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Energy risks in the Middle East and North Africa - a diverse risk landscape

Hala Long

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When considering natural catastrophes in the MENA region, it requires specialist expertise to understand that we can’t simply lump this diverse region together; each country has its own distinct risk profile. Turkey, Lebanon as well as Jordan are typically at a higher risk of earthquakes than parts of North Africa, while regions like Oman are more susceptible to cyclones. Flooding is also key exposure. Flash flooding in Saudi Arabia and Yemen can occur in areas that are mostly dry wadis.

The 2013 earthquakes originating from Iran and a series of cyclones in Oman threw a spotlight on the potential damage that can be caused to infrastructure, homes and businesses by such natural catastrophes. The reverberations of these events were felt in highly populated cities such as Dubai and placed a new emphasis on building safety and insurance cover.

Development of the region and the development of insurance cover

In the 1970s, the MENA region saw a rapid boom in wealth brought upon by the increase in oil prices and the subsequent increase in demand – it felt like if you blinked you might open your eyes to a whole new city-scape. The increase in growth and investments in the oil industry was replicated throughout the region with a sharp rise in worker remittances, trade and capital flows. The rate of growth has steadied in recent years, but over the past 15 years the region has seen average annual growth of approximately five percent. (The IMF world economic outlook of April 2013).

Concurrently over the same period the Global Energy insurance market has been able to bring to the MENA market capacities that have been able to provide cover for individual risks requiring $2 billion of capacity. This is a significant commitment of the $5.5 billion global insurance capacity for onshore energy available through underwriters in the Global market. This increase in demand and capacity has given rise to an expanded breadth of cover; there has been a shift from traditional coverage to a broader, more inclusive offering. Essentially the competitive environment means clients get broader coverage for their money. 

Underwriting and the coverage

While we have seen an increase in capacity, there have also been significant advancements in the expertise and tools that we have access to. Although natural catastrophes are not a regular occurrence in the Middle East, economic development in the region has led to an increase in the concentration of values in one area. This requires a stronger focus on asset protection, as well as a better understanding of the associated risks which are becoming exponentially more complex. Days of simple vertically integrated refinery or downstream plants are gone; today there is now a petrochemical complex of multitude of different units. In response to these developments, coverages have evolved and expanded to protect these increasingly major and complex assets.

Clients are now purchasing coverage that protects not only their physical assets, but also against business interruption or financial loss. This decision is driven by a significant increase in production; inter dependency between plants and supply chain management which is creating a far more complex value chain than we have seen in the last few decades. For that reason, risk managers are increasingly focused on understanding their supply chain management and their suppliers’ financial strength.

How the risk is being approached and modelled today 

There has been a professionalization of risk management as supply chains deepen and companies become more acutely aware of risk. In line with this, there have also been significant efforts made to fill the gaps between risk models and data on natural catastrophes in the region.

Worldwide insurers rely on experience and data sets to assess and price risk. In mature markets, such as the EU and North America these data sets are significant and are used to model natural catastrophe based on the frequencies and severities of past events. In the Middle East the lack of historic data sets presents a challenge. However insurers are focusing on the future, using analytical tools to determine how the forecasted climate change will affect each region and what the expected outcome of that will be. This in turn is helping to determine the risk both from direct exposures as well as other indirect business interruptions, providing improved insight into how these risks can be addressed. However, as with any model/tool the data input is critical. Evolving risk models do not alleviate the requirement for detailed information of the risk being insured. The better the information, generally translate to better insurance outcome for the insured.  

A sustainable future 

While the frequency of natural catastrophe events occurring in the region is still relatively low, if or when an event does occur, the severity and impact on assets, supply chains and the region’s economies could be massive. Therefore natural catastrophes are a topic of increasing relevance for both clients and insurers. The good news is that the insurance industry’s appetite for providing protection in the region is significant and the coverage is broad.

But this doesn’t mean risk managers can take their eye off the ball. In order for energy clients in the Middle East to grow their business in a safe and sustainable manner they need to be confident that the assessment of their current risks is realistic and they have an understanding of their emerging risks like Cyber. This means accurate Estimated Maximum Loss calculations; identifying appropriate values and understanding inter relationships when considering supply chain management and applying that to the business strategy going forward.  

We also can’t underestimate the importance of people and talent. Engaging the right professionals is a key element to successful risk management. In the oil and gas industry this encompasses chemical engineers, insurance brokers, valuation services, insurers and reinsurers and more. 

Returning to my opening thought, yes the risks across the Middle East are diverse across countries, but there is commonality found in the opportunity to demonstrate superior risk management while protecting the region’s natural resources, assets and ultimately economies. 

Want to know more? You can reach Hala on: hala.long@xlcatlin.com

First published in Premium magazine in September 2015

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