Click here for the source.
By: Andrew Simpson
According to Brian McCarthy, best practices in the fast-changing energy insurance sector begin and end with a commitment to research and development (R&D).
It was the insurance sector’s lack of R&D on the energy sector that drove McCarthy to launch Energi Insurance in Peabody, Mass., in 2006—and that commitment to R&D continues to define the company that specializes in North American energy risks.
McCarthy is a former independent agent—the former CEO of Conifer Insurance Agency and Conifer Energy— and an Internet pioneer. He was one of the first to offer an agency system for buying and selling insurance online.
Energi, however, is less about pioneering a new way to do business than it is a return to some old-fashioned best practices, albeit with a modern interpretation.
“Back in 2002, we were an independent insurance agent and broker. We specialized in the energy industry. Our policyholders became very frustrated with the limited number of insurers in the energy sector. But in addition to that, the carriers [were] not providing meaningful loss prevention, safety and really aggressive claims management,” he said in a recent interview.
Back to Basics
According to McCarthy, there was a time when insurers serving the energy sector took R&D and loss control seriously. “When I first came into the business, we had the little Aetnas and the Insurance Companies of North America, Aetna Life & Casualty, Travelers. There was a real emphasis back then on engineering loss control, an emphasis on underwriting.”
Then the business changed, with financial approaches to underwriting taking hold, he said. The energy sector, however, still “needs to have an engineering approach to it, an extensive research and development approach where you ensure that you really understand the sector before you go in and insure it.”
“You approach it the same way as HPR [highly protected risks] and boiler machinery…It’s very critical to do that because of the catastrophic risk exposure,” said the veteran of the market.
He and his energy insurance customers were tired of having insurance companies entering and exiting the market, writing energy firms that did not implement best practices and, perhaps most upsetting, not offering serious loss control assistance.
Energi leaders and some fuel distribution customers decided to take matters into their own hands. They brought in actuarial and reinsurance consultants.
“We went back to basics, back to basic underwriting. To do basic underwriting, that was critical—to understand the risk exposures, understand the industry-defined best practices and make sure that you selected the right risk from the get-go,” McCarthy said.
Energi was incorporated in 2005 and began operations in 2006 as a group captive. It operated that way until 2009, when it merged with Conifer Insurance Agency Inc. and became an industrial reinsurance company.
Energi looked to two insurers, ACE and XL, for its business model, McCarthy said. They both started out as group captives before evolving into industrial reinsurance companies and then into insurance companies. That’s the track that Energi is on.
Energi is probably the only industrial reinsurance company in the U.S. today, according to its founder.
An industrial reinsurance company is one where policyholders—including energy distribution companies, in Energi’s case—are owners of the company along with management.
Insurance company partners act as the insurance company, and these insurance companies cede a portion of the business to Energi’s reinsurance operations. Energi’s strategic insurance partner is Hannover Re.
“Today, we’re really a virtual insurance company. We don’t issue policies today because we don’t have primary paper or a primary insurance company. We don’t own one,” said McCarthy.
Energi may not be an insurance company in the full sense, but it has most of the operations of an insurance company. It acts as a program administrator and reinsurer, providing underwriting, distribution management, loss prevention and claims oversight.
The Energi business model has two main revenue components:
• Energi earns fee income for services it provides for its third-party insurance partner as an administrator of insurance programs. These services include product development, marketing and sales, risk selection, initial underwriting, safety and loss prevention, and claims management.
• Energi earns underwriting income and investment income by providing reinsurance on a portion of the casualty business placed through its core insurance programs.
The company is now licensed in all 50 states, has more than 1,000 policyholders and reports about $150 million in business in-force in the U.S.
Within the past few months, Energi has opened offices in Chicago and in Irving, Texas, bringing to seven the number of states where it has locations: Massachusetts, Florida, New Jersey, Connecticut, California, Texas and Illinois.
Energi plans to move into Canada and begin building strategic alliances in other countries, with insurance companies and managing general agencies, in conjunction with Hannover Re.
Energi’s core programs include fuel distribution, fuel transport, energy construction, agricultural cooperatives, renewable energy, energy efficiency, utilities, and oil and gas exploration. It does not handle manufacturing.
The firm writes property, general liability, workers compensation, commercial, automobile and excess coverage.
Energi contends that its in-depth knowledge of the various energy sectors and their best practices not only drives its underwriting process but also gives it the tools to provide “differentiated safety, loss prevention and claims management services” for each energy sector. These services reduce loss costs and enhance productivity for policyholders over the long term, the company promises.
“Really, what we developed was a new way to do engineering loss control. We call it a ‘compliance audit’ to determine if risks are in compliance with industry-set best practices.”
McCarthy highlighted the importance of this audit, explaining that “if companies do not implement industry-set best practices, you’re going to have to defend against those in court. They’re going to be a critical determination of liability.”
