Costs for reinsurers to balloon as oil sands set ablaze

Costs for reinsurers to balloon as oil sands set ablaze

Costs for reinsurers to balloon as oil sands set ablaze Three weeks in, the northern Alberta wildfire known as ‘the beast’ has realized a wide-spread fear – flames have reached the oil sands and are rapidly approaching the Saskatchewan border.

The Horizon North Blacksands Executive Lodge caught fire Tuesday following a mandatory evacuation of workers. More than a dozen other camps between the Fort McMurray and Fort McKay areas have suspended operations, with roughly 8,000 people affected. Several camps remain at high risk of burning, including major oil company Suncor.

The Conference Board of Canada estimates a loss of 1.2 million barrels per day from the shutdown, and a resulting $985-million hit on the nation’s GDP. As well, the cost to insurers and reinsurers is likely to balloon from the previously estimated $9 billion in losses.

“At this time, the estimates of insured damages have been between $5 billion and $9 billion. Included in these estimates reflect insured physical damage to residential and commercial property and direct business interruption losses, except for those related to the oil industry,” states Hart Brown, Senior Vice President, Practice Leader, Organizational Resilience at Hub International Inc.

Reinsurers are to take the brunt of any additional losses, as local P&C primary carriers have limited their exposure to $200 million or less – but none of those estimates include the losses business interruption and property damage incurred by the oil sands.

"The total amount of losses and insured losses will not be immediately known and it will be based on the specific limits, sub-limits and policy language in each potential claim scenario,” he adds. 

Oil sands projects face increased challenges when faced with fire, making it all the more difficult to resume operations. Despite contingency plans in place, Brown says staffing issues due to an evacuated workforce as well as pipeline logistics could extend camps’ downtime and total production outage – all of which will need to be taken into account by insurers and reinsurers.
 
Fires and explosions are currently the top cause for BI claims around the world, and the energy sector often experiences the highest losses. It can be tricky to calculate an accurate BI claim for the oil sands, as there’s often a minimum timeframe between the incident and when coverage will kick in. Brown says insurers face a multitude of scenarios when determining the loss.
 
“There has to be an analysis of what would have happened if the event did not occur, a calculation of actual revenues realized in that time period, additional expenses to regain operations and finally a calculation of makeup revenues,” he says. “The oil sands operators have, so far, indicated that the current losses can be made up once production is back on-line. Meaning any BI claim may take into account the amount of increased revenues realized that would be considered above the normal due to a surge in demand as part of the recovery.”