Increase in Energy Industry Losses in Latin America

by Zelle LLP

Zelle  LLP

[co-author: Daniel A. Correa]

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Recent studies in the insurance industry have shown that the fall in oil prices has historically led to an increase in claims in refineries and petrochemical plants.
The 2016 Marsh report, in relation to the 100 claims in the hydrocarbon industry of highest cost (“The 100 Largest Losses, 1974-2015”), contains a graph that identifies such claims. Generally, it can be concluded that the risk increases when attempting to produce savings and the following occurs:
  • The amount of personnel is reduced, as is investment in safety training programs;
  • Projects for expansion and rehabilitation of plants with long operational life are reduced or paralyzed;
  • The number of interested professionals in the industry is reduced, which can create a generational gap causing knowledge transfer programs to suffer; and
  • Risks of disturbances exist related to budget tensions due to the low prices of petroleum, especially in countries such as Libya, Iraq, Nigeria, Brazil and Venezuela (according to the Oil & Gas Journal). 
We have seen recent fires at plants in the United States (Pasadena Refinery, LyondellBasel Plant, Shell Refinery Motiva), in Mexico (PEMEX Veracruz) and in other countries in Latin America. It may be too early to conclude that these are directly related to the low price level of the barrel of oil, a phenomenon that has affected the industry since mid-2015, but the odds are high.
Underwriters need to be prepared to assist insureds in the energy industry in the most efficient manner, since large claims can greatly affect the stability of these clients, also impacting financial products and associated schemes such as property, pensions and many others. As Marsh concludes in the abovementioned report, "The next challenge is for the commercial insurance market to respond to the changing demand of energy companies and to offer lower retentions, higher limits and/or greater coverage, in a way that recognizes the continuing cost pressures that the energy industry must face
Latin American countries such as Ecuador and Peru have continued their investments in projects and expansions of different plants. But at the same time there are difficulties in countries like Venezuela and Mexico due to government control of state-owned oil companies. At least in the case of Mexico there is an opening to a sound amount of foreign investment. 
There is no greater risk than a country that is on the brink of bankruptcy and does not want to accept foreign aid or investment, especially when its plants and deposits are of high international interest, and when the economic conditions as discussed above stimulate a trend towards large claims. 
The key to managing energy losses in Latin America is to first know the industry thoroughly, as there are not necessarily as many experts available or capable companies as in more developed countries. Likewise, the culture of each country must be known in order to understand how the insured should be treated, especially in understanding what internal pressures they may have and how to achieve the greatest collaboration of all parties. This categorically includes the availability of documents when assessing the root cause or extent of damages and repairs relevant to a major incident -which tends to generate a significant delay in the handling of the incident and a potential increase in loss of profit claims. 
Finally, the local legal environment can play a crucial part in many key aspects, such as the interpretation of policy wording and its applicability in the jurisdiction, or maybe bring certain requirements related to the adjustment process, or special rules relating to how any disputes between the parties be handled. Insurers should be aware that energy claims are very likely to attract the involvement of local authorities, thus putting extra pressure on the insured relating to an array of legal and practical issues including pollution, failure to meet established domestic production quotas, and inquiries relating to safe working conditions, for example.   
Good communication and correct management of expectations continue to be indispensable tools to adequately handle this type of claims in Latin America.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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