Sponsored: Starr Companies

Surviving the Cycle: Dedicated Teams Help Energy Bounce Back

As the industry begins its slow recovery, both insurers and energy producers will benefit from partnerships proven to stand the tests of time and adversity.
By: | July 27, 2017 • 5 min read

The rapid rise and steep fall of oil has taken the industry on a wild ride.

The drilling boom that began around 2010 sparked a lucrative period for the energy industry, but ultimately saturated the market with surplus oil. In 2015, prices bottomed out almost overnight, with the going rate for a barrel of oil plummeting into the low $20s. Smaller energy producers, or those newer to the business with less efficient operations, suffered the most.

Many went bankrupt.

“These were companies that entered the market during the boom, relying heavily on private equity to start their businesses,” said Les Lappe, assistant vice president, national practice leader, Primary Energy Division, Starr Companies. “Lack of experience meant less efficient business models than those of incumbent players. When the industry contracted so quickly, the newer entrants couldn’t afford to keep going.”

Those left behind after the contraction were arguably the strongest and most stable operators in the energy sector — but even many of them were struggling.

“There was no growth. Many of our clients were shrinking drastically,” Lappe said.

This, of course, had implications for insurers as well. But just as the downturn tested the efficiency and stability of energy companies and culled the less-experienced, it likewise pushed out carriers without a dedicated, long-term plan for the energy sector.

As the industry begins its slow recovery, both insurers and energy producers will benefit from partnerships proven to stand the tests of time and adversity.

An Industry on the Rebound

The surplus is unlikely to last forever, and America’s demand for oil has not diminished. Especially amid reduced reliance on coal, oil and gas have the potential for further growth.

“Our need for oil has actually increased by about 3 percent every year,” said Gregory Cropp, CPCU, assistant vice president, national practice leader, Excess Energy Division, Starr Companies. “Worldwide surplus has affected the price, but the more oil we extract from the U.S. and produce here, the more secure the industry will be domestically.”

The oil and gas industry indeed began showing signs of life again early in 2017. The price per barrel has inched up into the $40s. “Utilization of rigs, currently settled around 45 to 50 percent, may reach 60 to 75 percent by the end of 2017 or beginning of 2018 — especially as the number of onshore drilling permits pick up under the current regulatory regime,” Cropp said.

And, as Cropp points out, not every segment of the oil industry was depressed by the falling price of oil. Refineries, for example, took advantage of the downtime to refurnish equipment and improve their risk profile.

“Some refineries actually grew significantly through this turnaround,” he said. “They took it as an opportunity to do necessary maintenance. Now that work will tail off, and the oil well contractors will begin to pick up activity.”

Concurrently, insurers are entering the market hoping to reap the benefits of the recovery.

“There are a lot of new entrants offering excess casualty, domestically and in Bermuda and London as well,” said Carmella Capitano, vice president, Energy Division, Starr Companies. “So, we’re seeing more capacity come back into the marketplace.”

Though the oil and gas sector has not yet fully recovered, insurers also have to be wary of risks introduced by a growing market. If the price of oil rises too high, it creates space for new, inexperienced energy producers to enter the market — producers that may take more risks and operate with less safety.

“When the price exceeds $100 per barrel, we see more opportunistic players coming into the industry, and they introduce risk,” Lappe said. “The contraction actually had benefits for the industry as a whole by eliminating some of the riskiest companies and elevating the safety standard overall. Now we’re seeing more of a stabilization. In our experience, $50 – $75 per barrel creates a very stable market both for the oil producers and insurers.”

To survive market cycles and mitigate risks associated with both booms and depressions, oil producers need an insurance partner with a long-term view and an arsenal of dedicated resources.

Insuring for the Long Haul

As the energy sector contracted, insurers also shrank or shifted their teams to adjust. That often meant laying off underwriters, and putting construction or manufacturing specialists on double-duty to handle the dwindling energy business. Some carriers pulled out of energy altogether.

Through the years of plummeting oil prices and a sharp contraction, Starr maintained a team of underwriters, loss control specialists, claims managers, auditors, and financial experts all 100 percent dedicated to the energy sector.

“We are one of the rare insurance companies with a fully dedicated team,” Capitano said. “Between underwriting and service, we have about 60 employees across the country solely focused on energy.”

Its commitment to the industry demonstrates the value that Starr places on building long-term relationships with clients. When insureds shrank, underwriters provided premium flexibility.

“We assisted our clients by reducing premiums on their policies, or shifting some risk exposure back to them, with the expectation that when the market strengthens, we will put the exposures back onto the policy,” Lappe said. “It boils down to treating each other fairly through the process, which goes a long way in building a lasting client relationship.”

Underwriters are empowered to make their own decisions and write “outside the box,” working with each client’s unique situation instead of strictly adhering to defined application parameters.

The account service teams reinforce underwriters’ client-focused approach.

Starr’s loss control consultants, each with 25 plus years of experience in energy, visit sites all over the country and provide recommendations to improve safety and operations. The insurer’s lead claims manager, a lawyer by training with 15 years in the energy business under his belt, “knows when to mediate, when to settle, and when to take a case to trial,” Cropp said.

“We also have an actuary and a credit manager we’ve worked closely with, which has allowed us to maintain a financially stable portfolio during the downturn,” Capitano added.

“What we provide is expertise, both in underwriting and service,” she said. “I could put our team against any competitor’s, and we’ll win because of our commitment to the sector. When energy bounces back, and even if it crashes again, we’ll be here for the long haul.”

To learn more, visit http://www.starrcompanies.com/insurance.



This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.

Starr Companies is a global commercial insurance and financial services organization that provides innovative risk management solutions.

