RSG Underwriting Managers (the underwriting arm of Ryan Specialty Group) underwrites in the global energy markets via two MGUs: Global Special Risks (GSR), which focuses on fossil fuels, and PERse, which focuses on renewable energy. In this article, executives from each unit offer their perspectives on the challenges and opportunities facing these aspects of the energy sector.
As the world’s energy needs have grown and the way these needs are served becomes ever more complex, many insurers have grappled with the insurance and risk transfer needs of the changing energy sector—and some have been burned along the way.
RSG Underwriting Managers (RSGUM) has acknowledged the opportunities for underwriting expertise and discipline in this industry, and the group has taken a different approach in two key ways. First, RSGUM has developed specialised managing general underwriters (MGUs) to keep pace with the changing landscape and technologies in the energy sector and, second, it has invested heavily in technical underwriting expertise to ensure the MGUs understand the risks. RSGUM’s energy MGUs are true partners to their capital providers, always striving for underwriting profit.
RSGUM has two MGUs writing energy business: Global Special Risks (GSR) which focuses mainly on fossil fuels, and PERse, (Power, Energy, Risk, securing the environment), which insures renewable energy risks such as wind, solar, hydro, and bio. Both MGUs have expanded their offerings in recent years to keep pace with the changing energy market.
Broadening of oil and gas sector offerings
Steve England, chief executive of GSR, explains that five years ago, GSR was primarily a “control of well” underwriter. Today, in addition to control of well, GSR’s product mix includes general liability for operators and consultants, professional liability, and environmental liability for clients working in the upstream oil and gas energy sector.
In addition to expanding in casualty offerings, GSR has added property programmes for oil field service contractors, and upstream lease operators in the upstream sector, as well as the ability to provide property coverage for fixed assets and equipment for mid-stream oil and gas companies. GSR also offers specialty property coverage in the oil and gas marine sector that includes sub-sea equipment, cargo, and general equipment.
England says that the broadening of its portfolio was largely triggered by the sharp decline in the price of crude oil in 2015/16 when it fell from a high of over $100 a barrel in 2013 to around the $30 a barrel mark in 2016. He explains that this had a direct impact on insurance in the oil and gas sector because, suddenly, the commodity price of a barrel of oil was less than the cost to produce a barrel of oil.
For many clients, margins were so tight that they stopped drilling activities all together. This economic force severely reduced demand for the GSR’s main control of well underwriting product.
GSR used this period to expand its offering and diversify. It understood that the price of oil would eventually change, and set out to develop a more robust product offering for its clients. The price of oil is now around $70 a barrel. GSR is in a better position to be relevant in the upstream and midstream oil and gas space.
“We took a hard look at our product mix and looked at what would be in demand when production came back,” England says. “We diversified into a number of new lines of business including areas like environmental liability that would cover things such as gradual pollution.
“Cyber liability is an area that is emerging in the oil and gas sector, and GSR has developed capabilities to offer cyber coverage to its clients.”
There have been recent reports of energy pipeline companies’ shared data networks being compromised, forcing at least four US natural-gas pipeline operators to temporarily shut down computer communications with their customers. GSR now has a product that will cover these types of companies, including any business interruption that might occur, says England.
He admits that the downturn in the price of oil forced innovation at the business.
“It made us develop new products, and we are more diversified and meaningful to our customers as a result,” he says.
England stresses that the company moved into new lines in a very disciplined manner. In each instance, the company first spoke to clients to establish demand and the levels of capacity in each market segment. GSR also ensured it had the in-house technical expertise to underwrite the risks; at times, GSR made strategic hires and tasked new underwriters and teams with building the new product offering.
England believes the sector is starting to ramp up activity again, which will create additional premium opportunity as drilling starts to come back on line.
“Many of our clients are bullish again, and we are seeing new players come into the market. Private equity is starting to play a bigger role in the upstream space. GSR’s ‘pay on behalf of’ control of well policy form is gaining a lot of interest from the private equity clients,” he explains.
“GSR looks very closely at the expertise and experience of the companies we are insuring. We strongly consider the experience level of the management team, as opposed to how long an operator has been in business,” he explains.
Against this backdrop, England says, pricing in the market has firmed up in recent months—he has not seen significant rate increases but the big rate decreases have stopped, and the market is starting to level off. That is in stark contrast to what happened in 2014 through 2016 when new entrants to the market brought increased capacity which, in turn, reduced rates.
“A lot of that competition has become more responsible or departed the market,” he says. “We see the occasional outlier, but for the most part the insurers in our space are being more disciplined with rates.
“With our enhanced product offerings, we are now well positioned to satisfy a wider range of upstream and midstream oil and gas clients’ needs.”
Summarising how the company has changed in recent years, he stresses that GSR has identified and hired a core group of underwriters who have a successful track record in underwriting energy business.
“Our capital providers enjoy the advantage of underwriting expertise, without the expense of housing these highly trained individuals. The result is a well-underwritten book of business, with a variable underwriter cost.
“Our product mix has grown to reflect areas where specialty underwriting is required, and our capital providers desire a book of business but do not want to aggregate the field underwriters necessary to gain market share.
“Certain aspects of the oil and gas sector lend themselves to specialty underwriting that requires unique skillsets not readily found in the underwriting ranks. GSR’s focus on upstream business, and now mid-stream business, lends itself to the specialty underwriters that GSR has brought on staff over the last five years. Our underwriters bring a discipline that is not easily replicable.
“In addition to very specialised underwriting, we have a unique relationship with a world-class well service provider. This relationship helps our underwriters assess and mitigate risk, and provides our capital partners with expert response in the event of an incident.”
