BY GREGORY DL MORRIS
Four months down and only two to go in the 2013 Atlantic hurricane season, and the National Weather Service reports average frequency of storms, but lower than usual intensity.
Nevertheless, insurers report persistent challenges in the market, notably tight capacity and insureds hesitant to dig deeply into supply-chain protection.
At the end of September, Liberty International Underwriters (LIU) released a summary from a series of interviews it conducted with maritime and oil-industry company risk managers. Those risk managers cited the protracted scarcity of property insurance capacity for windstorm risks, the lack of cost-effective contingent business interruption insurance to transfer supply chain exposures, and problems over insurance coverage gaps and pricing methodologies.
"When you have a large asset base, it is difficult to insure," one risk manager told LIU. Another noted, "We are utilizing virtually all the capacity the insurance industry offers. We could utilize a lot more."
DonHarrell,senior vice president/marinefor LIU's Marine and Exploration & Production Group elaborated: "The total available wind capacity has increased in the market but the larger energy companies are requiring more than what the insurance market can offer. That is forcing them to look at the capital markets for further protection. They are also self insuring more or purchasing less because the pricing is not meeting their expectations."
According to the Oct. 1 National Weather Service Monthly Tropical Weather Summary, "tropical cyclone activity in the North Atlantic Basin during September was near normal in terms of the number of named storms and hurricanes, but below normal in terms of the duration and strength."
Of the cyclones, it reported that "four named storms formed, two of which became hurricanes, but there were no major hurricanes. Also, one tropical depression formed that failed to reach tropical storm."
As for intensity, it said that, based on a 30-year (1981-2010) climatology, "four named storms form on average in the Atlantic Basin in September, with two or three becoming hurricanes and one becoming a major hurricane."
The NWS summary added, that "for the season overall as of the end of September, the 10 named storms is near the average value of 9.1, but the two hurricanes to date is well below the average of 4.7. There have been no major hurricanes thus far in 2013, well below the average of 2.1. In terms of accumulated cyclone energy, which measures the combined strength and duration of tropical storms and hurricanes, tropical cyclone activity through the end of September was about 70% below the 1981-2010 average."
Pete Connors, offshore energy global product leader with Allianz, said that the relatively quiet storm season actually added complexity to the situation.
"The lack of Gulf of Mexico windstorms puts pressure on the wind rates that underwriters charge. With fewer storms and thus resulting wind losses, oil companies have second thoughts about paying higher rates for wind cover.
"That means that they either increase deductibles, buy less wind limits, a combination of both or totally exclude wind cover and just buy risk cover.
Having said that, it is difficult to make a reasonable size book of Gulf of Mexico business without wind cover.
"Better Cat modeling has also given a level of comfort that wasn't there immediately following the storms of 2005," he said.
Carrier vexations over insufficient supply-chain and contingent business interruption insurance is a growing issue that has been reported in other sectors as well. Market watchers suggest there could be a combination of factors, including lack of coverage, as well as an unwillingness by insureds to try to address this complex issue.
Harrell, at LIU, concurred.
"I believe that it is a combination of the complexity of coverage required, pricing of these risks and what the assured are willing to pay. There is a direct correlation to the Assured Reputational Risk and major event that occurs in the supply chain that cause a CBI or balance sheet loss.
"It continues to be a challenge for the insurance industry to offer an effective supply chain product at a price that risk managers are willing to purchase. CBI is also something that comes in and out of the market during the cycles," he said.
GREGORY DL MORRIS is a New York-based journalist with a specialty in energy. He can be reached at firstname.lastname@example.org.
October 8, 2013
Copyright 2013© LRP Publications