15 June 2016Bermuda analysis

Changing energy companies should look to captives for support

Energy companies should look to their captives to react and support any changes in their strategic direction at times of change due to volatility in their markets.

This is the opinion of panellists at a session at the Bermuda Captive Conference yesterday (Tuesday June 14) entitled ‘How can captives help in the mining and energy sector’.

Andrew Hosie, senior vice president, national risk management services leader, Jardine Lloyd Thompson Canada, who led the session, prompted panellists to explain how the use of captives can benefit companies in times of great change. He focused the start of the session on changes in the price of oil, which is causing a challenge for many energy companies.

Anup Seth, managing director, Aon Risk Solutions, said that as a captive’s parent reviews its strategy and reacts to changing macroeconomic conditions, its captive should do the same.

“In the upstream segment of the industry, margins have fallen significantly. The risk and exposures are changing rapidly and a captive should be responding,” he said. “It might be the perfect opportunity to take more risk in a captive. If you have the balance sheet and risk appetite why not take that risk?

“In the downstream sector margins have often gone up because the cost of the raw material, oil, has gone down. In those instances, a company might be expanding and looking to diversify. We all talk about captives as a strategic risk management tool, well now is the perfect opportunity to help or facilitate such a strategic shift in a company.”

Anne Chalmers, vice president, risk and security, Teck Resources, explained how her organisation had used its captive, formed in 2005, when it hit a rough patch prompted by the 2008 financial crisis.

She said in mining commodities, the peaks and the valleys in terms of volatility can be a lot deeper and steeper.

“In 2008, the world came crashing down and although the captive had only taken baby steps up to that point, it had to take on more and was able to help us avoid paying very high commercial insurance premiums and help us manage the volatility at that time,” she said.