One of the reasons McCarthy is so attracted to the energy industry is because it is undergoing tremendous change that is shaping the country’s future.
“I think the most exciting thing for Energi and for our people is that we’re seeing the next industrial revolution occur in the United States,” he said. “It was in manufacturing, moved to technology, moved to biomedical, and now it’s moving to our own natural resources, with oil and gas and other renewables that we have in the United States. I think that the oil and gas sector is really the driver in our ability to become energy-independent by the year 2020.”
Two areas of this revolution where Energi has focused some of its own energy are renewable energy/conservation and the oil and gas exploration method known as fracking.
According to Energi’s founder, energy-efficiency projects in the United States are primarily done by major energy service companies like Johnson Controls and Honeywell, which guarantee that the measures they install are going to reduce energy consumption by a certain amount. Most of these guarantees are done on municipal and federal projects.
But now, energy-efficiency projects are gaining popularity in the private sector, and there is a growing need for warranty products in the private sector.
“What this policy does is it backstops the guarantee that second-tier contractors are now able to provide to the end building owner to guarantee [reduced] energy consumption,” said McCarthy. “The finance lenders need the reliability that if the energy savings don’t occur, there is an ability to repay those loans,” he said, explaining why it’s important to have this backstop.
He said his company put a lot of R&D into understanding the risks and developing the policies with Hannover Re.
Just as it has researched the energy savings market, Energi has also done its homework in the fracking segment of the oil and gas industry and determined the method is safe when best practices and regulations are followed.
The industry (American Petroleum Institute) has developed best practices for fracking that, if followed, minimize the impact to the environment, according to McCarthy. But even more important, in his view, is government’s role in safety and loss control.
“States like Pennsylvania, Ohio, North Dakota and Oklahoma are taking the lead in establishing regulations to enforce these best practice standards, to ensure that it won’t have an impact to the environment,” he said.
“As in any industry, we have good actors and we have bad actors. This will allow the regulators to ensure that they can regulate those bad actors, those companies that just don’t want to implement practices that are best.” The regulations also mean “that we can have our fracking done safely in the United States—so that it doesn’t have an impact to the environment and the air quality,” he said in his interview with Carrier Management.
While too many insurers enter the energy sector without the necessary commitment to R&D, a few insurers in addition to Energi do it the right way, according to McCarthy. He cites Travelers and W.R Berkley as two that “get it.”
“They’ve done a good job. They’ve spent the money on research and development, and they’ve got boots on the ground—engineering loss control professionals that really understand the sector, no different than what Energi has done today,” he said.
But there are still some insurers that do not get it, and the marketplace is less stable because of them.
“I’ve been in this business long enough to see companies come into the marketplace, and they don’t make that investment in research and development, don’t look at it as an industry that has to be highly engineered and loss controlled. In turn, they suffer the losses.”
After these insurers get burned by losses they might have avoided had they taken R&D and loss control seriously, they exit the market, McCarthy said.
“The end result of shortcuts in catastrophic risk exposure industries is you have these catastrophic losses that occur.
“We’ve seen some real hardening of pricing with insurers withdrawing from the marketplace—again, those carriers that didn’t invest in research and development, didn’t do solid underwriting, didn’t invest in loss prevention and safety. We’ve seen some of those carriers have to withdraw from the marketplace,” McCarthy reported.
McCarthy said that reduced capacity always results in increases in overall pricing. In addition, he said that “the sector does need some increase in pricing, and we’ve seen that over the last two years.”
For insurers like Energi that are committed to the market, that reduction in capacity is not necessarily bad. “It gives us more of an opportunity because of our approach of understanding the industry sectors and making sure that we underwrite the risks that want to implement best practices,” according to McCarthy.
Any specialist insurance company faces a recruitment and training challenge. In Energi’s case, it needs people who know not only insurance but also energy.
“When we onboard new employees, we have an extensive education and training process, not to just understand what our set policies and procedures are but to really understand these industry sectors—understand how they operate, understand the best practices that they need in place.” This is true for employees at all levels—from client services to underwriting—but especially for Energi’s people that are out in the field, McCarthy said, referring to loss prevention and safety professionals.
“We make that investment upfront in education and training.”
Energi looks for people who have either insurance expertise or energy expertise—and then trains them in what they lack.
“Without having a good, solid education and training operation, you’re not able to do that,” he said.
Energi’s products are distributed through about 300 independent insurance agents and brokers —regional rather than large national brokerages.
“We’re not open-brokerage. We do business with limited independent insurance agents and brokers in the U.S., and we like to build a strategic partnership with those brokers, so they have something unique to be able to bring out into the marketplace,” McCarthy said.
“We build a triangle partnership between the policyholder, the broker and Energi. That is so critical because of our emphasis on risk management and loss control in engineering,” he added.
This triangle is what McCarthy calls “the Energi glue with the policyholders,” and he said it is a major reason the company enjoys a 98 percent policyholder retention rate.