Insurance Industry

This Risk Strategy Helped Oil Drillers Survive. Can Other Industries Do the Same?

A strategy known as "blend and extend" helped energy sector contractors stay afloat when oil prices plummeted in 2016. Experts speculate on whether it could have broader uses.
By: | September 28, 2018 • 5 min read

In an industry such as oil and gas, a lot can happen over the course of a year. A global decline or spike in oil prices can impact the entire industry and change the risk profiles of operators within a week as they scale up or down.

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In tumultuous times, insurers and brokers can also look to creative strategies to ride out the market fluctuations. The fall in oil prices a few years ago inspired one broker to consider a unique strategy that involved rewriting insurance contracts in the middle of their terms.

While the strategy came with its own set of risks for the involved parties, it proved to be a fair middle ground that offered cost reduction for the client, maintained the relationship for the broker and preserved market share for the insurer.

Changing Policies for a Changing Economic Environment

The fall in global crude oil prices from $110 per barrel to near $30 per barrel between May 2014 and January 2016 sent shockwaves across the entire industry.

Lisa Harris, senior vice president, JLT Specialty Insurance Services, Inc.

Lisa Harris, senior vice president, JLT Specialty Insurance Services, Inc., who represents many offshore drilling contractors, recalled that it was a difficult period for many of her clients as operators scaled back operations and put a big pinch on drilling contractors in the process.

Balancing the need to cut expenses with the desire to retain access to drill boats for when the market rebounded, many energy operators resorted to a “blend and extend” strategy.

In many cases, they would cut rates for contractors by up to 30 percent and in turn extend the terms of a deal for up to two or three years. It enabled drillers to keep earning some revenues while also enabling the operator to retain a driller for when the market rebounded.

“While it wasn’t ideal for either party, it was a win-win, because it kept the drilling contractor and their crews working,” Harris said. “It’s something they’ve used in the industry during downturns.”

JLT evaluated several strategies to help their clients ride out and navigate the “pressurized economic environment,” said William Helander, executive vice president, JLT Specialty Insurance Services, Inc.

One of those options was to use the industry’s own blend and extend strategy in the insurance market. The idea was that as drillers scaled down operations and worked less, their risk exposures would also decline. Insurers could renegotiate contracts to offer cost relief while also maintaining the client relationship. JLT brought the idea to their insurers and found they were generally receptive.

In most cases the new mid-term contracts priced in factors that had typically decreased, such as payroll and values of other assets impacted by the various falling commodity price market.

“We would look and try to blend the lower exposures and, in turn, extended the program at a lower rate,” Helander said.

“It would take the risk out of the market for a longer period of time and [the driller] would get a lower cost basis right away.”

Balancing Risk for the Client and the Insured

Certainly, it’s not normal for insurers to rewrite a contract in the middle of a 12-month term, and doing so can create risk for all parties involved.

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“The inherent tension is that you’re asking someone to rip up that contract and write it in a way that’s more favorable to one party. Anytime you’re doing that, you’ve got to balance the market tensions of two parties looking out for themselves individually and doing that in a way that makes the most sense,” Helander said.

JLT mostly used the strategy with its London market relationships and, in some cases, domestically. Insurers considered not only the market but also things such as the age and technology of their fleets and the backlog of work.

Good underwriting partners were key to making the strategy work, Helander said. Insurers essentially had to be willing to give up some premiums to secure and retain their market share in the future.

“There has to be a partner that’s willing to give a little here to get a little later. That flexibility and level of competition is really important on the market side,” Helander said.

A Strategy for Other Insurance Markets

As the energy market stabilized and rebounded in 2017, premiums rose back to their original levels and JLT phased out the use of the blend and extend strategy.

But the success of the strategy means it could be on the table again in the future should energy markets head back into a cyclical downturn.

“I believe that where there is a need for that immediate relief, absolutely, it is all about market share. In an environment where prices are falling for insurance companies, guaranteeing something immediately is something that would be applicable,” Harris said.

William Helander, executive vice president, JLT Specialty Insurance Services, Inc.

In the energy sector, some utilities offer such mid-term review contracts to clients that enable them to take advantage of lower costs in a falling market by extending the original contract over a longer period.

For example, should rates fall, a supplier may offer to blend current rates with contract rates should the client extend the contract for an additional year or two.

Helander believes the strategy could ultimately work in other areas of the insurance industry such as in health care and tech. The insurer also gets the benefit in what’s considered a competitive and falling market to keep the piece of business out of the marketplace for a longer period. They would have a reserve of the policy terms for a year’s period, which means, in theory, they could not only give a little on the front end but would also extend it for a longer period.

