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Despite quiet 2006, cat-prone energy risks face tough market

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When it comes to energy market risks, it's still all about location.

Despite a quiet 2006 storm season, renewals in catastrophe-exposed regions continue to be subject to large rate increases and restricted capacity, though rates have stabilized for many other onshore and offshore risks.

Windstorm coverage and offshore business interruption remain the biggest problems for buyers, insurers and brokers say.

In the wake of back-to-back severe storm seasons in 2004 and 2005 that cost billions in losses, "buyers last year did not have a lot of optionsÖunderwriters basically said 'take it or leave it,"' said John A. Rathmell Jr., president of Lockton Marine & Energy in Houston.

In the most recent round of renewals, however, energy companies "are not being so emotional about their buying as they were last year," which is "starting to change the dynamics" in the industry, Mr. Rathmell said.

For onshore risks, overall it is a "benign market," said Thomas Kaiser, New York-based president of Arch Insurance Group's business divisions that handle marine, energy, aviation and construction risks.

"The offshore has also stabilized, but still has pressure in the cat-prone areas," Mr. Kaiser said. "Most likely, companies will be asked to accept annual aggregates and sublimits for the wind-exposed" risks.

"Windstorm limits are still a major issue," said J. Cran Fraser Jr., managing director of Arthur J. Gallagher Risk Management Services Inc.'s marine group in Houston. Over the past year, "several major offshore service companies went without windstorm coverage, which in hindsight was a smart move, but whether or not that is a good strategy going forward remains to be seen," he said.

"The focus continues to be in the Gulf of Mexico," said Frank Costa, president of AIG Oil Rig in New York. "After (2005's) record losses, the market will remain firm; wind capacity will remain very tight in 2007," he said.

The most dramatic rate hikes were seen on offshore property policies for Gulf platforms, where increases were "in the 200% to 300% range," according to Tony Mayer, managing director of Marsh Inc.'s global marine and energy practice. Those rate hikes could go up to "400% or 500%" if you are adding business interruption, Mr. Mayer said.

"Certain coverages, like business interruption in the Gulf, are still very difficult to place. That may change within a year, depending upon how '07 looks from a hurricane standpoint," said Mr. Fraser.

There is "still a major delineation between cat-exposed and noncat-exposed risk," said Richard Shaak, president and CEO Starr Technical Risk Agency Inc., a unit of New York-based C.V. Starr & Co. Inc., which in 2006 signed underwriting agreements with ACE Ltd. and Berkshire Hathaway Inc.

Insurers and brokers also generally agree that aside from cat-prone exposures, the toughest energy risks to place are petrochemical and refining risks, while small chemical manufacturers and utilities are generally not difficult.

In the last renewal, "we had no problems with deductibles and limits whatsoever, and there was plenty of capacity for us," said Bob Semet, insurance director for Exelon Corp. in Philadelphia.

Exelon, a gas and electric utility, obtains its coverage through a number of mutual insurers including Associated Electric & Gas Insurance Services Ltd., Energy Insurance Mutual Ltd., Nuclear Electric Insurance Ltd. and Factory Mutual Insurance Co., which does business as FM Global, Mr. Semet said.

"If we're not talking about the Gulf of MexicoÖthere's very adequate capacity," said Mr. Mayer.

However, "more Gulf of Mexico windstorm capacity may be available for approximately the same premium spend as in 2006, due to new vehicles entering the market," Phillip Ellis, London-based chairman of Willis Global Energy, said in a market review published last month. "However, this capacity is essentially reinsurance-driven and still very scarce, in relative terms, compared to the pre-Katrina/Rita environment."

"There have been some new players in the last year," most notably Berkshire Hathaway Inc., but Bermuda-based players—including Lancashire Insurance Group and Clearwater Insurance Co., a subsidiary of Odyssey Re—also stepped up, said Mr. Mayer.

The new capital coming from the Bermuda market has offered some offshore capacity, but it has been "conservative," said Anthony Carroll, chief underwriting officer of global energy for Boston-based Liberty International Underwriters.

But 2006 saw some exits from the market too.

In April, the sEnergy Insurance Ltd. unit of the Hamilton, Bermuda-based OIL Group of Cos., announced it was closing its doors (BI, April 17, 2006). Later in the year, Oil Insurance Ltd., another OIL unit, halved its aggregate limit to $500 billion, and lost nine members representing 12% of the weighted gross assets of OIL.

"We firmly believe that OIL is as viable ever," said George F. Hutchings, OIL's chief operating officer. "There have been other times in the history of OIL that outside constituents have questioned the viability, and in each of those instances, OIL has continued to survive."

"My expectation would be that others would leave," Liberty's Mr. Carroll said. "If OIL struggles with their new imposed caps, it would be expected that other members may look to exit, as the commercial market has responded very well, with no shrinkage in capacity."

But energy company policyholders also may be open to alternative risk transfer options, experts say.

"Buyers are increasingly looking outside of the commercial insurance market for alternatives," Willis' Mr. Ellis noted in his recent energy market review.