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Business interruption risks under scrutiny

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Business interruption risks under scrutiny

Energy insurance market underwriters are putting business interruption exposures under a microscope.

Jumps in crude oil prices and skyrocketing repair costs for offshore equipment and onshore facilities present major challenges to analyzing business interruption risks.

"Business interruption is extremely difficult to underwrite," said Anthony Carroll, chief underwriting officer, energy, for Liberty International Underwriters in Boston. "We've upgraded our risk management to include more focus on potential exposures to shutdown and really understanding refinery economics and offshore production economics so we can better assess exposures."

Two key components in assessing exposures are repair costs and the policyholder's contingency planning in the event of a shutdown at one of its facilities.

"Business interruption values have increased significantly because of the cost of steel and the lack of quality contractors," said David S. Hawksby, New York-based president of American International Underwriters' energy division.

But with crude oil prices leveling off, refining margins have stabilized. "Business interruption values have peaked," said Kudret Oztap, vp of AIU Energy in New York.

AIU has not made any changes in rates and terms over the past year. "Accounts were re-evaluated in '06, and all terms and conditions will remain stable," Mr. Hawksby said.

Steve Moore, managing director, Marsh Marine & Energy property practice in Houston, said, "Underwriters are looking in great detail at companies' margins," daily, weekly and monthly. Margins are the amount of revenue that refiners and other companies that use crude oil in production processes can generate from one barrel of crude oil. "Many underwriters are applying margin or adjustment clauses that require the insured to declare an amount, and at the end (of the coverage period) calculate gross earnings and either receive a return premium or pay an additional premium," Mr. Moore said.

Certain offshore installations also are being pushed to meet new safety specifications, said Jim Coco, senior consultant, Marsh Risk Consulting, Houston.

Underwriters also are factoring in platform age and design, Mr. Moore said.

Additionally, some insurers are bumping up waiting periods to a range of 45-60 days and establishing deductibles from $25 million to $75 million, Mr. Moore said.

The cost of coverage has caused some companies to go without the insurance.

Most large offshore companies have stopped purchasing business interruption coverage, said John Rathmell Jr., president of Lockton Marine & Energy in Houston. But offshore companies with annual revenues of $100 million or less continue to find it necessary to insure against potentially large losses, he said.

For offshore risks in the Gulf of Mexico, the maximum capacity available in the commercial market ranges from $200 million to $250 million, said Mr. Moore.

While the 2006 hurricane season spared policyholders and insurers alike from the devastation inflicted by the 2005 storms, rate decreases have been small.

"I think there are subtleties" in the market, said Lockton's Mr. Rathmell. "There's been a slight adjustment in pricing (for combined property and business interruption coverage). It's still extremely expensive."

It is easier to get higher limits and more favorable terms this year, he said. "Underwriters are giving a little more windstorm coverage," he said.

For onshore risks, brokers and underwriters say the market is softening, yielding rate reductions ranging from 5% to 10%.

One factor turning the market is about $100 million in new capacity, said Marsh's Mr. Moore. He estimates the Gulf of Mexico market's total capacity is between $400 million and $500 million.

Clients still are being asked to accept substantial retentions, however.

Energy companies with onshore facilities closest to the shoreline of the Gulf Coast still believe business interruption is worth buying, Mr. Rathmell said. He said he also is seeing slightly lower rates for third-party business interruption in Gulf Coast hurricane-prone areas.

Even among onshore facilities, different segments of the energy industry have different experiences. Rob Bothwell, Boston-based executive managing director with Beecher Carlson Holdings Inc.'s energy practice, said he has seen rate reductions ranging from 10% to 15% for power generators.

In fact, Mr. Bothwell said, "the only negative in the marketplace" involves one specific turbine model with a high failure rate. He described the market's response to that turbine as erratic, with some underwriters taking a hard stance in terms of rates and deductibles.

On the other hand, Mr. Bothwell said, "We've been able to do some really good programs for wind turbines," with deductibles or waiting periods as low as 15 to 20 days and rate reductions as high as 30%.

Rate reductions don't mean that buyers are saving premium dollars, because business interruption values have risen with the prices of oil, steel and qualified labor to return facilities to operating condition, said LIU's Mr. Carroll.

Considering the numerous factors that affect business interruption, buyers must be very clear about what their programs include, brokers and underwriters say.

Discuss issues with your insurer before claims arise, Mr. Carroll said. The gray areas are especially important to hash out. For example, he said, know what happens when a plant shuts down because of warnings of an imminent hurricane, but no physical damage occurs.

"There is ever more emphasis on the quality of information provided to insurers on the derivation of business interruption amounts and, in particular, the contingent and interdependent exposures in the event of a loss," said Neil Smith, executive director of Willis Energy in London.

The challenges in assessing business interruption risks are shifting the renewal period to November through January rather than June, said Marsh's Mr. Moore. "The market then has a better feel for what costs are," he said.