Risk assessment

Having determined the scope of coverage and the number and nature of the risks being presented, the underwriter has to set the appropriate premium levels. In general terms, the premium charged depends on the depth of each well – the deeper the well, the higher the premium. This basic rate (€ per metre of well depth) is then subject to a modifier, which is dependent on such factors as the geographical location of the well, the status of the well (exploration, field development, or production), the limit requested, the deductible, and the cost of the well.

Furthermore, since human error is often a key contributor to loss, specific attention will be paid to the experience of the oil and gas company and the drilling contractor and to the quality of the equipment employed. There is often a disproportionate increase in the frequency and severity of loss if the drilling plan is inadequate or the drilling crews are inexperienced and have to use poor equipment.

In the light of such factors, experience and expertise are necessary to assess the risk properly. If the geological conditions in a certain geographical area are known and the industry has years of experience in drilling there, the likelihood of blowout in that area may be low. In areas that have been less extensively explored, the risks are much higher and require considerable premium loadings. For example, a 7,000 m exploration well being drilled offshore in 1,500 m of water in the Gulf of Mexico is a much greater risk than a 1,000 m development well onshore in Canada.

In a volatile and difficult class of business like control of well insurance, it is very important to mitigate the risk as much as possible. Procedures such as demanding an independent review of drilling plans, or a survey of the drilling rig and its critical components can both improve the risk for underwriters. Furthermore, requiring the oil and gas company to have a dependable contingency plan in the event of a blowout can result in considerable post-event loss mitigation.

Control of well insurance is a difficult and demanding insurance product which has to respond to continuous changes in technology and environment. Its particular features require that the job of assessing risks and designing insurance solutions is exclusively reserved for specialists. Underwriters must have solid technical knowledge of and experience with this kind of cover and sound commercial judgement. Only then can the oil and gas industry be offered attractive insurance protection which facilitates a risk transfer that is not only reasonable and sound but also fair for both sides.

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