David Atherton
Director, Energy Practice
Aon Risk Solutions Mexico
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View from the Top

Prevention Precedes Insuring

Wed, 01/21/2015 - 17:20

Q: What factors are to be considered when evaluating a project for new companies coming to Mexico?

A: The first thing that needs to be evaluated is the business viability and the associated risks, which are not always necessarily insurable. It is recommended to make sure that contracts are put together in the best way for the different parties, and that companies are not assuming risks that they are incapable of handling. Therefore, companies need consultants, advisors, or insurance brokers that have the necessary financial resources, experience, and stability to protect their clients in case of unwanted incidents. I am talking specifically about errors and omissions, or about limits of liability. For example, if you miscalculate your liability and you get sued, this is going straight to someone’s balances sheet. This is a high risk and high return business, and the more companies minimize risks, the better their chances are of making good profits.

Q: How can risk engineering strategies help identify the true cost of oil and gas projects?

A: The first way to avoid spending money on risk is by not having accidents in the first place, and this is where the risk engineering comes in to help identify risks and provide suggestions to improve or eliminate them. An insurance policy is the last step in a proper risk management procedure, because first the company tries to eliminate the risk by not incurring in the activity that causes it. If the risk cannot be eliminated because it is inherent to the company’s activity, then it has to be mitigated through safety procedures. When risks persist, the next step is to transfer this risk, for which there are multiple ways such as through an insurance policy. When you cannot eliminate, mitigate, or transfer your risks, you need to make a business decision based on whether this risk is within the boundaries of your risk appetite. Usually, those risks are associated with the business’ nature and are not insurable. For instance, you cannot insure the risk of not finding oil. It is well known that companies that have become sophisticated and have up-to-date risk management procedures are always more profitable than companies that do not.

Q: Generally speaking, how sophisticated is the risk management culture in Mexico?

A: It is very polarized. There are Mexican multinationals that have extremely sophisticated risk management procedures that match those of any company in the world. However, the smaller or family-owned companies can be less sophisticated because they tend to commoditize insurance, looking for the lowest premiums and the lowest deductibles. This happens with companies that focus on the short and medium term rather than the longer term, which is compulsory for publicly traded companies. SMEs generally have a low appetite for risk management and sophistication, but have a focus on policy buying that is driven by obligatory policies which are not abundant in Mexico.

Q: What is your recommendation regarding risk sharing policies for new companies in Mexico?

A: I would recommend companies to involve insurance advisors as soon as possible in their projects and to do a complete due diligence on the risks of all parts. It is important for companies to decide on their insurance advisor before trying to pick their insurance carriers. What we see a lot in Mexico is clients picking a broker and a carrier, placing the market’s weight on selling rather than on buying. As consultants and brokers, we are on the side of our clients; we are not jus

Q: What will be the role of insurance companies in the consolidation of the Mexican Energy Reform?

A: We have to consider that the public also has some tolerance for risk, because they understand that for the country to progress certain things need to be done, such as drilling for oil, and producing, transporting, refining, and selling it, all of which implies a certain amount of risk. We have to make sure that the risk stays within the public’s risk tolerance range, which is not always the same as the company’s risk acceptance threshold. The Energy Reform will very quickly fall apart if there is an increase in the accident rate. This is where the insurance industry as a whole has a very strong responsibility in making sure the products that we provide work as they are advertised, that they meet the expectations of the people buying them, as well as the expectations of the third parties who are impacted by the potential consequences of the insured activities.