Understanding how a large, integrated multinational industrial company makes money seems easy when viewed from afar.  Converting lower value raw materials into higher value products while minimising operating expenses.  Easy.  But scratch below the surface and the reality is filled with mystery and replete with misconceptions.

Without understanding the internal production configuration, the value added to the materials at each conversion step, the in-built redundancies and the degree of non-linearity between throughput and variable costs, it is simply not possible to make a reasonable assessment of the Business Interruption (BI) potential within a company's business.  And thats before we even think about the complex externalities  associated with suppliers, customers and utility providers that create important Contingent Business Interruption (CBI) exposures.

Historically BI and CBI exposures have not been analysed to anything like the degree to which property damage (PD) or machinery breakdown (MB) exposures have been.  But that situation is no longer tolerable, given that the BI/CBI claim portion has exceeded 70% of total losses paid out by energy & power insurers in both 2022 and 2023, and this is expected to increase over time according to the wtw Global Downstream Energy Update 2023.  

Why are profits and fixed costs becoming more concentrated per unit of capital employed, and therefore creating more BI/CBI exposure for insurers?  Some of the most impactful factors are;

• Technology improvements - such as sophisticated computer models to design processing equipment, real-time production optimisation using machine learning, more advanced catalysts, etc - which increase the gross margin potential for newer processes.

• World-scale processing plants, which are a response to the increased competition in the modern industrial economy and the pressure to be more capital efficient.

• Increasingly globalised supply chains, which introduces more exposure due to natural peril events and logistical constraints.

• More efficient production management, with reduced inventories of raw materials and intermediates, less in-built redundancy of equipment, longer run-lengths between maintenance events, etc.

• Intensification of the industrial base, with manufacturing assets increasingly being located within major industrial parks, which in turn considerably raise the accumulation risk in the event of a natural catastrophe or man-made disaster.

Translating these factors into usable insights for insurers, intermediaries and insureds is a unique challenge.  With experience in refinery & petrochemical production planning, economics and logistics, Fíréanta delivers the type of business interruption and resilience intelligence that few risk engineering service providers can, cutting through the mysteries and misconceptions of BI.

The UK North Sea is a declining but nonetheless important oil and gas production basin, and - at this late stage in its lifecycle - the assets are now owned by a patchwork of companies, tied together by old pipelines and complex contracts.  This client had acquired controlling interests in four large offshore platforms and several pipelines, with these part of a large network of third-party assets which brought the company's oil and gas to the mainland UK at Sullom Voe.  

All operating fields were at end of life, characterised by high water cut and the requirement for lift support, meaning that even moderate property losses would result in a platform or pipeline being abandoned permanently, with important knock-on effects for connected assets.  BI and CBI exposures were anything but obvious. 

The BI Review uncovered some interesting complexities, particularly around how production revenue tax (PRT) was different for some of the assets - the highest were taxed at 81% whilst the lowest at 30% - which meant that some of platforms which looked less important from a BI perspective (because they produced less oil) were in fact generating higher levels of production income due to their lower tax rate.

The exercise not only benefitted the company's insurance placement process, but acted as a further validation of the future decommissioning strategy (which had already been well defined by the company, but was subject to annual revalidation) and supported the allocation of scarce capital to the most vital risk reduction projects.

This project was to develop an Enterprise Risk Management (ERM) program for the largest integrated power & desalination company in the world, covering seven world-scale plants and five cross-country pipeline distribution networks.  Being the state's main provider of water and electricity, being resilient to operational issues and interruptions was not simply to satisfy shareholders, but was essential for life and livelihood across the nation.

The study analysed 592 risks using the Bow-Tie methodology, and delivered the executive leadership team a live database which could be updated by each individual plant or pipeline manager to continuously refresh the risk situation as things changed and evolved.  Some of the learnings were a major surprise for the company's leadership; from the structural condition of subterranean electrical cable tunnels in two locations due to water damage, to the spalling of concrete lining on one section of the largest cross-country pipeline that threatened to stop flow completely, to the fact that procurement of critical spare parts was being hindered by unnecessary central bureaucracy, to the identification of a single gas metering station with a jet fire scenario that could shutdown almost 20% of the country's water for several months.  

These were just some of the headline learnings that came out of the two month project, and we were able to help the client develop both short-term and permanent risk mitigation action plans for the most important exposures, and introduce new management system processes to embed risk management techniques to optimise the company's risk profile over time.

A seemingly classic set-up for the Downstream operations of a the national oil company of a relatively small country but with a rapidly expanding industrial footprint.  Two refineries - one vintage, one new - plus a world-scale aromatics extraction plant, a small polypropylene unit and the associated storage and marine export infrastructure.  The belief in the insurance market was that the chief exposure was in the new refinery due to its capacity, complexity and the fact that it was co-located with the aromatics and polypropylene plants.

But whilst this was true on an operational basis, there was a nuance within the insurance policy which threatened to violate the underlying princple of insurance - to put the Insured back in the same financial position that they would have been in but for the loss. 

The policy basis was Fixed Costs & Debt Servicing (FCDS) only, and the policy response mechanism was an indexation to how much revenue was lost due to a loss event, plus compensation for any increased cost of working (ICOW), but inadvertently limited to only 7 cents for every $1 of revenue loss avoided!  

The problem with this mechanism is that it works perfectly if a business stops completely following a loss event, but it is hopelessly inadequate if the business continues operating on a partial basis.  In other words it is totally inappropriate for complex downstream hydrocarbon operations.  Some loss events caused very little loss of revenue but very high increased costs - because, for example, alternative sources of products could be brought in temporarily - but the policy response mechanism would actually disincentivise the Insured from doing this....

So whilst the techno-economic aspects of this BI Review were straightforward and didn't raise any surprises, the discovery of the grossly inadequate policy response mechanism - and subsequent presentation of analysis showing what the mechanism should be - allowed for a sensible intervention prior to renewal, wholly supported by the incumbent underwriters, which brought a new level of financial security to the Insured.