NR-Risk-Index_Physical-Environments

Top risk for oil and gas industry

Easily-recoverable oil reserves are a thing of the past, and oil and gas companies have little choice but to turn to unconventional sources of fuel such as shale oil and ‘fracked’ gas; and to look in places where a few decades ago oilmen would never have contemplated.

The majors are now drilling for oil at incredible depths and in extremely difficult physical environments such as the Arctic, hoping to make the next big find, making use of the latest advances in engineering and no little cunning. But the search for hidden treasure comes with a litany of risks.

The main reason there isn’t more deep-water drilling right now is not risk-averseness but the economic barrier that comes with lower oil prices.

In April 2010, an explosion on the deep water drilling rig Deepwater Horizon precipitated the largest oil spill in the history of the industry at the Macondo field, just off the U.S. Gulf Coast. The ensuing oil spill was the largest in history, and led many countries to tighten regulation on deep water drilling.

Memories of the Macondo spill still loom large over C-Suite executives. When we polled top executives from across the energy sector earlier this year on the risks they see defining the coming decade, business leaders from the oil and gas industry overwhelmingly pointed in the direction of operating in difficult physical environments.

In time, the Macondo spill will likely come to be seen as an unfortunate accident and an important learning experience for the industry. And, in fact, the main reason why there isn’t more deep-water drilling happening right now is not risk-averseness but the economic barrier that comes with lower oil prices. The cost of drilling and building permanent infrastructure at huge depths, and the cost of transporting hydrocarbons from remote locations, means that a sub-$50 barrel of oil makes deep water projects difficult to justify, especially given the current regulatory environment in many countries.

Natural Resources-Risk-Index 2016

Read the entire Natural Resources Risk Index

With a higher oil price, deep water drilling is likely to become more attractive, even in incredibly difficult environments such as the Arctic. In doing so, they are going to have to be incredibly careful, especially given that many oil majors often self-insure a proportion of their projects. That means the focus will be on risk mitigation, as well as risk transfer.

There is good reason to be optimistic about the future of deep-water drilling and exploration, in places like the Arctic. The industry has learned from Macondo with some firms even deploying two rigs at a time in tricky deep water plays.

Oil and gas firms are also incredibly innovative. The industry’s ability to overcome problems and work in new environments never ceases to amaze. A decade ago, deep-water drilling meant working in 1,000 meters of water. Today, it means drilling subsurfaces at a depth of 3,000 meters. In another decade, that’s likely to be commonplace.

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Control your company’s destiny with a work strategy

In many ways Brexit news hit like a splash of cold water – a shocking surprise. In the weeks that have followed, many organizations are now experiencing a constant, sprinkler-like flow of information and activities needed to manage internal and external stakeholders with preparedness during business as usual (BAU). But BAU this is not.

As this period of uncertainty continues, organizations need to think about alternative strategies for deploying its future workforce to manage potential risk exposure.  Rather than start from scratch, organizations can leverage existing principles and methods for workforce planning to be more agile through the Brexit process. Whether Brexit impacts your business or not, workforce planning can be a lynchpin for delivering on strategic goals and driving greater workforce performance.

Whether Brexit impacts your business or not, workforce planning can be a lynchpin for delivering on strategic goals and driving greater workforce performance

An unsettled and potentially divided workforce

One of the benefits of the E.U. has been free movement of labor and access to a single market for talent. An unintended (or perhaps intended?) consequence of Brexit could be the loss of easily accessible, highly skilled talent beyond the local market, like those in technology who are critical for building out and scaling key capabilities.

Not only is this is an opportunity to think of alternative strategies for talent deployment, but it also can be a strategic pivot point in how an organization makes talent sourcing decisions overall.  To what degree do we need to “own” our talent going forward, and how might that differ for critical or hard-to-fill roles?  How important is it that we are in a “center of innovation” (like London) or is there something to be gained by following a non-traditional route to work?

Triage the work

Given the magnitude and lasting impact of these potential decisions, organizations need to work through some key steps to determine the best approach for themselves:

1. Work strategy

What are the business priorities and what is the critical work that needs to get done?  When thinking about critical work, organizations should step away from a job mindset to one of “work models” to determine needs and priorities. A work model lays the foundation for how work flows through the organization:

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With work and work flow defined, now some of the alternatives for getting work done may be considered. If our premier work, as outlined in the level one descriptor above, is currently based in London, we can look to alternative strategies such as basing the work in another labor market, evaluating the benefits of co-location with the work found in level two, and so on.

