How Falling Oil Prices Affect Energy Losses

Is there a connection between falling oil prices and insurance claims?

This question is tackled by broker Marsh in a just-released research report: Can Energy Firms Break the Historical Nexus Between Oil Price Falls and Large Losses?

According to Marsh, insured losses in the global upstream energy sector reached a peak in the 1980s, shortly after the price of Brent crude oil fell from $35 to $15 per barrel.

In the late 1990s, this cycle occurred again when the price fell below $10 per barrel and again in the years following the 2008 slump, when the price fell from more than $100 to $32 per barrel.

When oil prices fall, companies face less revenue and more strain on budgets. Already, Marsh notes that oil and gas companies have been canceling projects and making staffing reductions.

But there are other potential cuts that are harder to quantify such as cuts in maintenance, health and safety measures, and employee training.

Cost-cutting decisions such as these appear to have led to increased losses in the past, according to the Marsh report:

Based on past experience, when this pullback in funding occurs, if it hasn’t already, we would expect to see an increase in losses soon after.”

Here’s the chart showing the link between oil prices and insurance claims:

Screen Shot 2016-03-27 at 10.22.07 PM

Despite falling revenues, Marsh urges energy firms to maintain their investment in risk management to reduce the potential for future major incidents and insurance claims.

Marsh also suggests that now is the time for energy firms to take advantage of lower prices in a benign insurance market to push for increased protection in uncertain times.

With the cost of insurance capital at historic lows, the opportunity clearly exists for companies to access cheap sources of capital from the insurance markets, reduce overall insurance premium costs, purchase insurance in areas that were previously omitted due to cost, and renegotiate coverage terms.”

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