Operators of oil rigs in the Gulf of Mexico may have breathed a big sigh of relief as they eyed the easterly track of Hurricane Bill recently because many drastically shrank their hurricane coverage programs, insurance executives reported late last month.

"We scared a lot of clients into self-insurance by [requiring] 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 in late July, 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, explaining that 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 number of clients headed for the exits."

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 coverage 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 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 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 added.

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," but 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 added.

He also took the opportunity to scold insurance underwriters for their kneejerk reactions to continue offering the same product year after year, while "just moving the price up and down."

"We can do much more than that," he said.

Deputy CEO Simon Burton, who explained that many buyers decided to retain higher layers of coverage in particular (layers that had been the preferred area of the business for Lancashire), also said the company shifted its attention to writing more property-catastrophe reinsurance risks, since that business offered good risk-adjusted returns in the second quarter. (As a result, Lancashire's overall premium volume for the year to date has remained relatively flat at about $385 million.)

"Our shift toward this class was timely as it coincided with concerns over the liquidity of state vehicles," he said.

Executives of several other Bermuda companies described property reinsurance opportunities in Florida in particular, where one cat specialist, RenaissanceRe, saw enough opportunity to prompt it to set up a new sidecar--a rarity in recent years.

RenRe said the new reinsurance sidecar--Timicuan Reinsurance II Ltd.--set up with $60 million of capital, created additional capacity for the Florida homeowners market, and that under a fully collateralized reinsurance agreement, Ren Re ceded a defined portfolio of property-cat business.

Commentary was mixed, however, about whether catastrophe pricing in North America will continue to be attractive to reinsurers.

For example, David Brown, CEO of Flagstone Re--who reported that Florida pricing was up roughly 15 percent during midyear renewals--also said more reinsurers started quoting on the business as the renewal season drew to a close. That additional supply put pressure on pricing, he said.

"Up until mid-May, while quoting business, we were being asked how much more capacity we would offer on many programs. However, in the last 10 days of May, several European reinsurers stepped up to offer additional capacity, causing many programs to be oversubscribed," he said.

Looking ahead, Mr. Brown said, "if industry losses in North America remain low for the rest of the year, our expectation is for increased competition," adding that "the market cycle could begin to soften should this scenario materialize."

Outside of the North American property reinsurance market, Bermuda executives individually described a wide range of specialty insurance opportunities ranging from non-cat business in Latin America, global aviation business and financial institutions (FI) liability.

Mr. O'Kane commented on the last category--FI professional liability and directors and officers coverage--where he said Aspen has no immediate plans to increase its play in the market yet.

"The worst of the [credit] crisis has passed in the real economy, but it hasn't yet hit the insurance industry," he said, noting he believes "there is a lot more [loss] reserving to be done" by insurance competitors, to be accompanied by "much much more movement of FI pricing internationally and in the United States."

"I'm anticipating within 12-to-18 months to be telling you some good news, which is that we're rapidly expanding significantly on the back of a significant market hardening," he said.

(In an article in last month's edition of NU's E&S/Specialty Lines Extra, Michael Rice, CEO of Aon's Financial Services Group in Denver, Colo., noted that Aon had already seen D&O price hikes as high was 80 percent for FI insureds.)

John Charman, CEO of Axis, said his company seized a unique opportunity to write bond reinsurance in Latin America during the second quarter--an opportunity he said was created by the pullback of a former market leader in the region that he did not identify.

Separately, Mark Byrne, Flagstone's chair, described an array of specialty insurance and reinsurance opportunities for his company in Brazil--a location where he believes there is a $44 billion primary market and a $5 billion reinsurance market each growing annually at a 20 percent clip.

According to Mr. Byrne, Flagstone--the global provider that operates as a reinsurer and insurer of short-tail specialty lines in North America, Europe, Latin America, Dubai, India and South Africa--recently launched an initiative to write non-cat-exposed lines in Brazil, such as inland marine, aviation, energy, engineering and short-tail casualty.

"Acquiring even a 1- or 2 percent share...could meaningfully impact premiums at Flagstone for the next one or two years," he said.

At Validus Holdings, CEO Ed Noonan described the potential for growth at his company as a result of new global onshore energy and aviation initiatives launched at the firm's London-based Talbot operation within the past year. The energy team wrote an $800 million account with its prior carrier, while the new aviation team wrote a $600 million portfolio within another insurer before joining Validus, he reported, describing the potential size of opportunities he envisions.

As for pricing, Mr. Noonan said rate increases in the aviation market are now in the 15-to-20 percent range, but Validus expects 20-to-30 percent hikes in the fourth quarter when most business renews.

Special Reports /

Gulf Energy Risks Ditch Cover As Buyers Balk At Price Hikes

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