No commercial insurance sector showed a greater HurricaneKatrina price-spike than energy, particularly with all thoseoffshore installations ripe for the plucking. Nearly ayear-and-a-half after the event, however, the market is returningto what might seem to be a new normalcy, even though the next suchoccurrence could be just one season away.

Thomas G. Kaiser, New York-based executive vice president at theSpecial Risks Division of Arch Insurance Group, said he sees aflattening of pricing for the offshore market following the greatspikes of 2006.

New annual aggregates and limits for wind risk will help softenthe blow for the industry should 2007 turn out to be a repeat of2005, with the double whammy of Katrina and Rita that struck energyfacilities.

John Rathmell, Houston-based president of Lockton Energy &Marine, sees some light for his clients, with capacity starting togrow--primarily from Bermuda.

"What we are seeing is a trend for underwriters to offer morelimit and try to keep the price the same," he said. "They recognizethat these buyers are not as emotional as last year, and that theyare looking for something different."

Mr. Kaiser noted, however, that "most carriers are now managingtheir exposure to the London-based concept of Realistic DisasterScenario--which is basically the worst possible thing that canhappen."

And while some buyers may look for rates to ease a bit after thebenign 2006 hurricane season, Mr. Kaiser warned it will take two orthree years for those 2005 losses to be paid off.

Jim Pierce, Houston-based managing director of the global energypractice for Marsh, said that post-Katrina catastrophe covers areno longer blended into traditional policies. "The reinsuranceindustry put a stop to that," he noted.

In industry parlance, upstream risks--refineries--have seen somesoftening in 2007, "except for the catastrophe market, in which weare still seeing a very limited amount of capacity," he said.

The biggest change took place in the first renewal season afterthe storm, when primary companies were faced with reinsurers thathad new agendas.

"Prior to Katrina, when one purchased coverage on one's assetsagainst well-controlled blowouts, one would buy coverage on anoccurrence basis so a buyer would have protection for multipleoccurrences for the assets and operations, including catastrophe,"Mr. Pierce said.

But the majority of treaty renewals for Jan. 1, 2006 offered toprimary insurers defined aggregate amounts of coverage, henoted--adding that insurers, in turn, figured out how they wantedto allocate that aggregate to the direct buyers.

"So overnight, the amount of capacity was reduced tremendouslyand was turned into one-loss capacity," he said.

As the year unfolded, the majority of offshore operators foundthemselves in a situation where they could really only buy afraction of insurance covering their operations. "Nobody was in aposition in which they could cover the totality of theiroperations," he said.

The highest limit Mr. Pierce saw purchased last year was a $300million aggregate. "If Katrina and Rita had repeated themselves,Katrina would have eaten up the 300 [million] and the buyer wouldhave been bare for Rita," he said.

The offshore market consists of about 70 percent Lloyd'sunderwriters--such as Wellington, Ascot and Kiln. In addition, AIG,Zurich and ACE also are important players, according to marketexperts.

"Underwriters now coming out of the box at least are saying theyare going to hold the line at the pricing levels they exacted in2006," Mr. Pierce said.

Last year consisted of what he termed "knee-jerk" reactions fromthe underwriters facing new reinsurer demands. "And so the directinsurers turned around and demanded some pretty stiff tariff on theprice of the capital they were offering to the buying public," Mr.Pierce said.

Meanwhile, insureds were so used to fully protecting theirbalance sheets that having just seen what havoc the storms couldwreak, "with only a couple of high-profile exceptions, [buyers]stepped up and paid the price."

The past couple of years have seen not only exceptional lossesfor the energy sector, but also record profits for theirclients--which plays into the psyches of risk managers. Whileseemingly it could play either way with newly flush oil companiesnot minding higher prices, Mr. Pierce and others contend it hadjust the opposite effect, with buyers showing a new willingness toface more exposure.

For example, oil companies now have sublimits for windstormembedded within their policies. "You could go to specialty marketsto buy excess coverage," Mr. Pierce said. "Those are what we call,instead of venture capital, vulture capital," he said.

Berkshire Hathaway supplied excess windstorm capacity forcompanies who thought they had to have it. "But if you wanted $100million worth of coverage, you were going to pay $20 million or $30million," he said. "So what will be interesting to see is if enoughbuyers feel compelled to continue buying those excess layers."

Buyers who once felt boxed in are now exploringalternatives--from retaining more risk to the alternativerisk-transfer market.

"They are looking for solutions. We are in the process, as acompany, of trying to find them some alternative solutionsinvolving the capital market, but at this point we are not preparedto roll that product out," he said.

"It will be more or less a direct insurance product. It willjust have different capital behind it, but there is no magic pillbecause of the extreme difference between the exposures offshoreand the capital available," he added.

The rising price of oil means a higher exposure, and Mr. Kaiserhas also seen an increase in self-retention in response to tighterterms and conditions. "There have been higher deductibles taken,and there has been more use of captives. And I think that willcontinue," he said.

Most energy sector reinsurance is purchased through thetraditional market or via assumed reinsurance, which facilitatesthe use of captives and other alternative risk-transfer mechanisms,Mr. Kaiser said.

A rising oil price will also lead to higher businessinterruption claims, he noted.

"The controversy has always been that when the oil in one ofthese facilities goes down, it is still in the ground. So there isalways the debate as to what is the proper valuation," hesaid--adding that insurers and carriers can generally come to anagreement of some percentage to use in the case of businessinterruption claims.

Moreover, while offshore claims take a relatively long time tosettle, it is mainly due to the complexity of calculating the riskand not a propensity for disputes, he said.

Onshore risks, such as oil refineries and the like, have notseen post-Katrina price hikes to the extent of offshorecounterparts. In addition, for international risks that aren'texposed to the types of hurricane events experienced in the UnitedStates, there has actually been a reduction of about 5 percent, Mr.Kaiser said.

Phillip Ellis, London-based chairman of Willis Energy, said thatrelatively mild price swings for the onshore market after 2005 ledto fewer new entrants than the previous such jolt of the 2001terrorist attack against New York's World Trade Center and a seriesof oil refinery fires.

Mr. Ellis said that new capacity provided by carriers such asLancashire Re and Starr Tech has been offset to an extent by theabsorption of GE Frankona by Swiss Re and the withdrawal ofVancouver-based Commonwealth Insurance Company, which exited almostentirely from the sector last July.

In addition, sidecars such as Arch Capital's Flatiron Re Ltd.and XL Capital's Cyrus Re Ltd. have also stepped into the breach,which could have pricing implications later on.

Tony Carroll, chief energy underwriter for Liberty InternationalUnderwriters, noted the energy sector lost some capacity when nineinsureds withdrew from the OIL Mutual Insurance Company. "We haveresponded well, but the prices will go up," he said.

Mr. Ellis said insurers may at first take a hard line in notoffering coverage at reduced OIL rates. "However, our ownexperience has been that when push comes to shove, insurers mayprove more flexible than these initial comments may suggest," hesaid.

Although the energy sector has unique characteristics, it doesshare some traits overall with commercial risk in general.

Mr. Ellis noted that while the market develops a price for aninsurance product that does not always reflect the risk, "the gapis now closing."

"Clients with good loss histories and lower-risk technologiesand locations are demanding that they be valued differently fromthose without those qualities," he said.

"For the latter clients, a wake-up time is coming," hepredicted.