The changing face of renewables
The executives running PERse, the company’s renewable energy specialist MGU, explain that business has been on a similar journey of change in recent years. Market entrants green to the space, and the evolution of technology along with aging fleets and M&A activity, are all driving considerations in the current renewable world.
PERse’s team of underwriters and personnel started writing renewable energy business some 20+ years ago. At that time, with the exception of hydro, very little power production came from renewable energy sources.
That has changed at a rapid pace over the last decade. In 2017, more than 50 percent of all the new power produced in the world came from renewable energy projects. Just as all these projects have become more economical and cost-effective in producing electricity, all come with their own unique exposures.
Michael Bernay, chief executive and managing director of PERse, says that as owners, operators and utilities expanded and diversified into all renewables, PERse worked to provide their clients with detailed and specific coverage options to meet their evolving needs.
“Today, we have written business in every renewable energy industry class,” Bernay says. “While our written portfolio is still made up primarily of wind energy, solar and bio (biomass and biodiesel), we are a leading insurer of geothermal power plants and battery storage.”
He also notes that, in addition, due to recent US tax incentives, hydro projects are a cost-effective way of producing power, and many dams are being repowered offering new and different opportunities in that sector.
“We have also provided coverage for wave and tidal projects which are very much prototypical but still being built,” he says.
PERse’s flagship product is its property policy, which can provide up to $1 billion in capacity on any phase of any project. Bernay says the company refers to the coverage as “cradle to grave” since it can address every part of a project’s lifespan. Cargo/ocean marine, construction and operational can all be written under a single policy.
“We have recently added a casualty feature to our offering in order to further diversify the book. This addition allows our brokers to offer their clients all the coverage required from a single underwriting source. We believe this is an important service to our broker/agents and their clients,” he says.
Battery storage in particular has become a hot and evolving topic in the renewable energy industry.
“It has received some scepticism from various insurance underwriters due to misunderstood losses in the marketplace, but clients, lenders and bankers are all asking for more comprehensive coverage,” Bernay says.
“We have invested the time to work with engineers to come up with answers to our capital providers’ concerns, and we now have the ability to offer $50 million and more of coverage to projects that include battery storage. We believe this type of offering distinguishes us from our competition.”
Patrick Stumbras, president and managing director of PERse, adds context to how the product mix has changed in recent years. He explains that, in North America, there has been much consolidation in the wind energy sector, meaning the company is now dealing with a smaller number of larger clients—but many with more complex needs.
The other big factor changing the landscape has been an increasing number of US states stipulating how much of their energy generation must come from renewable sources. Some states are targeting at least 20 percent of energy being generated in this way.
Dovetailing with that dynamic is a new partnership with AEGIS, which participates as a lead insurer on almost all US public utilities’ traditional energy businesses. Under the agreement, PERse will provide engineering expertise, claims handling and reinsurance on the mutual’s renewable energy risks.
“This partnership gives us access to a wider portfolio of clients and risks and a renowned partner in the power space,” says Bernay. As utilities move towards an increase in actual ownership of renewable assets, their traditional programmes may not address the specific needs of a renewable energy risk.
He also emphasises the size of the lines the company is capable of putting down in a sector that can involve very large one-off risks. He notes that it has insured a $2.8 billion solar project and wind projects worth almost $1 billion.
“We probably have more cat capacity than any competitor,” he says. “We also have a lot of technical expertise and model every project; we are often able to advise clients on what levels of coverage they should buy, which reduces their overall spend.”
Stumbras notes that while there was concern regarding the direction the government would take with respect to renewables, it has turned out to be unfounded. The renewable atmosphere is buzzing and is clearly evidenced by, for example, the acceleration in pace of US offshore wind. He believes that the MGU model is well suited to writing complex renewable energy risks. The technical and mechanical issues underpinning some of these risks demand large amounts of diverse capital and deep expertise.
“We can’t influence whether an earthquake is occurring but we can understand why a wind turbine might stop turning,” says Bernay.
He also stresses that losses will happen, and patience is key in this business.
“Our patience and loss controls set us apart,” he says. “There will be losses but it is how you handle those and learn from them.”
He adds that rates have been a challenge in the sector, but it has been a question of retaining discipline and underwriting on a very technical basis.
Historically, the company has predominantly managed North American risks, but its international portfolio is growing. Bernay says that the international segment of the business now represents some 15 percent of the portfolio as it increasingly supports domestic and international clients with risks globally.
Summarising the way the company has adapted and developed in recent years, Bernay says that its core ethos promotes very technical underwriting and knowledge of each class of business it enters.
As an example, he notes PERse has just finalised a product for the offshore wind energy industry which is now starting to emerge in North America. Offshore wind, which differs from onshore, requires a different skill set and capital provider commitment.
“We hired a specialty underwriter, aligned ourselves with a third party specialist engineer, and worked with a worldwide capital provider to make this product viable and attractive. We take a tactical approach to the underwriting and the loss mitigation of each industry class we enter.
We work in partnership with our clients and capital providers to resolve potential risk exposures and correct potential loss issues,” Bernay says.
“Finally, we continue to have active discussions not only with our brokers, but with our clients and the financial community (lenders, consultants) as to what products are needed or can be improved upon within the insurance industry.
“Similar to the products identified above, our next offering will be based on the industry’s needs and our clients’ requirements.”
Steve England is chief executive of Global Special Risks. He can be contacted at: email@example.com
Michael Bernay is chief executive and managing director of PERse. He can be contacted at: firstname.lastname@example.org
Patrick Stumbras is president and managing director of PERse. He can be contacted at: email@example.com
RSG Underwriting Managers, Energy, Risk transfer, MGU, Global Special Risks, Renewable, Insurance, Steve England, Michael Bernay, Patrick Stumbras, Global