The Place of Insurance In Oil and Gas Transactions

Anne Mkala
Aon Kenya Ltd

Overview
About Aon
Industry Update
Principles and Fundamentals of Oil and Gas Risk
Insurance Risk transfer
FAQs

Aon - Who we are

#1 Rated risk services broker, reinsurance
intermediary, and human resource consulting and
outsourcing

Energy, Power and Construction

(EPC) credentials

600 offices world-wide

Largest broker of energy insurance speciality business in the

Over 120 Countries

energy premium in the international insurance markets

Aons EPC Division brings together experts from Aons
extensive network to share best practice and market
intelligence
More than 300 professionals world-wide

62,000 colleagues

US$ 78 billion premiums placed

2011 revenue $11.28BN

260 Energy, Power and Construction specialists

in London
Largest broking operation in Kenya and
throughout Africa
Main sponsor of Manchester United

Aon Risk Solutions

Proprietary & Confidential | November 2012

world

Place US$1.5 billion of premiums representing 1/3 worldwide

Hubs in London, Houston, Bahrain and Singapore

Centres of Excellence in all continents
Largest network of engineers

Market leading conferences and training seminars

Technical publications and market newsletters.

Areas of expertise
Our exclusive focus on the energy industry enables us to have
dedicated professionals that look after clients in a variety of
energy sectors including:
Upstream (exploration/production)
Major integrated and national oil and gas companies
Mining
Midstream (pipelines/terminals/liquefied natural gas)
Contractors (drilling/service)
Downstream (refining/petrochemical)

Aon in Africa
Aon owned office

Aon correspondent office

What really is Aons footprint

in Africa?
Aon has a presence in 49 out
of 55 African countries
Represented by:
Aon Owned offices
Correspondent offices

Aon in Africa
33 Correspondent Offices:

16 Aon Owned offices:

1. Angola
2. Botswana
3. Kenya
4. Lesotho
5. Malawi
6. Mauritius
7. Morocco
8. Mozambique
9. Namibia
10.South Africa
11.Swaziland
12.Tanzania
13.Tunisia
14.Uganda
15.Zambia
16.Zimbabwe

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Algeria
Benin
Burkina Faso
Burundi
Cameroon
Central African Republic
Chad
Congo, Democratic Republic
of
Congo, Republic of
Egypt
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Ghana
Guinea Bissau

17.Ivory Coast
18.Liberia
19.Libya
20.Madagascar
21.Mali
22.Mauritania
23.Mauritius
24.Niger
25.Nigeria
26.Rwanda
27.Senegal
28.Seychelles
29.Sierra Leone
30.Somalia
31.South Sudan
32.Togo
33.W Sahara

Industry Update
Global risk in the energy sector is increasing and becoming ever more complex.

From upstream to downstream operations,

More remote exploration,
Deeper wells and water,
Greater civil liability,
Regulatory and political risks
.
These risks are amplified by the higher capital expenditures needed to complete for
new projects and continued volatility in the commodity and financial markets.
Recent losses in the sector have highlighted the need for effective insurance and risk
management programs.
The last thing that an organization needs in the middle of a crisis is to find out that the
insurance they were relying upon is anything other than completely effective.

Global Risk Management Survey (GRMS): Top Risks 2011

Natural Resources
(Oil & Gas)
1

Commodity price risk

Political risk / uncertainties

Regulatory / legislative change

Failure to attract or retain top talent

Environmental risk

Economic slowdown

Business interruption

Physical damage

Capital availability / credit risk

10

Exchange rate fluctuation

7

Topics
Who arranges insurance for oil and gas projects, why and how?
Understanding the risks and extent of insurance coverage intended
The culture and drivers of the insurance community

The Energy Sectors and Value Chain

The Energy Insurance community

OCIL
(Casualty
Mutual)

Casualty
Insurers

Upstream
Insurers

Consultants
Energy
Company

Lawyers

Captive
Insurer

Brokers

Loss
Adjusters
OIL
(Industry
Mutual)

Midstream
Insurers

Downstream
Insurers

Expert Support
Expert support required throughout the lifecycle of Oil and Gas
projects:
Development Phase
Assistance in negotiations with lenders and joint venture partners
Detailed understanding of finance agreements and covenants
Insurability advice and benchmarked cost estimates

Construction, testing and commissioning

Support and advice on the intricate mix of contractual, project and cost
risks
Contract review and bespoke insurance covers

Handover and Operational phase

Comprehensive cover, dovetailed to operational insurances
Access to global placement hubs to maximise cover and minimise cost

The Upstream Energy Insurance market

The Upstream Energy insurance market derives from Marine

The Marine market is the oldest in London - now extends worldwide

Lloyds of London divides its business traditionally into four sectors:

Marine (incl Energy upstream)

Non-Marine
Aviation
Motor

Companies

London / Europe / Asia / North America

What is insured ?
Interest
Physical Damage Owned property
Loss of Hire (Mobile Rigs)
Contractors Equipment
OEE - Control of Well, Redrilling, S&P

E&P
On / Off

Delay in Start-up

CAR
Operating
*Installation

Business Interruption / LOPI

Third Party Liabilities, incl Pollution damage
War, Terrorism & Political Risks

Production Facility Explosion

Hurricane

Onshore Blowout

Offshore Blowout

Deepwater Horizon

Pipeline explosion

Summary
Who arranges insurance for oil and gas projects, why and how?
Understanding the risks and extent of insurance coverage intended
The culture and drivers of the insurance community

Frequently Asked Questions

Common insurance questions

1. Who is ultimately responsible for decisions on insurance purchasing?

2. What mistakes people make arranging insurance & how to avoid them?
3. With so many insurance carriers, how to distinguish between them?
4. What sort of risks cant be insured & how can companies respond?

