The following article has been reproduced with the kind permission of Insurance Day. The Insurance industry must adapt to the fundamental changes taking place in the energy sector to remain relevant writes Suki Basi in Insurance Day. (To read a PDF copy of the article, please scroll down to the end of the article)
The global Covid-19 pandemic has impacted the world’s energy industry profoundly, but the sector was already struggling with its efforts to map its future.
Just as in the period prior to the pandemic the UK had been wrestling with the challenges presented by its decision to leave the European Union which had dominated its thinking, the energy market had a single focus – its response to the growing debate around climate change.
As with the UK and Brexit, Covid-19 has pushed climate change off the energy industry’s current agenda. However, when the world emerges from the pandemic and the unprecedented actions that global governments are undertaking to manage the spread and save lives, climate change will not have simply vanished into the ether.
At present energy firms are facing an almost perfect storm of demand and the inability to agree supply.
With hundreds of millions of people ordered to stay indoors across the world, shops and hospitality venues forced to close, the demand for oil has reduced dramatically. Airlines have grounded thousands of planes and while there has been a shift to air freight services the demand for aviation fuel has fallen significantly.
Yet still oil firms have been driving production, seemingly oblivious to the fall in demand.
Russia and Saudi Arabia have been at loggerheads over the issue in a continued fight for market share. As such they have made no attempt to reduce output creating a global glut that is seeing many countries increasingly struggling to store their excess capacity.
Saudi Arabia has said it will increase exports as its refineries have reduced demand. However, in the current market there are few if any takers for that excess. The result has been a rapid and seismic fall in oil prices with little hope of any uptick until agreement between the oil producing nations is reached and production is limited.
The oil price is already having an effect with warnings that the highly leveraged US shale drilling firms are close to bankruptcy. There are also questions over the viability of many oil and gas fields as the value of the product continues to fall.
This in turn has seen analysts and investors avoiding energy stocks and we have witnessed a plunge in the value of publicly listed energy organisation.
There is hope that Russia and Saudi Arabia will negotiate a truce in the coming days. But to hit the estimated reduction in global oil output of 15 million barrels a day will take a concerted effort by OPEC members and the load will need to be apportioned to the satisfaction of all.
Aside from the immediate impact of the pandemic and the fact that the global economy is now braced for recession, the energy market, and its insurers, need to be cognisant of the fact that the industry is undergoing fundamental change.
Technology and the debate around climate change have seen a momentum shift to renewable energy sources.
Indeed, according to research by Lloyd’s over the past 10 years or so, renewable energy sources have expanded to such an extent they are now the dominant source of new power capacity additions in many countries.
In 2018, China, the US, Europe and India invested more than £230 billion in new renewable energy, while total investment in the power sector has begun to outstrip investment in the oil and gas sector for the first time in decades.
It is becoming increasingly clear the major types of renewable energy are set to be hydropower, wind, bioenergy, solar, geothermal and ocean / marine. However, for all technologies, apart from hydro power, the theoretical resource supply far exceeds current levels of power generation, implying that renewable energy supply is only constrained by practical social and economic conditions.
How the global recession will impact the growth in renewable energy is far from clear but the rapid growth in the renewables industry, the changing nature of risk in the sector and the fact that insurance is often a pre-requisite for provision of project finance mean that there is likely to be a growing need for insurance.
The issue for insurers is that as their clients face fundamental changes to their businesses, they will expect the industry to adapt at the rate of change they face.
For the insurance industry the pandemic has in some respects enabled there to be a greater focus on where the market currently stands, and the lessons needed to be learned from past errors. It is clear that at present the future is still shrouded in such uncertainty that neither the industry nor its clients can have any realistic idea of what the future will hold.
What is clear is the world that will emerge post the pandemic will be different from the one that was in place prior to Covid-19.
The likelihood is that in the weeks and months to come energy firms will be seeking support from their underwriters for the costs and impacts of the Covid-19 pandemic. It is likely there will be issues around business interruption and the costs involved in the mothballing of rigs and equipment and the interruption in the global supply chain.
The growing interconnectivity of risks is not exclusive to the energy industry, but it is indicative of the need for insurers to understand the growing complexity of the risks they face and the need for policies that better reflect the risks their clients face.
For far too long insurers have based their coverages on physical damage at a time when the growing use of technology has seen the threats to business become ever more intangible.
The insurance industry has the opportunity to emerge from the shadow of the banking sector and play a vital role in the rebuilding of businesses and with it the global economy. To do so it needs to offer solutions that matter to their clients
The pandemic has clearly demonstrated that there remain risks which cannot be mitigated by the insurance industry alone. Instead we are at a point where insurers need to engage with governments to find new ways to meet the needs of business in exceptional times such as those we are currently experiencing.
The world will always need energy. The questions that remain to be answered are predominantly around how that energy will be created and delivered. The answer is not solely in the hands of the energy sector.
Just as insurers will need to be ready and able to adapt to the changing nature of the demands from its clients, so will energy firms be required to react to the demands of their clients and regulators as they balance new technology, the need to meet climate change targets, and the needs to ensure economic growth.
As such the insurance industry has the opportunity to use their huge levels of data and analytics to identify future energy trends and ensure they help their clients prepare for the changes to come.
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