NU Online News Service, May 24, 3:09 p.m. EDT

It’s still a buyer’s market for insurance on upstream and downstream energy risks, according to a Marsh report. However, uncertainty has developed as reinsurers take heavy losses and natural and man-made catastrophes take their toll.

Marsh says it named its report “From Creme Caramel to Creme Brulee” to reflect that the energy market has moved from soft all over to an appearance of hardening on top but containing a “soft inside driven by too much capacity and excess capital available in the industry.”

The Marsh report notes that the market “has reached what we see as the bottom of the pricing cycle and, as it bounces, prices will go up and down within that low range.” Marsh also points to mixed signals being sent by the market. “Everybody agrees that the fundamentals of supply and demand and overcapacity are pointing the market one way,” according to Marsh. “But in the last few weeks sentiment has changed and halted the slide (but for how long?).”

For upstream risks—which consist of search, recovery and production—Marsh says the market is achieving rises on a number of accounts of between 5 percent and 10 percent. “Deepwater Horizon was considered to be a 1-in-20-year event,” Marsh says. “This, coupled with the Gryphon FPSO loss, also considered to be a 1-in-20-year event, has left most underwriters with difficult discussions with their reinsurers.”

Marsh says underwriters have been making a profit on upstream risks since 2005, but they have not made a gross profit. Instead, they have made a net profit “after reinsurance.” Marsh explains, “Reinsurers cannot sustain this and we expect they will be looking for major increases.”

Furthermore, Marsh says while earthquakes in Chile, New Zealand and Japan did not hit the energy market in a major way, they do “affect reinsurers’ bottom line as we have seen in reinsurance first-quarter losses.”

Wind premiums, Marsh says, are remaining flat, with finite capacity for this coverage, unlike non-wind coverages. “This landscape may change next year if the reinsurers are able to inflict their rises on the direct underwriters,” notes the report.

But, Marsh says, underwriters are still looking for new business. “We still believe it is a buyer’s market,” Marsh notes. “There is ample capacity for most risks except extreme capacity placements, gulf wind and deep water exploration.” Marsh also says rates are still historically low even with modest increases.

For downstream risks—which involve refining and distribution—Marsh says the 2011 first quarter saw “the return of a frequency of losses to the insurance market.” For operational losses, the quarter saw between $1.25 billion and $1.5 billion in losses, Marsh says.

With respect to natural catastrophes, Marsh explains that the market is still waiting to see the “loss effect of contingent business-interruption extensions for suppliers based in Japan” after the March 11 earthquake and tsunami.

Since the quake, Marsh says, “the general response has been a declaration by many insurers that there will be no more rate reductions.” Rates are essentially flat, Marsh says, with some markets trying to push small increases.

But market capacity remains at a 10-year high, Marsh notes, and thus the market is “conflicted,” dealing with losses but also needing to write business. Future losses will determine the eventual direction of the market, Marsh says, adding that the environment is still positive for clients.

“At flat rating levels the current rates are at a historic low, so the current market situation still represents excellent value for the buyer,” Marsh says.

Special Reports /

Marsh: Energy Market Conflicted, But Buyers Still In Driver&rsquo;s Seat

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