services include safety surveys and reviews of an enterprise's in-force loss prevention programs. They aim to uncover ways these programs can be enhanced to mitigate, control and eliminate safety and operational issues. "Hard" services examine hard data and take engineers on-site at an insured's facility to observe process equipment, layout and housekeeping, review maintenance and inspection policies and logs, and interview those individuals who are involved in the facility's day-to-day operations. During this process, engineers also seek to identify where specific loss prevention enhancements can add value.

Rates, Terms and Conditions

With specialized risk engineering analysis giving all parties a better understanding of an enterprise's risks and risk management practices--and bringing greater transparency to an organization's risks--policy underwriting, negotiation and pricing can proceed more smoothly. This is assuming, of course, that the underwriters involved have sound experience with energy risks.

Given the highly technical and potentially catastrophic nature of energy exposures--which may include fires, explosions, worker injuries and fatalities, possible political risks, massive concentrations of property value, extreme weather, toxic chemicals and contingent business interruptions, just to name a few--energy underwriters should be specialists in the truest sense of the word. They must not only have a deep knowledge of the universe of energy exposures their clients face, but they must also possess particular expertise in key segments of the business, such as oil and gas, exploration and production, mining, power generation, and other property risks.

With an intense understanding of energy exposures, including the sector's evolving technologies and latest trends, these underwriters can bring an essential wealth of knowledge to the underwriting process. In few other industries is technology so central and fast-changing; for energy risk underwriters, assessing exposures related to both prototype and end-of-life technologies is part of the daily challenge.

By contrast, underwriters who do not have a full understanding of the risk at hand, or the expertise to analyze it, may be left to price risks based on the worst-case scenario in order to safeguard their organization's balance sheet--or they may recklessly undercut pricing, rather than rating the true scenario at hand.

Consequently, transparency in risk engineering and underwriting not only makes risk management more effective but more cost-efficient as well.

On the Same Page in Claims

A new emphasis on transparency is evident in claims management approaches as well. …

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