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Quantifying risks for the offshore energy market is different and more challenging than risk assessment for onshore property, which is why it is critical to use a model developed specifically for this risk. Most onshore hurricane damage is generated by wind. Offshore platform damage is caused primarily by waves with some topside damage from wind. Pipeline and wellhead damage is caused by wave and current action, and sometimes by errant rigs dragging anchors. Specialized vulnerability functions must be used that reflect changes and improvements in platform design standards. It is also critical to account for water depth, air gap, age, and configuration of a platform to enable platform damage estimates.

A significant component of loss is associated with interruption of oil and gas production or shut in capacity. A major element of loss in ability to deliver product to onshore facilities is pipeline reliability. In some cases, product can be delivered through redundant routes. A sophisticated “network” analysis is required to understand what the residual capacity of the pipeline network will be after a severe storm, which platforms are most vulnerable to reduced delivery, and how long it will take to restore capacity to pre-storm levels. In addition, insurance policy terms and coverage types are different and more complex than land-based counterparts, making insured loss more difficult to calculate.

Many of these issues have been addressed by improvements to recently released offshore energy models. Some have integrated wave models for platforms and pipelines. Some have incorporated the necessary pipeline network modeling to properly quantify business interruption risk. Vulnerability functions have been developed to differentiate risk between older facilities and newer designs that mitigate much of the wave risk with larger air gaps. Recent claims data have enabled improvements to model damage prediction capability. As the new models are adopted, users will become more comfortable with their ability to predict losses consistent with recent loss experience. Operators will have a better tool to make platform design choices and a clearer understanding of both risk and financial returns.

All parties in the risk chain – operators, insurers, reinsurers, and the capital markets, through the use of sophisticated catastrophe modeling – will improve their understanding of risk and its potential financial consequences on their company, which will lead to better decisions on how to manage and/or insure this risk.