“It’s one of those strategies that when you’re walking into a deteriorating environment or an improving one, it can be used up and down with success, provided those dynamics around market interest and client interest all align well,” Helander said. &

Craig Guillot is a writer and photographer, based in New Orleans. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

In the Fast-Paced World of Retail, This Risk Manager Strives to Mitigate Risks Proactively and Keep Senior Leaders Informed

Janine Kral works to identify and mitigate risks, building strong partnerships with leaders and ensuring they see her as support rather than a blocker. 
By: | October 29, 2018 • 4 min read

R&I: What was your first job?

My very first paid job was working on my uncle’s ranch in British Columbia in the summers. He had cattle, horses and grapes — an unusual combo. But my first real job out of college was as a multi-line claims adjuster at Liberty Mutual.

R&I: How did you come to work in risk management?

Right out of college I applied for a job that turned out to be a claims adjuster at Liberty Mutual. I accepted because they were offering six weeks of training in Southern California, and at the time that sounded really fun. I spent about three years at Liberty Mutual and then I spent a short period of time at a smaller regional insurance company that hired me to start a workers’ compensation claims administration program.

I was hired at Nordstrom as the Washington Region Risk Manager, which was my first job in risk management. When I started at Nordstrom, the risk management department had about five people, and over the years it has grown to about 75. I’ve been vice president for 11 years.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

I would say that technology has probably been the biggest change. When I started many years ago, it was all paper and no RMIS.

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R&I: What risks does the retail industry face that are unique?

We deal with a lot of people — employees and customers. With physical brick and mortar settings, there are the unique exposures with people moving in and out in a public environment. And of course, with ecommerce, we have a lot of customer and employee data, which creates cyber risk — which is not necessarily a unique risk in today’s environment.

R&I: Can you describe your approach to working with senior leaders and front-line staff alike to further risk management initiatives?

It starts with keeping the pulse of what’s happening with the business. Retail moves really fast. In order to identify and mitigate risks proactively, we identify top risk areas and topics, and then we ensure that we have strong partnerships with the leaders responsible for those areas. Trust is critical, ensuring that leaders see us as a support rather than a blocker.

R&I: What role does technology play in your company’s approach to risk management?

Janine Kral, claims adjuster, Nordstrom

We have an internal risk management information system that all of our locations report events into — every type of incident is reported, whether insured or uninsured. Most of these events are managed internally by risk management, and our guidelines require that prevention be analyzed on each one. Having all event data in one system allows us to use the data for trending and also helps us better predict what may happen in the future, and who we need to work with to mitigate risks.

R&I: What advice might you give to students or other aspiring risk managers?

My son is a sophomore in college, and I tell him and his friends all the time not to rule out insurance as a career opportunity. My advice is to cast a wide net and do your homework. Research all the different types of opportunities. Read a lot — articles, industry magazines, LinkedIn. Be proactive and reach out to people you find interesting and ask them about their careers. Don’t be shy and wait for people and opportunities to come to you. Ask questions. Build networks. Be curious and keep an open mind.

R&I: What are your goals for the next five to 10 years of your career?

I have always been passionate about continuous improvement. I want to continue to find ways to add value to my company and to this industry.

R&I: What is your favorite book or movie?

My favorite book is Shantaram by Gregory David Roberts. It’s a true story about a man who was in prison in Australia after being convicted of armed robbery, and he escaped to India. While in India, he passed himself off as a doctor in a slum. It’s a really interesting story, because this is a convicted criminal who ends up helping others. I am not always successful in getting others to read the book because it’s 1,000 pages and definitely a commitment.

R&I: What’s the best restaurant you’ve ever eaten at?

Fiorella’s in Newton, Massachusetts. Great Italian food and a great overall experience.

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R&I: What is your favorite drink?

“Sister Carol.” I have no idea what is in it, and I can only get it at a local bar in Seattle. It’s green but it’s delicious.

R&I: What is the riskiest activity you ever engaged in?

Skydiving. Not tandem and without any sort of communication from the ground. Scary standing on a wing of a plane, but very peaceful once the chute opened, slowly floating down by myself.

R&I: If the world has a modern hero, who is it and why?

I can’t think of one individual person. For me, the real heroes are people who have a positive attitude in the face of adversity. People who are resilient no matter what life brings them.

R&I: What about this work do you find the most fulfilling or rewarding?

It’s rewarding to help solve problems and help people. I am proud of the support that my team provides others. &




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]