Energy construction boom – a paradigm shift for insurers
The current boom in oil and gas construction and rising profit margins in the energy industry can have a serious impact on replacement costs and business interruption coverages. Insureds and insurers must review policy conditions to ensure that exposures are adequately valued and avoid underinsurance.
In recent years, global demand for oil and natural gas has risen to record levels. Sustained consumption in industrialised countries and a growing hunger for energy in China and other emerging markets have pushed up prices to historic highs. After years of underinvestment, this trend has attracted new capital into the industry, fuelling a worldwide boom in the construction of oil, gas and petrochemical plants.
In addition to the wider impact of energy demand on the global economy, the overheated oil and gas construction market has specific implications for the insurance industry. The resulting shortage of manpower, skills and materials is likely to significantly increase the reinstatement costs of energy installations. In the event of a loss, many insureds may find themselves underinsured and attritional losses will have a much larger impact on insurers, due to the increase in overall costs.
Business interruption insurance is also affected, as most operators have not adapted their indemnity periods to the increased delivery and construction/ installation times for plants and equipment. In addition, price rises and higher refining margins can have a larger than expected effect on the insurers’ exposure.
This focus report analyses the implications of the energy construction boom for the insurance industry and discusses how they can be addressed by insurers and insureds.
Related Link
Please also see the Centre for Global Dialogue publication on Our energy future: An economic, geopolitical and risk perspective. How can we ensure a sufficient supply, considering economic and geopolitical risks as well as climate change?
