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Southern storms could further squeeze energy insurance

natural gas

The series of winter storms and deep freeze that hit Texas and other states in mid-February is likely to exacerbate rate hardening and tightening conditions in the energy insurance market, industry experts say.

The power outages and rolling power cuts in Texas disrupted many industries, including energy and power company operations across the state and beyond, reflecting their rising exposures to business interruption, they say.

Potential physical damage and business interruption claims are still under investigation and to be determined, said Robert Albino, a managing director in the energy and power practice of Marsh JLT Specialty in New York.

While some companies are operating again, others are in the process of ensuring that they resume operations in a safe and reliable manner.

Based on early feedback, there is the potential for preservation of property type claims, Mr. Albino said. Many clients took additional steps to protect their assets when they either lost power or had to shut down operations because of the general conditions, he said.

For the energy and power industry, time element coverage usually relies on initial physical loss or damage to trigger and typically comes with a lengthy time deductible period that needs to be satisfied before there’s an opportunity for recovery, he said.

“It’s all about the documentation and pending investigation of what happened at each plant and then how it matches up to the respective insurance program that each individual client has,” Mr. Albino said.

In general, the market is still seeing price increases and contraction in capacity and, depending on the level of claims, this could worsen conditions, Mr. Albino said. Policy language and deductible structures will be reviewed by policyholders and insurers, he said.

“It exacerbates an already difficult situation,” said Leonard M. Forey, managing regional partner-East Texas at Higginbotham, a Fort Worth, Texas, insurance brokerage.

The energy market was already hardening but how much the storm adds to that will depend on how much of the loss is absorbed by insurers, he said. Larger operators such as refineries and chemical plants, which felt more of the effect of the storm, tend to bear a lot of the cost themselves, he said.

The storm had a big effect on the downstream oil and gas industry and the power industry and the loss projection could be in the billions of dollars, Mr. Forey said. “Facilities in the South are just not geared to take the extreme temperatures if they are going to last for any prolonged period,” he said.

Generally, business interruption losses tend to have a much greater financial effect than the underlying property damage, said David Robertson, Los Angeles-based global head of energy risk consulting at Allianz Global Corporate & Specialty SE, part of Allianz SE.

Over the years there’s been a movement toward larger plants and equipment, more complexity and concentration in a single area, and more interlinkage between the supply chain, he said.

“What 25 years ago might have been a small pump fire at a plant, now the pump itself may be three times the size, the plant may be producing double or triple what it did, so the business interruption exposure is considerably higher,” he said.

A severe winter storm in 2011 also saw Texas experience freezing weather that led to widespread power outages. This was followed by several bouts of wintry weather in 2014 and 2017.

Whether companies view February’s storm as an aberration or as likely to recur on a more consistent basis will determine whether they go through the extra cost of protecting themselves against such events, Mr. Foley said. “When you’re talking about the income and production they lose, that may justify them taking additional steps in the future,” he said.

Texas doesn’t see cold temperatures very often, but this event highlights the importance of winterization, Mr. Robertson said. “It’s a matter of property preparation and maintenance.”

These large losses are characterized by several infrequent and unexpected situations arising simultaneously, he said.

“In this case we had an arctic freeze for an extended period of time that suddenly, unexpectedly reduced gas production, and then power generation was impacted both by the cold weather and loss of fuel gas, and then these insufficient winterization programs exacerbated operational performance up and down the supply chain,” Mr. Robertson said.

All this occurred at the same time that demand for power and gas was increasing dramatically, and then it was compounded by loss of water supply, he said.

Completing a winterization checklist can help companies minimize the damage that may occur from winter weather, he said.




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