By DAN REYNOLDS, senior editor of Risk & Insurance®
Energy pricing for both onshore and offshore risks has remained flat in recent months and might even come down a bit as the industry finally shakes off the effects of 2008's Hurricane Ike.
Ike, which was a slow-moving storm with a Category Four storm surge and Category Two intensity when it struck Galveston, Texas on Sept. 9, 2008, ended up doing almost as much damage to offshore drilling platforms by itself as the more notorious hurricanes Rita and Katrina did in 2005.
"It was a slow-moving storm, it pushed an awful lot of water, you had wave heights which would normally not be associated with a storm of that category on the Saffir-Simpson (hurricane wind) scale," said John Keely, a Houston-based director of Exploration and Production for Aon Risk Services Southwest Inc.
According to Keely, Ike destroyed 54 platforms and severely damaged another 95. Katrina and Rita combined destroyed 105 platforms and severely damaged 52.
As a result of all that Ike damage, energy insurance pricing post-Ike spiked to points even beyond where they were after Katrina and Rita. That price hike was also pushed by a recessionary economy in 2008 and 2009, which saw insurers suffer either investment losses or severely reduced investment income.
Then energy company risk managers had to watch as major carriers such as Berkshire Hathaway and Zurich decided around April and May of 2009 that they'd take a break from covering offshore risks, taking with them around $900 million in capacity, according to Keely.
Sounds horrible, no? Actually, it's not that bad.
As high as those post-Ike prices went, a lot of energy companies in the first six months of 2009 decided to do some pulling out of the insurance market of their own, electing to self-insure or buy portions of what they did before.
"On average, underwriters are telling us that they only sold about 60 percent of their wind aggregate that they had to sell. So there is a whole 40 percent of the market that wasn't used," Keely said.
Keely said in early 2009 renewals he estimates that about one-third of offshore wind customers elected to self-insure, one-third purchased 100 percent of some wind product and one-third bought a percentage of some wind product.
"They may have bought 50 percent of the cover and that sort of thing. That was sort of where the buyers were."
Another Houston-based broker said that he, too, thinks that the post-Ike pricing moved plenty of buyers of the offshore product. "I think a fair bit of that is the pricing they hung on it," said Michael Ruehman, a managing director with John L.Wortham & Son. "Many insurers found themselves re-evaluating whether they wanted to spend that kind of money compared to the amount of coverage that they were offered by the market," Ruehman said.
"There are certainly some companies out there, some insureds that have a very strong balance sheet. They have some cash and some felt that they could more effectively self-insure," Ruehman said.
For Zurich's part, the president of its global energy unit Rick Gibbons said that although the company's global energy business is doing very well, "ahead of plan" as Gibbons put it, the company had to face facts in the spring about offshore named wind cover in the Gulf of Mexico.
Gibbons said over the last four five years, the loss ratio for the overall offshore named wind market (not just Zurich's business) in the Gulf was between 360 percent and 400 percent.
"The underwriters went at it and developed renewal terms and conditions with deductibles and rate changes all very positive strong rate changes (i.e.higher rates) and proceeded to work on that business in that manner," Gibbons said.
"What became evident in March and into April was while it was one thing to be able to talk about getting dramatic rate changes it was another thing to have the clients buy the coverage," Gibbons also said. "And many clients decided that for better or worse they were not going to pay the money even though they had been collecting over $3.60 on the dollar for the last five years. Several clients decided not to buy wind or to buy less of it."
As a result, Zurich decided to deploy its capital elsewhere.
"So, in fact, in May the decision was made to recognize that we were not getting the premium volume that we thought was necessary to support the business model offshore Exploration and Production for wind. We said we are not going to write it anymore so we stopped writing named windstorm offshore in the Gulf of Mexico," Gibbons said.
Gibbons said things don't look they've changed enough for Zurich to be writing offshore wind cover in early 2010.
"I don't see us changing our position on the named wind storm cover in the Gulf of Mexico for E&P business. I don't see that happening," Gibbons said.
There's capacity in onshore too. That sector saw almost no significant departures from carriers, and even saw some new faces.
"They hadn't had as bad a previous year, other than the economy, and there were more people seeming to be jumping into at least the energy utility side, the property side, so to speak," said Timothy Bucci, a director, risk management and corporate insurance, for NiSource Inc., a Merrillville, Ind.-based provider of electricity and natural gas.
"Most of the onshore clients are still buying wind coverage although deductibles and limits may have been adjusted," said Kurt Tentinger, a Houston colleague of Keely's who is an Aon managing director and leads the onshore team for Aon's Houston office.
That's not to say that onshore underwriters didn't come at their clients with some hefty pricing and tougher underwriting standards in early 2009, Tentinger said.
"We saw markets adjust their underwriting guidelines for types of onshore risks they would assume, minimum engineering standards, aggregate limits to be deployed, deductible levels and pricing standards," Tentinger said.
But Tentinger said the reaction from clients was tepid enough that the market didn't move all that much.
"The market didn't move upward as far as some thought that it would. Most insureds avoided self-insuring," Tentinger said.
The result being that energy insurance pricing, because there is still a good deal of capacity in the market for both upstream (offshore) and downstream (onshore) risks, was looking fairly flat for October and stands a good chance to be under some downward pressure come the first of the year.
At least that's what Aon's London-based head of energy, William Lynch thinks. In a Sept. 3 press release, Lynch said October renewals looked flat, while rates had climbed between 15 percent and 20 percent for renewals in the beginning of 2009.
Although there have been what Aon calls a steady string of losses, the absence of any major named storms so far in the 2009 hurricane season in the Atlantic and Gulf meant there would be so significant changes to the market.
Aon cited additional factors for consideration.
Capacity in the insurance market has remained relatively stable despite fears many insurers would withdraw.
Confidence in the economy has begun to increase and the 'financial Armageddon' feared in late 2008 and early 2009 has not materialized.
As more energy risks are being underwritten locally, London-based insurers increasingly need to offer competitive rates.
The exception, according to NiSource's Bucci, was onshore casualty.
Bucci said some long-time London energy reinsurers pulled out of that market, which led to casualty pricing increases. "The higher you go in the casualty towers the cheaper the premium is, and I guess they don't expect to get hit, and when they do get hit it's pretty painful," Bucci said.
As a result, casualty pricing saw big increases in the primary side.
Going forward, there is reason to assume that pricing for both onshore and offshore property will come down somewhat for January renewals. For one, according to Aon's Keely, Berkshire "is back in the business next year."
Keely said the word out of Monte Carlo as that catastrophe cover from reinsurers will ease from the end of this year through to May. "I think that will be passed on to buyers. I'm not sure that the product will be changed all that much," Keely said.
As always, Ruehman said, capacity and its attendant price will vary depending on the size of the risk. "It's all relative," he said. "It's a lot easier to throw a baseball than it is a shotput."
October 15, 2009
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