However the losses are being counterbalanced by dramatic over-capacity, resulting in a market in limbo, where prices have stopped going down, but aren’t going up, except in specific lines that were the hardest hit by last year’s Macondo disaster.
The annual Willis Energy Market Review released today at the broker’s inaugural Willis North American Energy Conference in San Antonio, Texas, found that in addition to the Japan catastrophe, two other losses have contributed to this break in market softening: In January this year, the Willis Energy Loss Database recorded an estimated total loss of over USD 1 billion from a fire at the upgrading plant of a Canadian oil sands operation. In February, there was also an estimated total loss of USD 800 million from Gryphon A, a floating production storage and offloading vessel in the North Sea.
The losses may not be enough however to deter insurers from continuing to compete for business in a relatively profitable sector, noted the Willis report. According to the broker, capacity is currently at an all-time record level of USD 4.3 billion in the upstream market, while the downstream market is also recording a ten-year high at USD 3.7 billion.
In the report, Willis focuses on the future of well pollution risks post Macondo, saying that the upswing in upstream rates as a result of the disaster has to date been confined to the “stand alone ” Operators Extra Expense (OEE) market and the Marine Third Party Liability (TPL) market. Willis says that insurers writing these lines of business may now consider the regulatory environment under which deep water drilling operations are conducted as a factor when assessing drilling risks.
Commenting on the findings of the report, Alistair Rivers, CEO of Willis Energy said, “While rates in the energy insurance industry have stopped decreasing for the time being, the continued profitability of both the upstream and downstream markets for insurers and the abundant capacity this brings, means that it is still possible for the softening dynamic to re-assert itself as the year progresses.
“While this is great news for buyers, what the sheer scale of the Macondo disaster has taught us is that more capacity isn’t always the answer. As an industry, we need to devise new solutions involving the conventional insurance market, capital markets, mutuals and governments.