Insurance Practices to Minimize Upstream Risk

Q: How has the insurance market in Mexico evolved following the pandemic, in particular as it relates to closing prevalent gaps?

A: The COVID-19 pandemic was seen as an opportunity for some markets. For Marsh, the pandemic was an opportunity to keep working with markets that continued their activity, such as the oil and gas industry. These markets have evolved from a soft market to a hard market in terms of maturation and are putting more attention on the quality of risk management. Now, the Mexican market is more aligned with international guidelines regarding risk quality.

Most insurance-focused companies report to global hubs, as does Marsh. For example, the company has hubs around the world specializing in energy, as well as power. These companies have evolved along the same lines that the global market did. From what we see, the main energy companies face similar risks around the world. Particularly in Mexico, risk underwriters are becoming more experienced and are increasingly aligned to international guidelines, which helps raise the quality of risk insurance to a global level.

Mexican markets have come a long way in terms of regulation. Mexican companies have helped to sensitize the underwriters in the region to the conditions of Mexico’s regulatory compliance. This sometimes requires explanation and interpretation. Local players are adding this value, enabling the capacity to ensure the risk transfer is carried out properly.

Q: How successful has the Marsh 3D concept been in the Mexican oil and gas sector?

A: The company’s 3D concept is to Define, Design and Deliver, which are the steps that are carried out for every client. The 3D strategy has been very successful for our energy and power clients.

First, the company begins to identify which risks exist around the client’s operation to define and design the best strategy, working together with local markets and perhaps international players. Due to the nature of the oil, gas and energy sectors, it is common to build a mix of local capacity for casualty and environmental risks.

Nonetheless, there are also bigger risks that require reinsurance. For those, our sister company Guy Carpenter helps local carriers to access the international reinsurance markets. Marsh works with local markets and designs the best solution for its clients.

At this moment, considering the overall context of the increase in oil prices and inflation, it is crucial to have a good strategy for the client regarding retention, which involves determining its participation in the loss in case a claim arises.

To deliver is the final point. Importantly, not everything is insurable. Therefore, in addition to being brokers, Marsh offers solutions as a risk consultant. Marsh counts on various advisory services including engineering consultancy, assets valuation and provides solutions regarding complex claims in this environment.

Q: How have lingering COVID-19 hurdles and the conflict between Russia and Ukraine impacted the demand for risk management services?

A: From the beginning of the pandemic, it was unclear if the pandemic would lead to losses, since for some claims in the insurance market physical damage is required. In that sense, COVID-19 did not really cause much physical damage but it did lead to severe financial and operational consequences. In London, Lloyd’s has international committees that determine the definitions of the clauses to determine whether a claim is insurable or not. It was decided that in the case of a global pandemic, for some Casualty lines, related expenses could be covered. Nevertheless, not all claims or events caused by COVID-19 can be claimed because the physical aspect is lacking.

We depend on the market, so if the market does not consider a risk to be insurable, then we try to minimize such risk. Through Marsh Risk Consulting, the company began providing assessments to our clients regarding how to minimize losses due to COVID-19 infections affecting its operations.

Furthermore, due to sanctions imposed on Russia, Russian assets could not be insured by international global markets. For some reinsurance markets, this has freed up capacity, which in turn, has helped contain increases in insurance rates.

Q: How has the company settled in the Mexican market, using its experience from other hubs?

A: The company started in the energy sector in Mexico following the 2014 Energy Reform. As part of an international group, we received support from all of Marsh’s hubs, mainly from the US and the UK. In 2019, after the acquisition of JLT, we began strengthening our position in the region. From that point until today, Marsh has applied a different strategy called Marsh Specialty. With this unit, the company consolidated in more than 10 countries in Latin America and the Caribbean and strengthened its operations. We hold monthly committees regarding energy and power, featuring the participation of experts or colleagues and the support of our teams in London and other regions. Marsh’s Mexican team remains connected to other hubs.

Q: How is the company using its international expertise with its Mexican clients for the consultancy on deepwater and shale operations?

A: Deepwater projects require specific equipment and expertise. Marsh is ready to assist its clients to perform well in deepwater by bringing all the expertise it has regarding insurance placement globally, principally in the North Sea. These placements are mainly negotiated with the same underwriters that are in London. Marsh aligns best practices in terms of health and environment elsewhere in the world to the Mexican market.

The Gulf of Mexico is one of the main hubs hosting deepwater drilling projects and requires huge investments. PEMEX is carrying out its own program there. Marsh is ready to provide deepwater solutions to private market participants that the government could require for a joint venture with the NOC.

Q: What goals does Marsh have for the Mexican market in the near term?

A: The company’s goals right now are to support infrastructure projects required to address Mexico’s lack of fuel storage capacity. The most important part of our strategy is to focus on the energy transition, which we see getting increasingly relevant from an investment and reinsurance perspective.

Our main strategy now is to help our clients to begin working on the energy transition and create strong internal environmental, social and governance (ESG) regulation. Marsh has a new tool to evaluate the ESG factors of each client. These factors are gaining importance around the globe, even more so for energy companies. Marsh assists its clients and prospects with this evaluation. Moreover, part of the value we add through this assessment is to determine the best strategy to improve ESG matters.

Marsh is the world’s leading company in insurance consulting and risk management. With offices in 130 countries, including Mexico, its oil and gas practice offers tailor-made solutions toward all aspects of the industry.