NU Online News Service, Aug. 24, 1:13 p.m. EDT

Gulf of Mexico oil rig operators ducked a bullet when Hurricane Bill tracked away to the east because many have drastically shrunk or cut hurricane coverage, insurance executives said.

"We scared a lot of clients into self-insurance by huge premium dollars, where it might have been more intelligent...to focus on coverage," said Richard Brindle, group chief executive of Bermuda-based Lancashire Insurance, where energy insurance makes up for more than 30 percent of the overall book of business.

Mr. Brindle, who made his comments during an earnings conference call last month, admitted to being blindsided by the decisions of many offshore energy insurance buyers to forego insurance coverage purchases for the Gulf hurricane peril. The buyers made their decisions months before the first hurricane of the season formed.

"We are humble enough to admit we did not anticipate [this]. In our defense, I don't think anybody did," he said.

A combination of low oil prices, insurance price hikes of over 100 percent, and "loose [debt] covenants from mortgagees and lessors which did not effectively force our clients to buy cover, all conspired to create a market where an unprecedented numbers of clients headed for the exits," explained Mr. Brindle.

Another executive whose company writes the business, Chris O'Kane, CEO of Bermuda-based Aspen Insurance, said pricing and deductible levels in the energy insurance market for hurricane cover in the Gulf of Mexico "moved dramatically in our favor," resulting in a rate per exposure in Aspen's portfolio that was more than double last year's level during second-quarter 2009.

"However, many clients faced with increased pricing chose to buy less cover or even [entirely] retain the risk" (in other words, to buy no coverage), he added, noting that Aspen decided to decline, which meant the company ultimately wrote just 60 energy insurance accounts this year, compared to 116 in 2008.

While Mr. O'Kane said he did not have hard data as to what happened in the overall energy insurance market for Gulf of Mexico hurricane risk, "the best evidence...suggests that about one-quarter of the clients have stopped buying Gulf of Mexico cover altogether, and that total limits purchased reduced by about half."

Mr. Brindle said his underwriters are meeting with clients and brokers in Houston in an effort to try to win them back. Insurers need to understand "whether the market might have been smarter to focus less on big premium dollar numbers and more on coverage restriction issues," he said.

Among specialty insurance market participants, he reported, "There has been some talk apocalyptically about Gulf of Mexico business being over as a class of [insurance] business." He dismissed the chatter as being "quite ridiculous frankly."

"It's a hiccup," he said, explaining that oil was priced at $30 per barrel when insurance buying decisions were being made. If they move back up to $70 or $80 per barrel and insurers work with clients on coverage changes, "we are optimistic we can get them back," he said.

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