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Energy Underwriting: the value of process safety leading indicators

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Steven Braithwaite.

Energy Underwriting: the value of process safety leading indicators

By Steven Braithwaite*

Major loss events are a serious and growing concern within the energy industry. Incidents such as Macondo (the explosion and fire in April 2010 on the Deepwater Horizon semi-submersible) and the Texas City refinery explosion in 2005 have resulted in huge economic losses to operators and insurance organisations, as well as causing moral outrage. In order to help prevent incidents such as these, the energy industry uses a range of engineering and management techniques under the umbrella of Process Safety Management (PSM) to help prevent major loss events.

Elements of PSM include mechanical integrity of plant, management of change processes, quantitative risk assessment and emergency response. Monitoring is also an important element of PSM which also includes the use of process safety indicators.

These indicators fall into two types, lagging and leading. Lagging indicators are a measurement of past occurrences and include the release of toxic substances, fire or explosion, which are areas where insurance organisations traditionally focus. Leading indicators are used to monitor the efficiency and effectiveness of key processes and barriers which have been established to prevent or mitigate an incident.

Examples of leading indicators include:

  • percentage of maintenance and inspection of safety critical equipment carried out as required within a specified time frame;
  • percentage of Management of Change programmes completed as required to specified criteria; and
  • number of alarms activated and their reasons.

Leading indicators can highlight deterioration within the system that could eventually lead to a major loss. I am currently evaluating how energy insurance underwriters could use PSM leading indicators in the underwriting process to obtain a better understanding of both the likelihood and severity of incidents in the future.

The inspiration for this work comes from the major changes the insurance sector is currently experiencing. We are now seeing the movement towards block-chain, organisations dealing with big data as well as societal shifts in the way insurance is viewed. Another issue is investment into technological innovation, for which not only dexterous start-ups are flying the flag but also the major players. In the UK, the Financial Conduct Authority has set up ‘Project Innovate’ in an attempt to ensure that regulation and oversight keeps pace with these changes.

Insurance companies are clearly ready to use leading indicators. In personal insurance, examples of this can be seen in use of telematics in car insurance allowing tailored coverage along with further services of real time risk mitigation i.e. warning a driver that the engine could fail. Using flight data, Collinson Group, send travel vouchers automatically to insured customers who experience delays giving them access to airport lounges.

Implementing this tailored and active approach means insurers are becoming more of a real-time risk consultant to customer needs which increases engagement from the insured.

Up-scaling from personal insurance to an industrial level, this idea of monitoring the present to predict the future could be used by energy underwriters in understanding the on-going risk within process plant, with leading indicators being the source data.

If an insurer sees that process alarms are continuously being tripped or maintenance is not being carried out sufficiently, they would assume that the plant has a high probability of suffering a major incident enabling them to adjust their coverage accordingly.

This method of insurance organisation monitoring and engagement could have the following benefits:

  • Active engagement between operator and insurer;
  • More accurate data available to enable more precise rate setting.
  • Encourage safer operation of plant due to active outside monitoring.
  • Insurer input into the plant operations using experience gained from interfaces with other plant will increase awareness of challenges.
  • Encourage further investment into PSM that can often be ignored, as it is not a tangible revenue stream for the operator.
  • Active engagement of management into PSM who will see the tangible value of investment.
  • More insurance options available for the operator including modular insurance.
  • If telematics were implemented, this could improve the legitimacy of the data recorded.
  • Wider societal benefits of safer plant and reduced risk of major disasters.

As with all proposed innovations there are potential obstacles to overcome, which in the case of implementing leading indicators is that for the most part they are currently site specific. This means they can vary from site to site resulting in an industry-wide lack of consistency. This would challenge insurers to establish the benchmark requirements needed to set meaningful rates. The issue is also exacerbated by the reluctance of energy organisations to share data with competitors.

If telematics were implemented to monitor plant leadings indicators, this could create further big data issues for the insurer. Regulatory control would have to be developed for this new field of leading indicator energy insurance.

A major factor is also to consider is who will instigate this change. Hard and soft markets can swing the impetus between the insurer and the insured. In the current climate of lower and lowering premiums, insurers are unlikely to be the epicentre. Pendulous market shifts positions the broker as the cornerstone of discussion. However, ultimately, all parties must play a role in the change.

These issues must be addressed in order to integrate PSM leading indicators fully into the underwriting process. I believe the first step to overcome these barriers is to understand how energy underwriters currently use leading indicators. With this information, we can hopefully change to reflect and respond to future demands.

*Steven Braithwaite has worked in the oil and gas industry for six years and has developed a broad interest in risk management. He holds a BEng Honours degree in Mechanical Engineering, and is currently undertaking his postgraduate MSc in Process Safety and Loss Prevention with the University of Sheffield.

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