Pricing poses questions for marine assurance

Insurance costs reflect underwriters' views of risk for each element of the project chain from fabrication and transit onwards
The cost and terms of temporary phase marine insurance have come under debate

Marine insurance for offshore oil and gas projects has become increasingly price driven in recent years, raising questions about the balance between the cost and depth of assurance. This applies along the chain from fabrication, through transportation to an eventual field location, and to aspects of offloading and installation.

Two main factors lie behind this market ‘softening’, according to Chris Graham, new business development leader on the offshore construction side at insurance broker Aon. Its clients range from small independents and contractors, to oil and gas majors. He said: “We have seen a vast increase in global capacity for energy insurance over the past five years as capital providers sought returns outside traditional financial markets. Also, there have been no significant losses [to insurers], and a series of benign hurricane seasons.”

Technological advances, more robust practices and greater experience may also have contributed to lower prices. Better weather forecasting, more powerful tugs, dynamic positioning and the rise of IT have transformed perceptions of what is possible and the attendant risks.

In the more than 50 years since Noble Denton played a role in establishing marine assurance in the North Sea offshore industry, prices have dropped significantly. Noble Denton, a marine and offshore technical advisor, is now part of DNV GL.

“Much of what the industry does has just become so much more familiar,” said DNV GL’s Richard Palmer, regional manager for Australia, New Zealand and Papua New Guinea. “With familiarity, maybe some assured parties start to perceive marine warranty services almost as a necessary evil.”

A 50-year perspective also points to technical precision and the consequences of equipment failure as key factors. Contrast sticking a pipe through the seabed in 25 metres (m) of water in the 1960s with doing it at more than 1,000m depth today. In the early days, there was less aversion to things going wrong because the consequences would not have been so disastrous. Now, even a nick to the side of an asset could be catastrophic because a vessel or unit is designed with more precision for a specific task and to a specific operating limit.

Furthermore, as technology and analytics have increased, the inherent redundancy in design has reduced. That is reflected in more robust regulatory frameworks, developed in response to incidents.

Now, “even a nick to the side of an asset could be catastrophic” because a vessel or unit is designed with more precision for a specific task and to a specific operating limit, Dimmell added. “Furthermore, as technology and analytics have increased, we reduced the inherent redundancy in design. That is reflected in more robust regulatory frameworks, developed in response to incidents.”

Generally, underwriters now take a more technical approach to analysing risk offshore. With many factors influencing rates, brokers choosing the right underwriter to lead the project and gain the broadest coverage at the most competitive terms need a clear technical understanding of the risk and that particular underwriter’s appetite for it, Aon’s Graham observed.

Underwriters would like to insist on the highest levels of due diligence and risk management within offshore construction. “However, although we strongly advocate providing as much information as possible, with the market at its softest for some years, and in appreciation of commercial constraints that clients may have, this has not been enforced in every case,” Graham explained.

In this market, the due diligence clause within the standard offshore CAR wording (WELCAR 2001) has typically been deemed sufficient by underwriters without adding further subjectivities or warranties, he added.

One underwriter’s engineering chief acknowledges this, but sees room for improvement in offshore construction. “Many companies do not seem to manage the marine phases very well,” said Francis Lobo, head of engineering – energy, at Catlin Group Limited’s London underwriting hub for insurance and reinsurance. “They have established processes, but silos exist within project teams and gaps between different contractors. Larger companies try to close these gaps, but we still see weaknesses in due diligence and risk management in these phases.”

The market will turn

Lobo expects market softening to reach a point where companies who do not maintain underwriting discipline will start to sustain losses to the extent that backers will withdraw capital. There could be a hiatus event such as a Macondo or, more likely, a large windstorm resulting in pan-market losses, causing the market to turn.

“One must also consider the role of assured parties’ captives [company owned insurance vehicles],” Graham added. “Over the last few years, such entities have increased their capacity and appetite for construction risk.”

If captives opt to rein in this capacity, or decide not to follow the market further down, it would likely result in less market competition, with the potential to generate a rates increase, particularly on larger projects, he explained.

The soft market has prompted discussion on whether depth of assurance could be eroded longer-term. For insurance to be valid, an assured party must appoint a marine warranty surveyor and comply with the scope of warranty work agreed with the lead underwriter.

Through technical reviews and site attendance, such surveyors independently survey marine operations – structures, objects, vessels and equipment, systems, and procedures – to evaluate risks and assess the feasibility of operations. DNV GL sets industry guidelines for such warranties through its Noble Denton marine assurance services.

The scope of a marine warranty survey is the “eyes and ears” of the underwriter, Palmer said. “The surveyor’s responsibility is entirely to the underwriter.”

Detailed scopes allow underwriters to ensure, indirectly, high levels of due diligence and care. Operators may anyhow have to look beyond lower insurance costs, if they are to ensure safety and sustainability while working increasingly in challenging environments.

Aon’s Graham said: “We advocate using a marine warranty surveyor, but negotiate with underwriters to minimise the scope that forms part of the policy, thereby limiting potential for breach of warranty and avoidance of coverage.”

“For some, price is an important factor, but we would encourage clients to consider such issues as wording, coverage, financial rating, claims experience, and handling capabilities when deciding on their insurance partner,” Graham said.

Lobo observed: “Our clients like a good price, but many see insurance buying as a long-term relationship and want to be sure insurers will pay if there is a terrible event.”

Such clients do not want to argue with insurers because of poor relationships caused by assured parties switching providers regularly, or because the insurer lacks the financial strength or rating to back the claim.

“Many clients, particularly larger ones, like to keep us on board and maintain the relationship. Conversely, if there is scope for us to offer inducements for them to maintain their risk management at the highest levels, we would look to do that rather than losing a client,” Lobo said.

The value of a company such as DNV GL working alongside Catlin and its clients to provide marine assurance is in building long-term relationships where everyone wishes to see the highest standards, he added.

How pricing risk works

The price of offshore construction insurance reflects rates for each project element. Project risk during onshore fabrication is generally less than during transit, installation, hook-up and commissioning, because of higher consequences and probabilities of loss in these later phases. Underwriters price this accordingly.

Standard rates may be applied to each phase, but with adjustments made up or down after consideration of risk factors. Rate differences for offshore installation may depend on water depth, contractor quality, and the method and type of installation; for example, a North Sea fixed platform or a tension leg one in Gulf of Mexico. The use of a marine warranty surveyor may also affect the rate.

A fabrication rate could be heavily discounted if the yard is well known, and has a good reputation and loss history. Underwriters’ personal experiences and knowledge shape what they charge. Knowing this, experienced brokers help source the right insurance for a client’s needs at levels of risk management, due diligence and pricing on which all parties can agree.

Warranty and class

Two distinct types of survey are encountered in the temporary phases of an offshore oil and gas construction project: warranty and classification (‘class’).

Assured parties are obliged to appoint a marine warranty surveyor to perform warranty work whose scope is negotiated with the lead insurance underwriter. In broad terms, a marine warranty survey involves a technical review, site visits and attendance at key operations to provide an independent, expert view of the risks involved in a project’s marine operations and whether they are workable. The marine warranty surveyor’s responsibility is to the underwriter. The Noble Denton marine assurance services provided by DNV GL set industry guidelines for marine warranties.

Class surveys check that floating bodies and their various parts and equipment are fabricated and maintained to standards for their class. Safety related systems in topsides are included in this. Class surveyors are employed by classification organisations such as DNV GL.