14 October 2016 Insurance

Hackers could control 70% of power and petrochemical companies in days

Conventional oil and gas underwriters need to start thinking about diversifying their portfolios into newer energy technology, especially renewables, Kamal Tabaja, Group COO for Trust Re, told EAIC Today.

However, for the foreseeable future, fossil fuels will remain the dominant source of energy, he said.

Upstream energy markets, from 2014 to 2015 alone, premium volumes have dropped from about $3 billion to $2.3 billion; at the same time, overall losses whether insured or not, have risen.

“Likewise, in the downstream sector premium volumes are being eaten away fast, as a result of abundant capacity and increasing reliance on captives,” he said. “Contrary to the upstream sector, however, losses recorded in downstream are much less.”

Volatile oil prices have impacted the upstream and downstream sectors differently, added Tabaja. In the former, an increasing number of clients have opted for lower programme limits and higher self-retentions despite the fact that the decline in oil prices has reduced the scope for a ‘natural’ hedging of exposures. In the latter, the contrary is true: the sharply reduced cost of feedstock has boosted refiners’ margins, with business interruption values up accordingly.

“Further consolidation is very likely given the current turmoil affecting the global oil and gas industry, implying that the demand for energy insurance capacity will come under additional pressure,” he said.

Tabaja believes sound Enterprise Risk Management (ERM) practices are a further way in which reinsurers can add value to stakeholders.

“The risk landscape is changing fast, presenting both challenges and opportunities. With reference to the energy sector, technological progress is of particular relevance. One example is the rise of subsea drilling, as opposed to traditional platform-based field drilling. Statistics reveal that such completions operate relatively smoothly after the initial installation. In addition, they are economically advantageous and offer environmental benefits,” he said.

“Another relevant trend is risk concentration. It presents major underwriting challenges in most areas of energy and power insurance. A further development to monitor is supply chain risk, as exemplified by the Tohoku earthquake, the Thai floods and the Tianjin blasts.”

He also highlighted the importance of the emerging risks of terrorism and cyber.

“By now, terrorism has become a global phenomenon. Although particularly highly concentrated in a few countries, it is spreading to more. Terrorism continues to be a threat with the resulting growing need for, and uptake of, terrorism and political violence insurance by businesses as a risk mitigation measure. Trust Re provides terrorism & political violence cover as part of its specialty lines reinsurance offering.

“Cyber-attacks are placed within the top ten global risks in terms of likelihood and have become increasingly relevant for many companies, especially due to the growth in use of cloud computing, social media and ‘big data’. The Energy sector is certainly not immune to the threat of terrorism or cyber- attacks,” he said.

“I asked a hacker who is employed to spot cyber weaknesses, how long it would take him to hack power and petrochemical companies. He said that he would have been able to take control of the system of about 70 percent of the companies in three to seven days, and the rest between two weeks and two months. This shows you the vulnerabilities.”

Against the backdrop of a rapidly changing operating environment in the energy sector, those who embrace the opportunities of ERM as both a risk mitigation measure and value-added proposition are those most likely to ‘weather’ the current storm, said Tabaja.
“The same is surely true for the non-energy sector.”

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