Business interruption (BI) losses are likely to increase in the oil and gas sector over the next decade, unless greater consideration is given to how an event could affect supply chains that are more integrated, interdependent, and streamlined, says a new report from Marsh.
Since 2014, the oil and gas sector has felt pressures from a sustained lower oil price environment, with state-sponsored feedstock subsidies being swiftly eradicated, even as shareholders demanded more efficient returns on existing capital deployed.
In this increasingly competitive environment, industry players are seeking new ways to save costs. Integration and consolidation is becoming a key development in driving optimisation and increasing business profitability, said the “Rethinking Business Interruption Risks in an Optimized Oil and Gas Industry” report.
However, these actions will introduce a new level of challenging contingent business interruption (CBI) exposures, as redundancy is rationalised and operators become less resilient to respond and mitigate unplanned losses.
Risk exposures in energy and power operations are some of most challenging to identify, assess, and manage, noted Marsh. These manufacturing complexities are continually evolving as the industry develops new ways to remain competitive, while adapting to mandatory regulatory changes. It expects operator complexity will grow, as new optimisation work processes drive integrated value across entire supply chains, delivering new co-optimised production clusters that will aim to maximise general interest profitability.
The commercial changes between affiliates will drive the industry understanding of business interruption to the next level. It is therefore essential that the insurance industry adapts to recognise these changes and deliver policies that accurately reflect these evolving business risk exposures.
The stress testing of policy wordings, against a range of credible loss scenarios, is one method to ensure the policy mechanism responds appropriately alongside the new business commercial structures, said the report.
Conducting business interruption reviews for industrial complexes benefits both risk managers and insurance markets. Independent experts can quantify operational resilience, critical nodes, and supply chain interdependency. This promotes internal risk management processes and helps in marketing risks to underwriters for insurance placement purposes.
The full report can be read here.