Growing Companies Will Need Risk StrategiesWed, 01/18/2017 - 15:39
Q: How advanced is the Mexican oil and gas industry’s approach to risk management?
MG: Marsh Brockman and Schuh knows PEMEX’s approach well and we think it has a very good risk management strategy. Compared to other Mexican companies, the NOC has an effective structure in place to deal with risk. Round 1.3 saw the entry of many new Mexican companies into the market, in most cases in joint ventures with Canadian or US companies. Even though they are small now, they are the future Mexican oil producers and will grow in size. They will also need risk management processes. On the other hand, the deepwater round welcomed international oil Majors that understand risk management very well already.
SA: The Mexican oil and gas market is about to welcome many new players as operators. It is a great opportunity for these new companies to incorporate advanced risk management into their DNA.
Q: How does Marsh Brockman and Schuh persuade clients to see risk management as an investment rather than a cost?
MG: Marsh Brockman and Schuh carried out a study two years ago analyzing the loss statistics of the global oil and gas industry over the last 30 years. The study found a strong correlation between the dates of main losses and falling oil prices. Significant peaks in worldwide oil and gas claims followed around six months to one year after the prices fell. While it is not the only factor, the study concluded that companies who enter into heavy cost-saving programs because of low crude prices also cut maintenance costs and lay off experienced people. We do not have a crystal ball but we warn clients about the possible results of cost-cutting strategies on their financial outlook.
Q: Who will disseminate risk management knowledge to new Mexican companies?
SA: To achieve international standards new operators can go it alone or ask an IOC for help, which will happen naturally in joint ventures. Or they could also come to specialists like Marsh Brockman and Schuh. We can inform our clients about what their competitors are doing in other countries, because we interact with many companies in more developed regions.
MG: International oil Majors approach risk management differently. When Marsh Brockman and Schuh helps IOCs with risk management, we talk about risk transfer and risk financing. Buying an insurance policy is a way of financing risk but it is not the only way. Very big companies tend to operate with insurance captives, which is a fully-owned insurance company. In the open market, they only buy insurance coverage well in excess of what they are retaining. Companies do this based on their extensive experience investing worldwide. Creating and managing an insurance captive is a specialized field in insurance and smaller companies do not require one.
Q: How do Marsh Brockman and Schuh’s products and services add value to a clients’ cost-efficiency, safety and productivity?
MG: Marsh Brockman and Schuh has thousands of oil and gas clients around the world. Every company is different but they always compare in terms of managing risk and insurance limits. Marsh Brockman and Schuh’s size and expertise mean we can provide this comparative data very quickly. Marsh Brockman and Schuh has followed the global insurance industry trend of building up a very large database that allows us to monitor trends. We offer different services around Big Data analysis, helping companies discover the optimum premiums for their operations. Marsh Brockman and Schuh offers specialized engineers who can help our clients with Probable Maximum Loss Studies (PLMS) should they lack the in-house knowledge. We also offer claim-recovery services that help companies recover losses quickly and get the most money back.
SA: Marsh Brockman and Schuh’s goal is to become an outsourcing solution for the risk administration needs of new companies entering the Mexican oil and gas industry. As well as providing their insurance policies we offer a range of additional services on top of the original transaction, like ensuring the policy complies with Mexican regulations. This guarantees the policy will be approved, lowering the trial and error nature of the whole process and in turn increasing efficiency. Marsh Brockman and Schuh goes into the process as if we were a participant, asking all the questions of our clients to ensure we offer the best service.
Q: How effectively have Mexico’s oil and gas authorities considered risk in the terms of each licensing round?
SA: There is significant focus on safety and security, environmental preservation, liability assignment and corporate responsibility in the contracts produced to date. Mexico is not starting from zero in this area because we have examples from around the world to work with. The authorities have been successful so far but the real challenge for them will be to ensure the regulations are being supervised and enforced effectively.
Q: What gaps do you detect in the Mexican oil and gas insurance market?
MG: When PEMEX held a monopoly over the market it had its own insurance, so there was no need for the development of an oil and gas insurance market here. The key region for analyzing oil and gas risk is still in London and there are few Mexican oil and gas underwriters. This could lead to the need to bring international knowledge to Mexico.
Operator Extra Expense cover is an example of where foreign knowledge could help in Mexico. This coverage is required by law and ASEA requires each winner in the licensing rounds to have this coverage but a local market for this type of cover does not exist. A company can get a local policy but only by going to London to sit down with the experts who really understand the risks involved.
Mexican authorities know the insurance market in Mexico needs to evolve. Minimum coverage limits can be expensive but authorities offer the option to reduce the limits greatly if the client provides a Probable Maximum Loss Study. Specialized engineers are required for these studies and ASEA will need to look abroad to source this talent.
SA: Although they have been consulted and have given a nonbinding opinion on the matter, the National Insurance Commission (CNSF) should be playing a bigger role. Mexico is currently following the US licensing model but the authorities are not involved enough in the process.
Q: How could local and international oil and gas insurers work together to improve the market in Mexico?
MG: Specialized insurance for oil and gas is available all over the world, and Lloyd’s of London is a premium market place. They have syndicates registered in Mexico so these coverages are available through reinsurance here, but the majority of the underwriting for these oil and gas insurances is performed outside of Mexico. International and Mexican insurance companies should collaborate to find common interests and work together to develop the necessary local knowledge in insurance proceedings.
Q: How will Marsh Brockman and Schuh’s 3D Plan boost demand in Mexico over the coming years?
MG: Marsh Brockman and Schuh’s 3D Plan is an approach that is about listening to the client before we create or sell an insurance policy. We find out the client's concerns, goals and the risks involved. We use our Big Data solutions to design a tailormade insurance policy. This process is especially important in the oil and gas industry where the stakes are high in terms of environmental and financial losses should anything go wrong.
SA: Marsh Brockman and Schuh expects to see an increase in demand for our 3D Plan. Existing companies are increasing their service offerings and becoming more integrated, while IOCs are establishing offices here in Mexico because they want to capitalize on the opportunities of the opening market. Capital is being deployed by firms and Mexican entrepreneurs and there are many opportunities both in upstream with Round Two and in downstream with the opening of the gasoline market.
Q: How has Marsh Brockman and Schuh’s merger with Mercer brought you closer to your clients and helped retain talent?
SA: As human resource specialists, Mercer has accumulated a lot of knowledge about that side of the oil and gas industry, while Marsh Brockman and Schuh brings physical and technical expertise to the table. The combination of our knowledge allows us to approach oil and gas companies from almost all angles.
MG: Marsh & McLennan Companies (MMC) formed a group to offer a breadth of services to the oil and gas industry. Each segment deals with a different party in our clients’ companies. While Mercer approaches the human resources department, Marsh Brockman and Schuh deals with CFOs and treasurers, meaning we can see companies from many angles.