Supply Chain Risk

Harvey Hampers Third of U.S. Refining Capacity

Overall economic impact may reach $100 billion.
By: | September 5, 2017 • 4 min read

Coast Guard personnel walks through Aqueous Film Forming Foam (AFFF) as the top layer blows off spilled oil at a Kinder Morgan Liquid Terminal in Houston, Texas, Aug. 30, 2017. AFFF is a safety measure used to prevent exposed petroleum from igniting. Photo: U.S. Coast Guard

From the newest export terminals for liquefied natural gas to refineries first built before World War II, Hurricane Harvey’s track from Corpus Christi, Texas to Louisiana could not have been better designed to imperil the heart of North America’s refining and petrochemical industry.

Andrew Coburn, director, External Advisory Board, Cambridge Centre for Risk Studies

The U.S. Department of Energy (DOE) reported that six refineries around Corpus, seven running from Houston to Galveston, and two more in Beaumont and Port Arthur shut down. Five others across the region were operating at reduced rates. Those closures comprise refining capacity of almost 4 million barrels per day.

That represents about 40 percent of total capacity along the Gulf Coast, and 21 percent of total U.S. refining capacity. The five refineries operating at reduced rates represent a further 1.5 million b/d, or 16 percent of Gulf Coast capacity and 8 percent of total U.S. capacity. That raises the total national capacity impinged to a stunning 29 percent. Beyond the processing capacity, at least 11 oil and gas pipelines were shut or operating at reduced rates either because of actual flooding or for lack of volume.

The Cambridge Centre for Risk Studies tracks the economic activity of 300 cities around the world assessing them for the implications of shocks and disruptions. According to Andrew Coburn, director of the advisory board, the core gross domestic product (GDP) for Houston is $314 billion. In January the center ran a model of a storm similar to Harvey hitting Houston and estimated that the total economic hit to that GDP at $60 billion. The GDP of the greater Houston area is about $500 billion. Proportionally that would put storm disruption at $100 billion.

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“Beyond the immediate impact to industry,” said Coburn, “there is also the disruption to the national and global supply chains.” Houston is a major rail center, container port, crude-oil and fuels port, air hub, and trucking center.

Upstream of the refineries, oil and gas production offshore as well as in the prolific Eagle Ford shale formation in south Texas is heavily reduced. Jeff Quigley, director of energy markets for Stratas Advisors, said during an August 30 webinar that he expected offshore production to come back sooner rather than later. Onshore production, however, was harder to forecast because it is so decentralized.

“Beyond the immediate impact to industry, there is also the disruption to the national and global supply chains.” — Andrew Coburn, director, External Advisory Board, Cambridge Centre for Risk Studies

David Robertson, global head of energy risk consulting for Allianz estimated that about 800,000 b/d of oil production was impacted, which is close to 10 percent of the national total. “That is having a predictable impact on pricing.” He added that the pipelines and are under particular pressure.

Several insurance and process-industries sources noted that refineries and chemical plants along the Gulf Coast are designed to withstand hurricanes, and that operators had sufficient time to wind down operations and secure the facilities. However, pipe racks, pumps, and tanks are all vulnerable to leaking, floating, or being displaced by water or debris.

“The refineries are run by sharp people who have learned important lessons from previous hurricanes,” said Robertson. “They have a good track record for operations, especially at a steady state. Historically the largest losses in the industry have not come from storms but from incidents on start up, shut down, or maintenance.”

The notable exception to facilities being secured is the Arkema peroxide plant northeast of Houston in Crosby, Texas. When the plant was flooded and lost its generators, the peroxides could not be kept cooled and auto-ignited in a series of fires that caused toxic releases. Why that facility was more vulnerable than others to flooding has yet to be determined.

Other than that there have yet been no reports of major damage to industry as a result of the storm. “The waters are only just starting to go down but we have not heard of any significant damage to refineries or chemical plants,” said John A. Rathmell, Jr., president of Lockton marine and energy, and a former Risk & Insurance Power Broker.

“A lot of our clients in the energy and chemical sector have been through multiple storms. They have hardened their faculties by raising critical equipment off the ground. So far we have not heard of any problems with process unit integrity.”

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Two other common concerns are pollution and business interruption (BI). The latter is not likely to apply broadly, Rathmell explained, because most of the major oil and chemical companies retain those risks. Those that do buy BI coverage may have 30- or 45-day waiting periods, more commonly 60- or 90-day.

Pollution liability is much more complicated, he added. Unless it can clearly be demonstrated that a substance leaked from a certain facility, then contamination is likely to be considered ambient in such a massive flood. Hundreds of gas stations, warehouses, junk yards, and dumps were inundated by Harvey.

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Property

Insurers Take to the Skies

This year’s hurricane season sees the use of drones and other aerial intelligence gathering systems as insurers seek to estimate claims costs.
By: | November 1, 2017 • 6 min read

For Southern communities, current recovery efforts in the wake of Hurricane Harvey will recall the painful devastation of 2005, when Katrina and Wilma struck. But those who look skyward will notice one conspicuous difference this time around: drones.

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Much has changed since Katrina and Wilma, both economically and technologically. The insurance industry evolved as well. Drones and other visual intelligence systems (VIS) are set to play an increasing role in loss assessment, claims handling and underwriting.

Farmers Insurance, which announced in August it launched a fleet of drones to enhance weather-related property damage claim assessment, confirmed it deployed its fleet in the aftermath of Harvey.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now,” said George Mathew, CEO of Kespry, Farmers’ drone and aerial intelligence platform provider partner.

