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Anticipating risk

Improved assessment and modelling is necessary to support the financing of resilient infrastructure

Population growth, ongoing urbanisation and a growing middle class is increasing demand for secure, affordable and sustainable energy, which in turn is placing more strain on energy infrastructure.

Physical risks are also growing. Over the past 30 years there has been a four-fold increase in extreme weather events, coupled with the transformation of markets and business models driven by climate change policies. As a consequence, the energy sector faces challenges to supply at a time when it is experiencing transitions.

Cumulatively, these changes alter the risk profile of the entire energy sector and are putting increasing amounts of pressure on infrastructure resilience. Responding to these challenges would require additional funding on top of the estimated $48 trillion to $53 trillion in cumulative global investment needed in infrastructure by 2035.

In a series of reports by Marsh, WEC, and Swiss Re, securing the necessary investment to expand, transform and ensure a resilient energy sector was identified as a key challenge facing global policymakers, as well as energy and finance leaders.

Developing "bankable" projects depends on identifying and assessing evolving risks for individual projects. It is therefore critical to make fully informed risk management decisions, in order to best determine effective capital allocation and an effective flow of investments into energy infrastructure. This is vital to withstand the demands of the next 20-50 years.

Improved risk financing and risk management can stabilise revenue streams and help to attract the investment needed to build resilient infrastructure.

Yet in the face of unprecedented changes in energy demand and supply, energy companies and project developers must move on from simply using historical operational data to understand evolving and emerging risks. Risk analytics based on both industry wide and individual corporate data are fundamental to empowering corporate decision-making throughout the risk lifecycle. At each stage analytics enable risk managers to obtain a data-driven, forward-looking view of risk issues.

Companies and investors are increasingly using analytics to manage risk. It helps them dynamically analyse and measure both insurable and non-insurable risks, explore financing options, and determine optimal risk structures. Analytics are helping to answer questions such as: 'How much risk can the company tolerate?' 'What is the cost of retaining risk versus the cost of transferring risk?' 'Whose capital is cheaper, the company's or the insurance carrier's?' and 'Is insurance an efficient use of the company's risk capital?'

Faced with declining oil prices, a major oil and gas company sought a review of its risk transfer strategy to determine the value of insurance versus other financial instruments. Using data and analytics a comprehensive global risk model was built, which reflected their expected losses, loss volatility and premium spend. This was then presented to the company via an interactive risk finance optimisation tool. It enabled the company to manage its risk transfer decision in-house and ensure that capital is deployed in the most efficient manner.

By having a robust analytics framework in place, energy companies can gain a clearer picture of their risk profile, as well as gain insight into the pricing of its risk transfer programmes. This helps management teams strike the right balance between risk-taking and growth, enabling corporations to more confidently deploy capital.

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