5. Which projects and risks require insurance, and which dont?

6. What practical issues need to be considered when arranging cover?
7. What are common pitfalls & what are the ways to avoid them?
8. Do insurance claims always have to be a problem?

1. Who is ultimately responsible for decisions on

insurance purchasing?
Depends on size and structure of company

Can include many people with varying drivers and views

Potential stakeholders & decision makers are:

Group Risk manager / The Board Big Picture & Profits

CFO / Treasury/Tax/Legal Dept / HSE Cost and details

Procurement or Contracts Department Cost and process

Insurance manager - Quality of cover & overall benefits

Business Unit leaders / Project heads Cost versus budget

Joint Venture sub committees Cost and preferred partners

Lenders and advisors guarantee debt repayment

1. Who is ultimately responsible for decisions on

insurance purchasing?
The key issue for success is to be organised and have a
strategy that describes qualitative as well as quantitative
goals
The outcome often depends on who is the final decision
maker and
their own views, beliefs, experience and
management controls
Our recommendation is to aim for the highest quality
coverage and
counterparties wherever possible

2. What mistakes people make arranging

insurance & how to avoid them?
Mistakes

Pursuing a Short Term versus Long Term view

Low price driven tactics at the expense of quality

Frequent changing of markets to reduce cost
Poor communication with risk carriers

Not disclosing full facts / A poor risk presentation

Ignoring or incomplete compliance with subjectivities & warranties

Over reliance on rating agencies to guarantee quality

Non or late notification of risk changes or claims can void cover

How to avoid them:

Overcome the above by planning, strategy & focus

Building up goodwill and trust - aim for win win

3. With so many insurance carriers , how to distinguish

between them?
Strike the balance between the brand & the people

Adopt the approach of a Security Review Committee to

rank selection of markets based on:

Claims paying ability & willingness

Commitment to the sector

Knowledge & experience of the people

Flexibility of the decision makers

Profit seeking commercial markets or mutuals or both

Know their book and ambitions

Trade with people who have skin in the game

Gross versus net retained lines

Risk takers versus risk traders

4. What sort of risks a t e i sured &how a

respond?

o pa ies

Non fortuitous events

Predictable / expected events

Commercial Risks

Loss of Hole / Loss of Reservoir / Stuck Stem / Fishing Costs

Efficacy / Performance

Pure Fault / Latent Defect / Non Damage loss

Certain Liabilities Extra contractual liabilities

Respond by having good internal communication & review

philosophy in light of insurance realities

contracting

5. Which projects and risks require insurance, and which

dont ?
Drivers include

Legal requirements / Licence Obligation

Contractual obligation

Off balance sheet financing

Potential for damage to earnings or balance sheet

Availability of cover at reasonable cost e.g. Terrorism / Political

risks
Discretionary products e.g. Kidnap and Ransom

Duplication of cover adds unnecessary cost

6. What practical issues need to be considered

when arranging cover?
Cost and value anticipated / expected losses vs Catastrophe
Product suitability - for your needs over time
Time available - before deadlines

Valuation of assets for insurance - Agreed Values /Depreciation

Limit adequacy what is the technical basis

Location of risk complexity of local insurance regulations

Geographic location judge comfort of carriers and their appetite

Market Capacity versus multiple buyers Aggregation

Environmental issues Law

Negotiating tactics hard or soft

Counterparty strategy strict or open

7. What are the most common pitfalls and what are the
ways to avoid them?
Under or Over insurance

Valuation - Average 3rd party provider selection

Depreciation NPV of field rebuild scenarios

Incorrect cover

Exclusions & Warranties

Assumption of cover acquisition

Misinterpretation language and culture

DIC exposure - Direct insurance versus Reinsurance

Timing placement takes longer than expected

Over reliance on insurance & weak event mitigation

plans
Contractual obligations ensure insurance follows

8. Do insurance claims always have to be a problem?

Noif the policy is well formed and conditions are complied with
All Claims for commercial insurance have unique factors

clear triggering of the insured peril can be

hard to establish

Well planned and organised claim preparation is key

Even straightforward claims can become a problem

e.g. Conflict between carriers writing different layers of cover

Timely advise, an organised response and engagement with

are all essential to ensure a smooth claims experience
JV partners and contractors should work together

Legal action should be a last resort not first move

adjusters

Answering the most frequent

questions on Insurance

Anne Mkala