“The current wind and hail damage season that we are entering is when many of the insurance carriers are switching from proof of concept work to full production rollout.”

 According to Mathew, Farmers’ fleet focused on wind damage in and around Corpus Christi, Texas, at the time of this writing. “Additional work is already underway in the greater Houston area and will expand in the coming weeks and months,” he added.

No doubt other carriers have fleets in the air. AIG, for example, occupied the forefront of VIS since winning its drone operation license in 2015. It deployed drones to inspections sites in the U.S. and abroad, including stadiums, hotels, office buildings, private homes, construction sites and energy plants.

Claims Response

At present, insurers are primarily using VIS for CAT loss assessment. After a catastrophe, access is often prohibited or impossible. Drones allow access for assessing damage over potentially vast areas in a more cost-effective and time-sensitive manner than sending human inspectors with clipboards and cameras.

“Drones improve risk analysis by providing a more efficient alternative to capturing aerial photos from a sky-view. They allow insurers to rapidly assess the scope of damages and provide access that may not otherwise be available,” explained Chris Luck, national practice leader of Advocacy at JLT Specialty USA.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now.” — George Mathew, CEO, Kespry

“In our experience, competitive advantage is gained mostly by claims departments and third-party administrators. Having the capability to provide exact measurements and details from photos taken by drones allows insurers to expedite the claim processing time,” he added.

Indeed, as tech becomes more disruptive, insurers will increasingly seek to take advantage of VIS technologies to help them provide faster, more accurate and more efficient insurance solutions.

Duncan Ellis, U.S. property practice leader, Marsh

One way Farmers is differentiating its drone program is by employing its own FAA-licensed drone operators, who are also Farmers-trained claim representatives.

Keith Daly, E.V.P. and chief claims officer for Farmers Insurance, said when launching the program that this sets Farmers apart from most carriers, who typically engage third-party drone pilots to conduct evaluations.

“In the end, it’s all about the experience for the policyholder who has their claim adjudicated in the most expeditious manner possible,” said Mathew.

“The technology should simply work and just melt away into the background. That’s why we don’t just focus on building an industrial-grade drone, but a complete aerial intelligence platform for — in this case — claims management.”

Insurance Applications

Duncan Ellis, U.S. property practice leader at Marsh, believes that, while currently employed primarily to assess catastrophic damage, VIS will increasingly be employed to inspect standard property damage claims.

However, he admitted that at this stage they are better at identifying binary factors such as the area affected by a peril rather than complex assessments, since VIS cannot look inside structures nor assess their structural integrity.

“If a chemical plant suffers an explosion, it might be difficult to say whether the plant is fully or partially out of operation, for example, which would affect a business interruption claim dramatically.

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“But for simpler assessments, such as identifying how many houses or industrial units have been destroyed by a tornado, or how many rental cars in a lot have suffered hail damage from a storm, a VIS drone could do this easily, and the insurer can calculate its estimated losses from there,” he said.

In addition,VIS possess powerful applications for pre-loss risk assessment and underwriting. The high-end drones used by insurers can capture not just visual images, but mapping heat, moisture or 3D topography, among other variables.

This has clear applications in the assessment and completion of claims, but also in potentially mitigating risk before an event happens, and pricing insurance accordingly.

“VIS and drones will play an increasing underwriting support role as they can help underwriters get a better idea of the risk — a picture tells a thousand words and is so much better than a report,” said Ellis.

VIS images allow underwriters to see risks in real time, and to visually spot risk factors that could get overlooked using traditional checks or even mature visual technologies like satellites. For example, VIS could map thermal hotspots that could signal danger or poor maintenance at a chemical plant.

Chris Luck, national practice leader of Advocacy, JLT Specialty USA

“Risk and underwriting are very natural adjacencies, especially when high risk/high value policies are being underwritten,” said Mathew.

“We are in a transformational moment in insurance where claims processing, risk management and underwriting can be reimagined with entirely new sources of data. The drone just happens to be one of most compelling of those sources.”

Ellis added that drones also could be employed to monitor supplies in the marine, agriculture or oil sectors, for example, to ensure shipments, inventories and supply chains are running uninterrupted.

“However, we’re still mainly seeing insurers using VIS drones for loss assessment and estimates, and it’s not even clear how extensively they are using drones for that purpose at this point,” he noted.

“Insurers are experimenting with this technology, but given that some of the laws around drone use are still developing and restrictions are often placed on using drones [after] a CAT event, the extent to which VIS is being used is not made overly public.”

Drone inspections could raise liability risks of their own, particularly if undertaken in busy spaces in which they could cause human injury.

Privacy issues also are a potential stumbling block, so insurers are dipping their toes into the water carefully.

Risk Improvement

There is no doubt, however, that VIS use will increase among insurers.

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“Although our clients do not have tremendous experience utilizing drones, this technology is beneficial in many ways, from providing security monitoring of their perimeter to loss control inspections of areas that would otherwise require more costly inspections using heavy equipment or climbers,” said Luck.

In other words, drones could help insurance buyers spot weaknesses, mitigate risk and ultimately win more favorable coverage from their insurers.

“Some risks will see pricing and coverage improvements because the information and data provided by drones will put underwriters at ease and reduce uncertainty,” said Ellis.

The flip-side, he noted, is that there will be fewer places to hide for companies with poor risk management that may have been benefiting from underwriters not being able to access the full picture.

Either way, drones will increasingly help insurers differentiate good risks from bad. In time, they may also help insurance buyers differentiate between carriers, too. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]