Supply chain interruption insurance has slow uptake in downstream energy market: Willis

Carriers are slowly introducing supply chain interruption to downstream energy firms such as petroleum refineries, suggests a recent report from Willis Group Holdings plc, but many potential clients are not able to provide enough underwriting information for such coverage.

“After a slow start, stand-alone Supply Chain Interruption (SCI) insurance products are gradually being introduced to the market,” according to the report, titled Willis Energy Market Review 2013: What’s Next for Supply Chain Risk. “Historically, the uptake of these products has been slow due to limited capacity, high prices and prohibitive risk data requirements.”

In the report, announced Tuesday by Willis Global Energy, the London-based brokerage and risk advisor firm attributed the “relatively slow takeup” of supply chain interruption insurance to several factors, including the cost of premiums, lack of awareness among energy firms of the availability of coverage and lack of awareness of risks.

“In order for cover to be provided, more underwriting information would need to be developed,” according to the report. “Many companies have intimated that they have do not have the time, the expense or the resources to conduct such an exercise.”

Business interruption risks to downstream energy operations include damage, such as lightning strikes, explosions and pipeline leaks, as well as suppliers that become insolvent or which shut down due to power failures, computer system crashes or labour disputes, according to the report.

Willis suggested that for contingent business interruption insurance for downstream energy operations, carriers will usually not provide coverage unless they know the name of the supplier.

“Furthermore, the market usually requires detailed information with regard to their locations,” according to Willis. “Coverage for unnamed suppliers and customers is still available from some markets but with a very low loss limit applied and frequently the insured perils are limited to fire, lightning, explosion and aircraft.”

Willis also said it detects “a strong degree of pessimism” about the downstream energy market from carriers after Hurricane Sandy last year.

“Although Sandy produced little by way of direct downstream losses, it produced a number of  significant power losses which impacted the overall Property portfolio, not to mention the reinsurance treaty renewal season.”

Willis added some incidents in 2012 “continue to drain underwriting profitability,” and suggested there is a possibility some carriers might stop offering business interruption coverage to downstream energy firms.

“It is not perhaps too dramatic to suggest that several of these markets remain on the cusp of withdrawal,” according to the report. “It may be that a precursor to that might be increased competition before the market melts down. 

We may see a temporary dip in rates, as markets are forced to compete for revenue to meet budgets; however, this is likely to be followed by a stronger market hardening if results deteriorate. In this scenario, and if the class becomes unviable for some insurers, they withdraw and the number of leadership options are reduced.”