2. Workforce planning

With defined work requirements and prioritization, the data review and scenario planning aspect of workforce planning can occur. How many people will we need by work model or role in the future?  How many people will we have based on our historical workforce dynamics?  How will external market factors and potential Brexit activities and timing influence labor supply and demand projections and what talent gaps (shortfalls and surpluses) could be created?

3. Action planning

With both strategy and evidence in mind, the organization is better positioned to understand the trade-offs for moving high-value or high-volume work from London to Paris or Frankfurt. In addition, this same approach allows for more effective decisions on where to keep the work intact in these markets, or conversely, automate some of the work and change the roles at the same time.

While the degree of uncertainty may lead some organizations to “wait and see,” those that are more proactive in planning their future will likely end up with a significant strategic advantage.  In essence, they are managing the flow of talent intentionally and systematically vs. making bigger, more dramatic shifts later in the transition.  To come back to our analogy, they are watering through a drip irrigation system – with ongoing attention to the nature of work and action planning that provides for an efficient and effective outcome.

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Turning whistleblowing to your advantage

According to SEC.gov, since its inception in 2011, the Securities and Exchange Commission (SEC) has awarded $85 million to 32 tipsters. A third of those awards have come in just the second quarter of this year, including the second largest award to date: a $17 million award for a tip involving an unnamed financial institution.

Whistleblowing is set to become a permanent feature of the American business landscape

Under the rules of the program, whistleblowers that provide unique and useful information to the SEC can collect 10% to 30% of a penalty when it exceeds $1 million.

Sean X. McKessy, chief of the SEC’s Office of the Whistleblower noted, “The recent flurry of awards reflects the high-quality nature of the tips the SEC is receiving as public awareness of the whistleblower program grows.”

The plaintiff’s bar is aiding the whistleblowers

In fact, the success of the program has resulted in many of the largest white-shoe law firms establishing dedicated whistleblower-representation practices. These practices specialize in helping whistleblowers navigate the process, protecting the informant’s interests and, of course, helping them earn their whistleblower rewards.

More awards, larger awards, and specialized plaintiff attorneys all suggest that whistleblowing is set to become a permanent feature of the American business landscape. Therefore, it is important that financial institutions embrace the power of whistleblowing and use it to their advantage. If your institution hasn’t already taken the following steps towards developing an appropriate internal whistleblower program, do so. Welcome the opportunity to improve your institution. Don’t fight the trend. The alternative is to face fines and headlines that could result from an adversarial confrontation with the SEC.

Developing an appropriate internal whistleblower program

Formalize your internal whistleblower program and communicate it.

Publicize your program internally and encourage senior management to promote it. Not only is this essential for the practical success for any program, it is a vital means of demonstrating your commitment to regulators. Companies are often willing to encourage new ideas for improvement, but hesitate when it comes to reporting bad behavior.

Address concerns immediately.

Make sure the reporting process is transparent, anonymous and independent from management and human resources. Incentivize reporting and share the positive results with the entire firm. Keep the whistleblower informed about any follow-up.

Respond appropriately.

When managed correctly, internal whistleblowing programs can be a low-cost way to correct liabilities that your firm has otherwise overlooked

How your institution reacts to a concern that has been identified may be monitored by the SEC or a whistleblower’s counsel. Make sure your team responds with professionalism—and records those responses meticulously. Your internal communication must make it clear to employees in its policies and procedures that retaliation of any kind will not be tolerated.

Right attitude / better results

In 2015, the SEC received nearly 4,000 whistleblower tips and paid out more than $37 million in awards. Any stigma that may have been attached to whistleblowing in the past is gone, and Dodd-Frank has provided financial incentives for employees to come forward. The SEC has stated that they will be particularly diligent about investigating possible retaliation against whistleblowers.

Rather than begrudgingly adhering to the Dodd-Frank requirements – embrace them. Instill them in your management. Understand that, now that whistleblowing is part of our business culture, it can be harnessed to benefit your institution. When managed correctly, internal whistleblowing programs can be a low-cost way to correct liabilities that your firm has otherwise overlooked. It is time to think of whistleblowing as constructive criticism and recognize the benefits that it can offer.

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The Continuing Rise of Alternative Investments

Rising interest in alternative assets has been a prevailing trend over the last five years. Many now see student accommodation as a mainstream asset class – with nearly £6bn of investment last year. Meanwhile, the emerging build-to-rent sector will also receive its first tenants this year as schemes by Essential Living, Westrock and HUB open to the public.

