Category Risk Management

Regulation and Economic Volatility Driving Demand for Risk Management in Energy Sector, says Aon

11 May 2010 Aon
Nico Bianco Executive, Aon Risk Services

Nico Bianco Executive, Aon Risk Services

Commodity price risk, along with regulatory and legislative changes, are keeping risk managers in the energy sector awake at night, according to Aon's 2010 U.S. Energy Industry Report. The report was created by Aon Analytics and Aon's energy specialty practice to help oil, gas and mining industry clients benchmark their risk programs and identify methodologies to improve the effectiveness of risk management strategies.

While the report is focused on the U.S. markets, around the world economic volatility in the energy sector drives capital investment and expense management strategies within each firm and risk management strategies have to support the new objectives and priorities. The report also indicates that this uncertainty and an increased focus from regulators are the most important external drivers to strengthen risk management within organisations.

Today's energy environment is impacted by a wide range of risks, and the ability to manage them effectively is critical to success. Those who have the tools and resources to make more informed risk decisions will produce better results for stakeholders.

Regarding client and market insights from the report, financial stability was identified as the highest priority for energy companies when choosing an insurance carrier. Companies are looking for more flexibility from carriers as well as the ability to secure lower premiums due to risk management practices in place.

To reiterate on the impact of regulatory and legislative changes, Leuba Modiba, BU Head – Energy, Aon South Africa says, “ Risk insight in the African power industry indicates that the lack of a clear and appropriate national regulatory framework and the lack of commensurate cost reflective tariffs, not only pose a risk in the industry but further stifle growth and stability in the sector.”

He says as a result, to ensure quality of supply, several key customers resort to much more expensive measures to secure standby power supply.

“What the industry needs,” says Modiba, “is an enabling regulatory environment for independent power purchasers to encourage growth within the cogeneration sector. This in turn helps ease the regulatory and legislative risk,” he says.

Companies with significant Gulf of Mexico windstorm exposure have experienced the greatest volatility in premiums and retentions, particularly following Hurricane Ike.

Aon expects significant downward pressure on premiums this year following the sharp increases last year. Aside from property accounts with natural catastrophe exposures, the majority of energy companies have maintained the same deductible/retention for property, casualty and directors' and officers' (D&O) liability. Companies purchasing D&O coverage will continue to re-evaluate current limits and may elect to take advantage of the current market conditions by purchasing somewhat higher traditional limits as well as adding or increasing broad form A-side limits.

“According to a survey of energy industry respondents, the lowest state of risk preparedness has been seen in the areas of climate change, political risk/uncertainties and talent attraction/retention. Leading the list of top ten risks, where respondents experienced related losses, are exchange rate fluctuation, political risk/uncertainties and commodity price risk,” adds Nico Bianco Executive, Aon Risk Services.

Financial Insights revealed that the essential driver of the energy sector's financial health is the price of energy, a consequence of the prevailing and expected supply and demand fundamentals. The performance of Aon's index of 168 publicly listed energy sector companies' stock prices closely mirrored that of the market recovery and outperformed the S&P by nearly 15 percent.

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