In a keynote speech at the annual Houston Marine Insurance Seminar Tom Bolt, Lloyd’s Director of Performance Management, told an audience of energy insurers that he is not convinced offshore energy underwriters are ‘robustly managing risks.’
He added that the regulatory and legal environment is more onerous for the energy industry post Deepwater Horizon and insurers need to catch up with these changes.
Speaking for the first time since announcing “best practices” in the way offshore energy business is underwritten at Lloyd’s, Bolt explained that a review of the class in the Lloyd’s market uncovered concerns with the way risks are assessed and priced and exposures are managed.
He warned this approach is ‘not sustainable’ as there is a ‘material imbalance between premiums charged and exposures assumed’. Lloyd’s bulletin also cited a “lack of transparency in package policies,” which makes it difficult to assess and manage aggregations. “As a result, it is now a best practice requirement at Lloyd’s that liability coverage is provided on a standalone basis.”
Bolt described the performance of the offshore energy class as ‘very disappointing for capital providers,’ given the large amount of capital needed to underwrite and the modest returns generated.” He also questioned whether ‘better returns could have been made had the capital been deployed elsewhere’.
Nonetheless, Bolt reaffirmed Lloyd’s commitment to the energy market, indicating that this class of business continues to be important to Lloyd’s despite its disappointing performance. Lloyd’s underwrites over half of the world’s offshore energy business, the majority of which is for North American risks.
He acknowledged the difficulties for energy underwriters, who face significant individual losses against a relatively modest premium base. He also questioned whether risk prevention is currently good enough for drilling in extreme environments which are inherently more risky.
Pointing to claims of billions of dollars from Deepwater Horizon, Piper Alpha and Maersk Gryphon he showed that the size of claims from individual events dwarfs the premiums received and said “the economics simply don’t work.”
Lloyd’s will publish a report this Wednesday (21 September 2011) which looks at the implications and challenges for the insurance industry of drilling in extreme environments. It can be downloaded at: www.lloyds.com/energyreport
Source: Lloyd’s of London