Posted on 25 Mar 2010
Capacity in the Energy insurance sector is at a ten-year high; this abundance of capital, together with good underwriting results, is helping to drive down prices and increase competition among insurers, according to a new report by Willis Group Holdings, the global insurance broker.
The latest Energy Market Review from Willis titled, "On the Edge of an Abyss?", also finds that actuarial techniques are now being used more frequently to test premiums, optimize retention levels and maximize the benefits of using captive insurance companies.
Capital providers are increasingly attracted to the energy sector, Willis said, because of the profitable underwriting results posted by the vast majority of property/casualty insurers in the last year. Those results have been bolstered by a lack of major natural catastrophe losses, an upturn in energy industry activity and the worldwide recovery in oil prices. Willis said that, in the absence of a major catastrophic loss, a softening rate environment will likely continue into the foreseeable future, and could lead to an even more competitive market in 2010.
The broker's annual review found that 2009 was a relatively benign year in the energy insurance industry with US $3.75 billion in losses against an estimated global energy premium income of US $5 billion.
With the entry of new capital, 2010 global capacity for Upstream energy (the exploration and production phase) is at a ten-year high of more than US $2.7billion for construction risks and more than US $3.4 billion for operational risks.
Capacity for Downstream risks (energy operations after production and up to the point of sale) is also back up to 2000 levels, according to Willis, with a fresh injection of capital resulting in almost US $3.5 billion of International market capacity and more than US $2.8 billion of North American market capacity.
Commenting on the findings, Alistair Rivers, CEO, Willis Energy, said, "This may be one of the best buyer's markets in some years, but buyers should be cautious about the long-term implications of abandoning existing market relationships in search of the lowest price. The volatility of the Energy sector is such that a big loss is alwayslooming around the corner, threatening to turn a soft insurance market into a hard one overnight. It will be those buyers who have continued to invest in long-term partnerships who will be best positioned to navigate the market cycle."
Alistair Rivers said Willis is increasingly using sophisticated actuarial techniques to help clients quantify their risks. "Those who can prove their risk quality to insurers will stand to gain much more from the market than those who cannot. We are working closely with every client to maximise the opportunity that the softening market brings to reduce insurance costs by whatever means possible."
Other findings in the report include:
* Global Upstream capacity is up 60 percent in four years, with capacity in Lloyd's increasing by 90 percent, from US $891 million in 2006 to US $1,680 million in 2010.
* The Willis Energy Loss Database recorded 14 Upstream losses in excess of US $20 million in 2009, the largest being the US $750 million loss at the Ekofisk field in the North Sea.
* The fledgling Singapore insurance market was especially hard hit by Upstream losses in 2009, in particular the Montara Field loss, along with a series of other losses in the Asia Pacific region.
* The absence of a major storm in the Gulf of Mexico (GOM) in 2009 means that the jury is still out on the market's new Gulf Wind model. Several potential buyers decided not to purchase the GOM Wind product, which they saw as little more than an increasingly expensive "handkerchief" cover for their massive exposure.
* Just 12 International Downstream losses of more than US $10 million are recorded in the Willis Energy Loss Database for 2009, with North America also experiencing 12 losses at this level. The biggest International loss recorded was US $160 million from a three-day fire at a Puerto Rico fuel storage facility; in North America, the top loss was from an explosion at a Delaware oil refinery that cost insurers US $60 million.