Energy Sector Pricing: A Gusher of Capacity

The energy insurance market is ripe with capacity for risk managers, according to a recent report from a leading broker. New actuarial models have an emerging role in managing energy risks.

By CYRIL TUOHY, managing editor of Risk & Insurance®

Capacity in the energy insurance sector is at a 10-year high thanks in part to a lack of severe hurricane losses last year, but due also to a raft of new actuarial models used by reinsurers and brokers, according to a new report.

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In fact, in many instances, the industry is benefitting from the renewed attention to the actuaries themselves, mathematicians who are skilled at forecasting future loss outcomes to varying degree of confidence and calculating optimum risk-retention levels.

Solvency II, the European Union's impending regulatory framework for the financial services industry, also mandates the use of actuaries for all classes of business, according to the report. Solvency II is scheduled to "go live" on Oct. 31, 2012.

The details of the resurgence of actuaries and the models they use to price risk are contained in a report from global insurance broker Willis titled "On the Edge of an Abyss?" The report outlines the softening price environment, which could encourage short-term opportunistic carriers to enter the market and underprice risk in the name of market share.

Bolstered by a lack of major hurricane-related claims payouts, the capital markets are also drawn to the energy sector because of the solid underwriting results posted by the vast majority of property/casualty insurers in the last year, the report said.

"This may be one of the bust buyer's markets in some years, but buyers should be cautious about the long-term implications of abandoning existing market relationship in search of the lowest price," stated Alistair Rivers, CEO of Willis Energy, in the report.

The report, released March 24, also underscored just how soft prices have in fact become in the energy sector. The absence of a major storm in the Gulf of Mexico meant several buyers last year decided not to buy Gulf of Mexico wind coverage, according to the report, further increasing capacity.

On the supply side, global upstream capacity is up 60 percent in four years, with capacity at Lloyd's alone increasing by 90 percent, to $1.68 billion in 2010, up from $891 million in 2006.

There is more than $2.7 billion available to cover upstream construction risks, and more than $3.4 billion available to cover operational risks, the report noted.

Capacity for downstream risks--risks associated after oil and gas is pumped from the ground--has also increased to nearly $3.5 billion in the international markets and more than $2.8 billion in the North American marketplace, levels not seen for a decade.

On the demand side, the global energy insurance industry in 2009 suffered losses equivalent to $3.75 billion against energy premium income of $5 billion, the report also said.

There were only 12 international downstream losses of more than $10 million in 2009, with the most expensive coming from the $160 million loss from a three-day fire at a Puerto Rico fuel-storage facility.

The report also noted another 12 U.S. downstream losses in 2009, with the most expensive coming from an explosion at a Delaware oil refinery, an event that cost insurers $60 million.

March 30, 2010

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