An Engineering Approach to Upstream Insurance: Risk Management or Poacher Turned Gamekeeper?

Abstract

Recent accidents in the Gulf of Mexico, East Timor Sea and North Sea are, amongst others, regarded as catastrophic events by the insurance industry due to loss of life and financial loss. Traditionally, upstream insurance relies heavily on underwriting judgement for decision making. It is evident that the upstream offshore energy insurance industry lags behind other specialist insurance areas in assessing pure engineering aspects of a risk. This presents a problem in an area that requires wide engineering expertise to perform a risk assessment. Such expertise covers construction, well control, property damage, pollution, business interruption and any combination of these.Further, the impact on insurance companies has been almost overlooked by the Exploration and Production (E&P) industry as they concentrate on fulfilling their owners and regulatory requirements. Catastrophic events are considered, even within the E&P industry, as being "unfortunate". However, for the insurance companies and E&P companies they can be disastrous.These events have highlighted the importance of detailed engineering risk assessment on each area of engineering including: structures, process, control of well and construction. Within these areas, risk factors including; management and process systems, competency of personnel, technical and design details will be reviewed in detail together with pricing implications to the insurance industry.Insurance costs for E&P companies can form a substantial part of their annual expenditure, especially for new projects and new companies. Effective risk assessment, together with correct pricing, could be of benefit to all stakeholders. This paper discusses the factors relating to the risk assessment of upstream insurance projects and suggests ways of improving risk to both insurance companies and E&P operators by identifying best practice in each area of engineering. This will assist E&P companies adapting or modifying their existing operational systems and enable them to enhance their own risk management process by benchmarking against similar operators.