Service stations, data centres and other such assets blur the lines between property and infrastructure. And what’s clear is that as investors continue to diversify from retail, office and industrial property, more opportunities will arise.

Since 2003, investment in alternatives has increased from 4.2% to 11.3% of investors’ property allocations.

In its 2015 report, ‘What Constitutes Real Estate for Investment Purposes? A Review of Alternative Assets’, the Investment Property Forum (IPF) said that since 2003, investment in alternatives had increased from 4.2% to 11.3% of investors’ property allocations. Many funds, such as L&G, have predicted this will rise to 20%.

The Risks of Diversification

Most investors agree that diversification is increasingly important for success. This is one of the main drivers of the increasing appetite for alternatives. But it isn’t without risk.

Although the office sector historically displays far more volatility than sectors more dependent on demographics and social factors, such as student housing, as an asset class, it is well understood. The lot sizes are also huge which makes them attractive for institutions who see little benefit in smaller scale transactions. This lack of stock has been one of the key barriers in establishing the Build to Rent sector, for example.

Unlike niche assets – such as marinas – the market for prime office or retail is also relatively liquid. That said, one of the biggest portfolios of marina changed hands last May when the Wellcome Trust acquired Premier Marinas from BlackRock for an undisclosed sum.

Irrespective of whether it’s a hotel, housing block or leisure park, operational risk is a much higher consideration across alternatives.

The IPF’s report said it was “a major distinguishing feature of alternative real estate assets” and indeed, it stands to reason that an office block rented in its entirety as a single bank will be simpler in many respects than a student housing block with 300 beds. Indeed, the skill sets for managing operational risk are entirely different from traditional asset management. This is why many investors – such as Round Hill and M3 Capital Partners – partner with premium operators who specialise in managing the company at the end of the chain.

The boundaries between operators and their investors routinely crossover. Yet the skill sets and management structures employed have a crucial role to play in defining just how much risk is acceptable.

Protecting Against the Risks

From an insurance perspective, there is an increasingly sophisticated market for protecting both the operational risk and the development or construction risk of alternatives.

Looking at insurable risks from a property owner’s perspective, insurers are generally comfortable with alternative asset classes as long as there is a clear dividing line between the operator’s and owner’s exposures.  For example, faced with student accommodation, insurers operating in the specialist real estate arena would expect any risks associated with the provision of pastoral care, leisure facilities and anything similar to be catered for under an operator’s policy.

Clearly, a high level of due diligence, focused research and market benchmarking is essential before entering new territory. But as demand drives up investment in new areas, the knowledge-base and familiarity we have will only grow. It’s worth remembering for instance, that retail parks never existed before the 1980s. Could there be a more familiar experience for many than a Sunday-morning drive to a local DIY emporium?

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Cyber risk has definitely stepped off the “emerging risks” list

Cyber risk has definitely stepped off the “emerging risks” list and moved in with the “current risks.”  Not a week goes by without another major news story about some firm or government agency being hacked and losing control over millions of records of private data – cyber risks are not only here to stay, but to grow.

Businesses, governments and other organizations are being successfully attacked every year by criminals, terrorists, hacktivists, state-sponsored groups and insiders.  Losses come from data breaches as well as service interruptions, fraudulent transactions, computer viruses, cyber extortion and other new threats.  These losses include, but are not limited to:

Companies need to recognize that cyber risk defense requires an enterprise-wide response; it is not just an IT issue.
  • the cost of restoring computer systems including ransom payments
  • notifying affected people
  • loss of business due to reputational harm

There are many ways that organizations can take actions to protect themselves.  Most importantly, companies need to recognize that cyber risk defense requires an enterprise-wide response; it is not just an IT issue.  Although these efforts may not be effective against all cyber attacks.

Insurers have a central position regarding cyber risk.  As holders of large amounts of customer data, they are juicy targets for cyber attacks.  Insurers also provide coverage for other firms who are exposed; and some of those will also send some of their aggregated cyber risk to reinsurers.

Cyber risk insurance

Cyber insurance is available and it is here to stay; it is one of a small number of major growth opportunities for insurers and reinsurers.

Cyber risk insurance is expected to grow at a double digit pace for the next 10 years, especially in the IT, telecom, financial and healthcare sectors.  More than 30 insurers offer cyber coverage, but just five have dominated cyber insurance issuance to date.  With all of the expected growth in that field, there is room for more and a number of insurers are considering entering the business.