More from Risk & Insurance

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Risk Report: Marine

Crewless Ships Raise Questions

Is a remote operator legally a master? New technology confounds old terms.
By: | March 5, 2018 • 6 min read

For many developers, the accelerating development of remote-controlled and autonomous ships represents what could be the dawn of a new era. For underwriters and brokers, however, such vessels could represent the end of thousands of years of maritime law and risk management.

Rod Johnson, director of marine risk management, RSA Global Risk

While crewless vessels have yet to breach commercial service, there are active testing programs. Most brokers and underwriters expect small-scale commercial operations to be feasible in a few years, but that outlook only considers technical feasibility. How such operations will be insured remains unclear.

“I have been giving this a great deal of thought, this sits on my desk every day,” said Rod Johnson, director of marine risk management, RSA Global Risk, a major UK underwriter. Johnson sits on the loss-prevention committee of the International Union of Maritime Insurers.

“The agreed uncertainty that underpins marine insurance is falling away, but we are pretending that it isn’t. The contractual framework is being made less relevant all the time.”

Defining Autonomous Vessels

Two types of crewless vessels are being contemplated. First up is a drone with no one on board but actively controlled by a human at a remote command post on land or even on another vessel.

While some debate whether the controllers of drone aircrafts are pilots or operators, the very real question yet to be addressed is if a vessel controller is legally a “master” under maritime law.


The other type of crewless vessel would be completely autonomous, with the onboard systems making decisions about navigation, weather and operations.

Advocates tout the benefits of larger cargo capacity without crew spaces, including radically different hull designs without decks people can walk on. Doubters note a crew can fix things at sea while a ship cannot.

Rolls-Royce is one of the major proponents and designers. The company tested a remote-controlled tug in Copenhagen in June 2017.

“We think the initial early adopters will be vessels operating on fixed routes within coastal waters under the jurisdiction of flag states,” the company said.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.”

Once autonomous ships are a reality, “the entire current legal framework for maritime law and insurance is done,” said Johnson. “The master has not been replaced; he is just gone. Commodity ships (bulk carriers) would be most amenable to that technology. I’m not overly bothered by fully automated ships, but I am extremely bothered by heavily automated ones.”

He cited two risks specifically: hacking and fire.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.” — Rolls-Royce Holdings study

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty, asked an even more existential question: “From an insurance standpoint, are we even still talking about a vessel as it is under law? Starting with the legal framework, the duty of a flag state is ‘manning of ships.’ What about the duty to render assistance? There cannot be insurance coverage of an illegal contract.”

Several sources noted that the technological development of crewless ships, while impressive, seems to be a solution in search of a problem. There is no known need in the market; no shippers, operators, owners or mariners advocate that crewless ships will solve their problems.

Kinsey takes umbrage at the suggestion that promotional material on crewless vessels cherry picks his company’s data, which found 75 percent to 90 percent of marine losses are caused by human error.


“Removing the humans from the vessels does not eliminate the human error. It just moves the human error from the helm to the coder. The reports on development by the companies with a vested interest [in crewless vessels] tend to read a lot like advertisements. The pressure for this is not coming from the end users.”

To be sure, Kinsey is a proponent of automation and technology when applied prudently, believing automation can make strides in areas of the supply chains. Much of the talk about automation is trying to bury the serious shortage of qualified crews. It also overshadows the very real potential for blockchain technology to overhaul the backend of marine insurance.

As a marine surveyor, Kinsey said he can go down to the wharf, inspect cranes, vessels and securements, and supervise loading and unloading — but he can’t inspect computer code or cyber security.

New Times, New Risks

In all fairness, insurance language has changed since the 17th century, especially as technology races ahead in the 21st.

“If you read any hull form, it’s practically Shakespearean,” said Stephen J. Harris, senior vice president of marine protection UK, Marsh. “The language is no longer fit for purpose. Our concern specifically to this topic is that the antiquated language talks about crew being on board. If they are not on board, do they still legally count as crew?”

Harris further questioned, “Under hull insurance, and provided that the ship owner has acted diligently, cover is extended to negligence of the master or crew. Does that still apply if the captain is not on board but sitting at a desk in an office?”

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty

Several sources noted that a few international organizations, notably the Comite Maritime International and the International Maritime Organization, “have been very active in asking the legal profession around the world about their thoughts. The interpretations vary greatly. The legal complications of crewless vessels are actually more complicated than the technology.”

For example, if the operational, insurance and regulatory entities in two countries agree on the voyage of a crewless vessel across the ocean, a mishap or storm could drive the vessel into port or on shore of a third country that does not recognize those agreements.

“What worries insurers is legal uncertainty,” said Harris.

“If an operator did everything fine but a system went down, then most likely the designer would be responsible. But even if a designer explicitly accepted responsibility, what matters would be the flag state’s law in international waters and the local state’s law in territorial waters.


“We see the way ahead for this technology as local and short-sea operations. The law has to catch up with the technology, and it is showing no signs of doing so.”

Thomas M. Boudreau, head of specialty insurance, The Hartford, suggested that remote ferry operations could be the most appropriate use: “They travel fixed routes, all within one country’s waters.”

There could also be environmental and operational benefits from using battery power rather than conventional fuels.

“In terms of underwriting, the burden would shift to the manufacturer and designer of the operating systems,” Boudreau added.

It may just be, he suggested, that crewless ships are merely replacing old risks with new ones. Crews can deal with small repairs, fires or leaks at sea, but small conditions such as those can go unchecked and endanger the whole ship and cargo.

“The cyber risk is also concerning. The vessel may be safe from physical piracy, but what about hacking?” &

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]