Subsea construction insurance has become increasingly difficult to obtain, even for projects with modest budgets necessitating adapting to new risks and realities, writes JOSEPH INOKOTONG.
THE offshore oil and gas industry has continued to evolve, so do the risks and complexities associated with insuring these projects.
Navigating offshore insurance in the light of new risks and realities requires a comprehensive approach. Some of the strategies to consider include risk assessment, regulatory compliance and specialty insurance. There is need to conduct thorough risk assessments to identify potential exposures, such as natural disasters, cyber-attacks, or supply chain disruptions.
Staying up-to-date with evolving regulations, such as those related to climate change, data privacy, or sanctions, and exploring specialized insurance products, like political risk insurance or environmental liability insurance are needed.
Additionally, capacity building should be a requirement by investing in risk management infrastructure, including technology and personnel. Insurance programmes should be diversified across multiple carriers and markets, while fostering close relationships with insurers, brokers, and other stakeholders.
Data-driven decision-making will enhance the process by utilizing data analytics to inform risk management and insurance decisions. Scenario planning should be an integral part of the exercise, especially developing contingency plans for potential future risks and realities. Expert guidance should not be underestimated because consulting with experienced insurance professionals and legal advisors could make the difference. By adopting these strategies, organizations can effectively navigate offshore insurance challenges and ensure adequate protection for their assets and operations.
Navigating offshore insurance in light of new risks and realities requires a multifaceted approach. Some of the strategies to consider are risk management and reassessment. Reassessing risk profiles should not be ignored, rather risk assessments must be updated to reflect changing circumstances, such as climate change, cyber threats, and supply chain disruptions.
Also, risk diversification is paramount, and should be spread across multiple insurers, captives, or alternative risk transfer mechanisms in addition to implementing mitigation measures by investing in loss prevention and mitigation measures, such as windstorm-resistant construction or cybersecurity protocols.
An expert, Jack Swift, who has more than 20 years of dedicated insurance broking experience, contends that Lockton’s Offshore Projects Practice is keenly aware of the challenges these changes present, especially as the market increasingly focuses on high capex projects and the ongoing volatility in subsea construction.
Discussing high capex projects and the insurance market, Swift submitted that offshore projects today are characterized by substantial capex, demanding high insurance capacity to mitigate the risks involved. Oil and gas in particular is a frontier-type industry; the low-hanging fruit has all been picked, and the industry is pushing into ever more remote and demanding environments. Inevitably, this heightens both the risks and the insurance requirements.
In general, Lockton is seeing strong market appetite for the excess layers of large non-subsea placements. However, securing primary coverage remains a challenge, especially as pricing must meet insurer expectations to generate interest.
Globally, the subsea insurance market seems to be hardening. In contrast, Swift said subsea construction insurance has become increasingly difficult to obtain, even for projects with modest budgets. This shift is largely due to the sector’s challenging claims history and a lack of insurer leadership options. Notable high-profile losses on a number of projects have prompted insurers to reevaluate their participation. These loss records have cast a long shadow, with high-profile claims reminding insurers of the inherent volatility of this segment. As a result, there has been a hardening of the subsea insurance market, a reality that subsea clients cannot afford to ignore.
Premiums have not kept pace with many insurers’ view of the risk profile, leading many insurers to withdraw or reduce their capacity for subsea construction altogether. He listed some of them to include major players such as Zurich, Aspen, Swiss Re, and the Norwegian Hull Club, whose absence marks a notable shift in market dynamics and reduction in the available market capacity.
The hesitancy of insurers to underwrite subsea construction is understandable given the track record. Rate reductions over time, paired with substantial claims, have made this a difficult class for many to support. Swift highlighted that insurers must now see a compelling case for adequate premiums before they will entertain the idea of covering new subsea ventures. Brokers recognize that a proactive approach, grounded in transparency and high-quality information is essential for engaging insurers effectively.
The need to balance Environmental, Social and Governance (ESG) is a major consideration in decision-making as the offshore industry is also facing increased scrutiny around ESG. Insurers are asking more questions, reflecting a need for deeper insights into the environmental impacts and safety protocols associated with projects. The industry is in the midst of a transitional phase, where greener practices are crucial but must be balanced with operational realities.
Underwriters are more focused than ever on the details of risk management. Beyond ESG scores, they need to understand the health and safety protocols, training procedures and overall operational robustness of each project. These elements are now as critical as the environmental credentials, if not more so, given the inherently high-risk nature of offshore projects, Swift further stated.
The numerous challenges notwithstanding, adapting for the future is becoming imperative. Given that 2025 is a year likely to be marked by continued volatility, positioning oneself as a transparent, well-prepared and engaged partner will set you apart. Insurers will always place a premium on high-quality information. In a competitive and challenging market, it is essential for project stakeholders to present a well-documented risk profile and take control of the narrative rather than wait until underwriters start asking questions. This proactive approach not only enhances credibility but also significantly improves chances of securing the best possible terms. This can make a real difference when it comes to negotiating favorable rates and ensuring long-term support for projects.
Regulatory compliance can provide succor if operations are in conformity with the laws. This demands staying informed by monitoring regulatory changes, such as Base Erosion and Profit Shifting (BEPS) and necessary Insurance Distribution Directive. Operators must ensure compliance by verifying that offshore insurance structures comply with relevant laws and regulations, and consult with experts familiar with offshore regulatory environments.
Alternative risk transfer could turn the corner by considering forming captive insurance companies to self-insure specific risks, and utilizing parametric insurance solutions, which pay out based on predetermined event parameters (e.g., hurricane wind speed). Insurance-Linked Securities (ILS) options, such as catastrophe bonds or industry loss warranties should be explored.
Leveraging technology and data analytics could enhance the process of achieving the desired goals as utilizing data-driven insights to inform risk management and underwriting decisions. Embracing insurtech through collaboration with insurtech companies to enhance efficiency, customer experience, and risk management, and investing in digital infrastructure to support seamless communication and claims processing always prove to be useful.
Other options to explore include international cooperation and joining industry associations. Collaboration with global insurers demands partnering with internationally recognized insurers to access specialized expertise and capacity. Much can be achieved by participating in organizations like the International Association of Insurance Supervisors (IAIS) or the Reinsurance Association of America (RAA). Development of global standards by advocating for consistent regulatory standards and best practices across jurisdictions will engender a level playing field.
Tax efficiency should be maintained. Optimizing tax structures by ensuring offshore insurance arrangements are tax-efficient and compliant with relevant tax laws, and considering hybrid structures by combining traditional insurance with alternative risk transfer mechanisms to minimize tax liabilities. Consulting tax experts by engaging tax professionals experienced in offshore insurance and international taxation will play a pivotal in advising the operators.
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