Willis: Increase in Capacity, Downturn in Energy Sector Tempers Hardening Market

With capacity levels up at the start of 2009, the energy insurance market remains relatively stable — says a new industry report — despite insurers seeking rate increases and the energy industry trying to maintain profitability and reducing asset values in the face of plummeting commodity prices and demand.

The latest Energy Market Review from Willis reports that, with little or no withdrawals from the energy insurance market in January 2009, stated capacity levels for energy risks have increased by approximately 5 percent.

Insurers, meanwhile, are seeking rate increases to shore up long-term profitability in the energy market, as recapitalization becomes an increasingly expensive prospect. Since the third quarter of 2008, underwriters’ profitability has been buffeted by larger-than-expected windstorm losses from Hurricane Ike and a reduction in investment income due to the global financial crisis. Added premium that was generated by higher asset values, brought on by the “superheated” commodity prices of the past, is now coming under pressure as those asset values fall. Without that prop to offset a soft market, insurers now are seeking to maximize underwriting profitability through higher rates.

The prospect of a hardening market, while tempered in the short-term by increased market capacity, will also face resistance from energy companies as they seek to shore up their own profitability in the face of plummeting demand and crude oil prices that are now a third of their 2008 peak. These developments have implications for future capital expenditure plans and existing asset values, and could lead to reduced premium income for energy insurers.

Commenting on the relatively stable energy insurance industry market conditions thus far in 2009, Alistair Rivers, Willis Energy CEO, said, “Although in general terms our markets are beginning to harden, we estimate that overall capacity levels for energy business have actually increased for 2009; this has, for the time being, tempered the extent of any hardening dynamic, despite the macro-economic factors currently at work in the insurance industry.”

Gulf of Mexico Windstorm Risk

The Willis report noted that, with Hurricane Ike overtaking Hurricane Rita to become the third most expensive event in insurance history, a number of key energy insurers have found that their initial loss estimates for this windstorm have proved wholly inadequate, leaving their Gulf of Mexico wind portfolio in tatters. In the aftermath of Hurricane Ike, the report concludes that Gulf of Mexico Windstorm risk is more confused, volatile and expensive than ever before. Buyers are facing the prospect of paying increasingly higher prices for the limited cover available while being asked to retain an increasingly significant share of this risk on their own balance sheets.

Willis said the market is expected to offer approximately 30 percent less capacity for Gulf of Mexico wind risk than in 2008, although this is likely to be shortly augmented by fresh capacity from Berkshire Hathaway. The report also highlights a potential long-term answer for Gulf of Mexico wind risk in the form of new capital market solutions based on the Willis Hurricane Index, which offers a parametric windstorm “trigger” that more closely correlates with actual losses sustained than previous products of a similar nature.

“Should such a capital market instrument prove attractive to energy market reinsurers, it may serve to underpin the supply of more plentiful and consistent risk transfer capacity for Gulf of Mexico wind risk in the future,” said Rivers. “Achieving this ultimate solution to a seemingly insoluble risk management problem for the energy industry will require the goodwill and understanding of everyone involved: risk managers, catastrophe modellers, brokers and the capital market specialists, insurers and reinsurers. To date, this understanding has not always been in evidence; however, the needs of the energy industry now require us all to step up to the plate,” he said.

The Willis review also examines developments in energy-related sectors and issues including: Reinsurance, Upstream, Downstream, OIL membership, Construction, International and US Excess Liabilities.

For a full version of the Willis Energy Market Review, visit:
http://www.willis.com/Client_Solutions/Industries/Energy/

Source: Willis Group Holdings Limited,
www.willis.com

Topics Trends Catastrophe Pricing Trends Hurricane Market Mexico