The fire and explosion that killed 42 and injured more than 100 at a Venezuela oil refinery late last month added to a growing trend of onshore energy losses and may lead to greater scrutiny of all refinery risks by underwriters.
But the blast at the Petróleos de Venezuela S.A. refinery in Los Taques, Venezuela, likely won’t lead to a major loss for the international insurance market and it is not expected to alter market conditions significantly, according to energy insurance experts.
The state-owned oil producer did not purchase business interruption coverage for the site, and much of the loss is expected to be retained within PDVSA’s Bermuda-based captive, they say.
The Aug. 25 explosion ripped through the area surrounding the refinery, destroying homes and businesses. The accident is one of the worst for the energy sector over the past several years. Production at the plant was still suspended last week.
Caracas, Venezuela-based PDVSA owns a Hamilton, Bermuda-based captive, PDV Insurance Co. Ltd., which has a reinsurance program that is led in the London Market by QBE European Operations P.L.C., a unit of QBE Insurance Group Ltd. in Sydney. The coverage was placed by Cooper Gay & Co. Ltd. in London. QBE and Cooper Gay confirmed their involvement in the reinsurance program, but they would not give further details.
Despite being one of the largest refinery accidents in recent years, insurers say any potential claim is unlikely to significantly affect the energy property market.
“It is still early days in terms of assessing damage and cause, but the accident in Venezuela was clearly a big event with a major vapor cloud explosion,” said Stanley Cochrane, head of mining and onshore energy at Swiss Re Corporate Solutions, a unit of Swiss Re Ltd. “But from a property insurance perspective, it is not likely to be large event,” he said.
The refinery did not carry business interruption coverage, an important driver in refinery claims, said Mr. Cochrane, who is familiar with details of the program. Typically, business interruption makes up 70% to 80% of a refinery claim, he said.
In addition, the fire did not appear to have spread to the critical processing area of the refinery, said Mr. Cochrane.
The loss also is unlikely to hit the energy insurance market hard due to the relatively large retention of PDVSA’s captive, which is about $50 million, said Carlos Carrillo, Houston-based regional energy head at Allianz Global Corporate & Specialty, a unit of Munich-based Allianz S.E., who is familiar with details of the program.
“The loss is likely to be borne by PDVSA’s captive and, even if it were to breach retention levels, it will not represent a catastrophic loss for the international insurance market,” he said.
But the explosion at the Los Taques refinery follows several large refinery losses in recent years, said Mr. Carrillo. “There has been an increase in the frequency and severity of refinery losses in the past two years, and losses such as in Venezuela are making underwriters more aware of the potential volatility,” he said.
The Jan. 6, 2011, explosion at the Canadian Natural Resources Ltd. refinery in Alberta resulted in a $489 million insured loss.
Last month, a fire caused the temporary shutdown of a refinery owned by Equate, a joint venture between Dow Chemical Co. and Kuwait’s state-owned Petrochemical Industries Co. The closure may cost insurers $200 million.
Other refinery losses include a fire last month at a Chevron refinery in Richmond, Calif., although the company has a significant retention.
Underwriters have taken a more conservative approach to pricing refinery operations, and some energy companies have found it more difficult to complete their insurance programs, Mr. Carrillo said.
“The frequency of losses is scary and, if they continue, there will have to be a bigger effort to improve terms and conditions. Underwriters have growing concerns for the volatility and business interruption risk of refineries worldwide,” Mr. Carrillo said.
Despite recent accidents, insurance capacity for refinery operations remains plentiful, said Andrew Herring, London-based head of energy for the Europe, Middle East and Africa operations of Marsh Ltd. Following higher-than-average energy losses in 2011, however, underwriters are more cautious, and some have pulled back on capacity offered on a per-risk basis. However, energy claims have returned to more normal levels in 2012, he said.
“Following the losses of 2011, underwriters are more nervous and are requesting more information,” Mr. Herring said. “Underwriters have been looking to push rates up, especially in catastrophe-prone areas, but momentum has eased as profits improved in the first six months of 2012.”
Last week’s accident in Venezuela is not expected to change market sentiment, he said.
In the politically charged atmosphere ahead of presidential elections in Venezuela in October, media reports have raised questions over safety standards at the state-run Los Taques plant. Reports have alleged negligence and underinvestment in maintenance at the facility, but the cause of the explosion is not yet known.
In a statement, PDVSA said that it has launched an investigation into the cause of the explosion, although it confirmed that there had been a gas leak at the plant.
PDVSA’s program premium has tripled over the past eight years, according to Mr. Carrillo.
“This suggests that the insurance market perceives that the risks is not the same quality it was 10 years ago,” he said.