Cold shoulder for energy risks

This poses problems for ports given over to both energy and nonenergy cargoes and makes insurance quite a budget item for smaller energy ports and facilities. Why the reluctance to mix? It is all to do with the scale and suddenness of loss which is suffered in the energy industries. One seven day period in July well illustrates this problem with a relatively trivial incident and a comparatively disastrous one.

On July 19, there was a large explosion and fire in the port of Providence, Rhode Island. Fire engulfed a terminal owned by Motiva Enterprises, which delivers 2m gallons of fuel a day. The Motiva terminal has been shut down indefinitely. The fire occurred at 2230 hrs as the tanker Nord Europa was unloading petrol and coincided with severe thunderstorms moving through the Providence area. A lightening strike near the tanker set off vapour and produced a large fireball. The ship was later able to move to safety under its own power, leaving the local firefighting forces to bring the blaze under control. No deaths or injuries occurred.

On July 13 and 15, as part of the recent hostilities, the Israeli Air Force struck Lebanese power plant at Jiyyeh 30km south of Beirut. In all, 10,000 tonnes of heavy fuel oil, about the same amount as spilled from the Erika leaked from ruptured storage tanks into the sea. This is the largest oil slick ever recorded in the Mediterranean Sea and is threatening the Lebanese coast, as well as the coasts of Syria and Turkey. A further 25,000 tonnes is still ashore in the damaged facility.

Described by environmentalists as a catastrophe, clean up measures are hardly in place and at any rate would be stalled by the continuing unrest.

The insurance implications of this casualty will be heavily circumscribed by war exceptions and so liability claims will likely fail.

This propensity to experience large sudden expensive casualties is the main reason why your average port and terminal underwriter will start to suck his or her teeth whenever the risk presentation has an energy component. Port authorities, for instance, often have within their portfolios of risk some kind of oil/energy facilities, if only to provide bunkers for ships. So long as this part of the port is a minority risk, the marine market will probably accept the risk without too much reluctance. But if the energy risk is substantial, say at a tank farm, the underwriters’ willingness to cover the risks presented will usually stop at the valves of the manifold at the loading buoy.

What all this illustrates is the comparative financial resources needed to insure industrial risks.

Marine risks have traditionally been that much smaller than the equivalent energy risks. Compare, for instance, the scale of losses suffered after last year’s hurricane season in the US Gulf by ports and shipping (perhaps $1bn all in including cargo) and the oil industry with all the rigs, distribution systems and refineries (many thousands of millions).

Given this traditional cleavage of classification, the fact is that modern consolidation in insurance and reinsurance has left industry with far fewer, albeit much larger, underwriters of their risks. This means that although the primary underwriters are by nature and operational design rather scrupulous in how they write their risks, the reinsurance interests carrying the risk may well be identical (albeit organised into different managerial units).

This interdependence should surprise few of us, nor should it come as news that large insured losses in the energy sector, once paid for, will feed into the insurance rates charged to everyone else.