The Risk Boom

Few in Canada’s oil and gas industry could forget the fire at one of Suncor’s two (at the time) upgrader facilities north of Fort McMurray on January 4, 2005. With more than 100,000 barrels-per-day of oil knocked out of production over nine months, the biggest shock was the cost of business interruption. Suncor had to recover $979 million in business interruption (BI) losses, nearly five times the amount Shell Canada had recovered in BI losses for a similar incident just two years earlier.

“It had a significant impact because of the dollars involved,” says Joe Seeger, who was Suncor’s risk manager at the time. “We had to put our heads down over the next 22 months and recover over a billion dollars from the insurance market. It was an all-consuming, life-changing event.”

Seeger is now energy practice leader for Willis Canada and executive vice-president and managing director of Willis Calgary. He says the incident coincided with a surge in per-barrel pricing of crude, from $24 to $70, and also marked a distinctive shift in the insurance market’s perception of property risk pertaining to oil sands operations.

It revealed to insurers the volatility of crude pricing, says Seeger. “Their exposure base was changing almost daily, which gave them great concerns with respect to the business interruption aspect of the loss,” says Seeger. “And it did curtail capacity to oil sands operations after that. We’ve had to be a lot more creative since then.”

“We” is the 25 member-strong team Seeger now heads at Willis Calgary, which is completely focused on Canada’s energy sector. The team includes two risk control engineers, who assess upgraders, refineries and processing plants, technology, and equipment. Two people are dedicated to data analytics, examining captive feasibility and loss forecasting. Ninety-five per cent of his brokers’ time is spent in daily risk management consult with their oil and gas industry clients.

By putting risk management at the forefront of his client dealings, Seeger has put Willis Calgary at the forefront of a change in the way broking services need to be delivered for large, complex accounts.

“The cost of an insurance program for an oil sands operator has risen dramatically,” says Rob Dawson, chief financial officer at Canadian Oil Sands, who first met Seeger when they were colleagues at Suncor. “At a time when the insurance market more generally has been softening, that hasn’t been the case for the oil sands. There’s much less capacity in the market and the price of that capacity has gone up—you’ve had to be quite nimble and a lot more strategic, a lot more thoughtful about the way you’re placing your insurance program.

“What we look for in an insurance broker is not an insurance expert, not just someone who will bring us to market and purchase the right insurance at the right price,” he adds. “We need someone who is well aware of the emerging issues, very well-steeped in our own industry and our organization, someone who acts less as a broker and more as a consultant and business partner.”

Client Background

With the rapid expansion of the oil sands in the early 2000s, global broking firm Willis saw, in Seeger, an opportunity to build a specialty brokerage in Calgary—one that was tailored to serving the needs of energy clients. In 2007, Seeger was approached by then-global head of Willis Energy, Phil Ellis, who was attempting to woo Suncor, Seeger’s employer at the time, as a client.

“I told him about seven reasons I didn’t think it was a good fit at the time,” recalls Seeger. “He thanked me and went away. About two months later, he came back and said, ‘about those seven things, can you fix those?’”

In January 2009—about a year after his second meeting with Ellis—Seeger made the jump to Willis. He rapidly set a new strategic direction for the Calgary firm.

“The first word that comes to Joe’s mind isn’t the word insurance,” says Dave Twaddle, executive vice-president of Willis Calgary. “He’s looking at the client needs and not necessarily in the insurance context. Joe thinks about exposures first and insurance last. Insurance is just one way to deal with those exposures.”

Seeger isn’t the first risk manager to make the transition to the broking side of the business, but he comes to it with an unrivalled breadth of experience. Seeger started his career as an underwriter for RSA in 1994 before making his foray into the energy sector as a risk consultant, and then as a vice-president of risk to PetroCanada for Willis New York in the late ‘90s. Seeger moved on to become head of risk for some of Canada’s biggest energy companies—first Enbridge, as a senior advisor then risk manager, and then for Suncor—where he apprenticed under who he considers the top risk managers in the industry. At the same time, Alberta’s oil sands production began to grow exponentially.

“When I went to Enbridge in 2000, it was the first time I was exposed to the regulated aspect of the business,” says Seeger. “Being in a utility, there are not just shareholders to whom you’re accountable, but regulators are hugely influential and hold your license to operate a lot closer.”

It’s Seeger’s in-depth understanding of all elements of exposure that gives confidence, not only to his clients, but to those underwriting them.

Neil Ringrose, vice-president and Canadian national manager, business solutions for Scor Canada Reinsurance Company, says that the underlying premise of his work in the energy arena is risk management.

“The confidence in my delivery of capacity is leveraged by my knowledge and understanding of the risk management structure within organizations, how they treat their assets and how they protect against potential loss,” says Ringrose. “The broker is an essential conduit of communication and contact to deliver information that is ultimately necessary in my own decision-making process.”

Outsized Risks

It is estimated that, by the end of the year, 400,000 barrels of oil will be shipped out of Northern Alberta daily, supplying approximately 4.5% of the 90 billion barrels per day consumed globally, a number that grows by the minute. The sheer size of the industry, coupled with unprecedented demand, has completely altered the concept of liability in the energy sector—and the capacity of traditional insurance markets.

“The level of sophistication has improved, the magnitude of the exposures has grown,” says Lynn Oldfield, chief executive officer of AIG Canada. “Look at the size of the oil sands themselves. In the early days they were worth a couple of hundred million. Today, there are companies [worth] into the billions. There are more examples of catastrophic loss, where things happen in the dead of winter and everything is frozen for three or four months.

“I think in certain situations, like offshore polluter pays and environmental liability, a corporation could be challenged to transfer that risk. That necessitates alternative solutions,” she adds.

Ringrose at Scor says the capacity in the market is variable, but he, too, believes brokers are more often seeking alternatives to insurance on behalf of their clients.

“I think in Canada, the industry as a whole and the performance of the industry has certainly attracted global capacity in this marketplace, which makes it competitive,” says Ringrose. “But it will never satisfy the scale of the operations that exist here.”

Liability Response

High-profile catastrophes, while still exceptional, are occurring more frequently as the industry grows. With them, liability issues have been brought sharply into focus, for both the public and the regulators that represent them.  Last summer’s derailment in Lac-Mégantic, Que. highlighted the dangerous reality that large amounts of crude are being shipped more often through highly populated areas than they were two decades ago. In 2010, a six-foot break of an Enbridge pipeline in Michigan leaked 877,000 gallons of heavy crude (originating from Canada) into the Kalamazoo River, going down in history as the largest on-land spill, and one of the costliest spills on record in the US.

The TransCanada pipeline explosion in Manitoba on January 25 is another incident that has made a poignant example of problems associated with aging pipeline infrastructure.

“Whenever there is an incident, it is the regulator’s responsibility to make sure the public is protected, and they do a very good job,” says Seeger. “They want to make sure a like incident won’t happen again and, if it does happen again, the companies responsible will be able to respond.”

But for Seeger’s clients, these catastrophes and the assessments from various government jurisdictions and crown corporations that follow have created capriciousness in the energy industry.

Rob Dawson points to Federal Bill C-22 as one example. The Energy Safety and Security Act had its second reading in Parliament at the end of January. The legislation, sponsored by Industry Minister Joe Oliver, would effectively alter a number of laws governing the energy industry. In its current draft, the act reinforces the “polluter pays principle” that has long existed in Canada, “consistent with the notion that the liability of at-fault operators is unlimited.” But the legislation also focuses on increased liability requirements, “to $1 billion…without proof of fault or negligence, to which certain operators are subject in the event of a spill or damages caused by debris.”

“There is a lot of uncertainty, not just for us, but in the insurance market, where the capacity for this level of liability may not exist. There is no capacity because no one has purchased this level of insurance before,” says Dawson at Canadian Oil Sands. “If we have to go out and buy a great deal more liability due to a legislative change in the environmental liability laws, the cost and availability of that in traditional insurance markets may be prohibitive.”

“When I read about things like Bill C-22, I call Joe,” adds Dawson. “He is the person I call to educate me about it, and to help me figure out alternative ways to find capital—including self-insurance programs offshore, mutual insurance opportunities and, increasingly important, the growing amounts of capital available from non-traditional insurance providers, including banks.”

In this environment, says Michele Waters, director of enterprise risk management and insurance for Cenovus, the very relationship between her company and traditional insurance markets has changed—and so has the broker’s role.

“There is a lot of regulatory flux right now; at the same time, we’re dealing with a lot of public opposition to pipeline development,” says Waters. “We’re trying to act a lot more strategically. Insurance is a lot less about procuring or just renewing and a lot more about examining where we will be in the next five years, what our markets will look like, what access to markets will look like and what’s going on in the regulatory environment.”

“I’m very focused on rail right now,” she adds. “Rail is becoming more foundational as a transportation option. Rail use is becoming bigger, not smaller, and there is a lot of uncertainty about what the regulators are going to require in terms of liability, not only by the carrier, but the producer of the crude as well.

“What we are waiting to understand is, how deep will the liability go? How far back can the courts and the jurisdictions reach when it comes to liability?”

“We spend a lot of time with Joe understanding what our risk bearing capacity is and transferring it when it makes sense to do so,” Waters adds. “But we are changing some of our levers, understanding how we can use captive insurance companies, mutual insurance and commercial markets in a world where liability is very much evolving and market access is a great concern.”

Advocate

As the liability requirements increase, Seeger is at the forefront of advocating on behalf of his clients to protect their product and ensure it gets to market. This can even mean lobbying regulators for changes to the rules governing self-insurance so Seeger’s clients can be compliant without diminishing their pools of capital.

“Letters of credit are a callable instrument that allows the regulator to go to the bank and retrieve capital required to fund a loss,” says Seeger. “But letters of credit are on a company’s balance sheets as a liability, so it ties up their capital. We’re trying to talk to the regulators to get bonds in place. A bond is off balance sheet, which wouldn’t be callable to the operator, but to the bond company. So far, the regulators have said it’s not close enough to cash to meet their requirements.”

To provide the best broking service, Seeger considers it his top priority to help clients best manage risk. For the energy sector, that is decreasingly about procuring insurance and increasingly about working with regulators and banks to figure out creative alternatives to risk transfer.

“There are all sorts of vehicles that can be deployed to provide the financial backstop to step up in the case of a loss or accident,” says Seeger. “We aren’t beholden to any markets. We put the client first and drive solutions for them that absolutely make sense, and a lot of those solutions aren’t insurance.”

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Copyright 2014 Rogers Publishing Ltd. This article first appeared in the March 2014 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.