The explosion of the Deepwater Horizon oil rig in the Gulf of Mexico has changed sentiment among energy underwriters and will likely lead to new market dynamics, according to a recent report by insurance broker Marsh.

However, the report (“Energy Market Monitor”) noted that the oil spill will not have the same market-changing impact on the “upstream energy” market–which writes exposures for the exploration and drilling of oil wells–as other major events.

Following Hurricane Katrina, for example, the market experienced reductions in capacity and rate hikes, Marsh said.

In this case, however, “capacity currently isn't an issue and insurers seem keen to maintain their commitment to the market,” according to Jim Pierce, chair of Marsh's Global Energy Practice. “This is good news for the industry.”

The BP oil spill–because of the loss of life and the pollution it has caused–will, however, lead to changes, according to Marsh. Indeed, the report said operators' approach to deepwater drilling will be severely impacted.

Marsh also said government officials will lay down stricter rules and regulations for offshore drilling, but noted it is too early to define the new landscape.

Companies involved in the exploration and production of oil will scrutinize their current insurance programs in order to look into the limits they purchase and the terms and conditions they seek, the report said.

“Some insurers have been capitalizing on their clients' concerns and have been hiking up their prices for higher limits and deepwater drilling wells,” Mr. Pierce said.

But price increases are likely to be modest in other parts of the upstream energy market, unless more major losses occur, according to the report.

In addition, the report noted that the “downstream energy” market–which writes onshore risks for refining oil–remains virtually unchanged due to the absence of downstream losses.

Marsh said there were large rating reductions in this market reported in the June renewals, and it anticipated reductions in the next round of renewals.

The downstream energy market will barely be affected by the oil spill, since the market has an overabundance of capacity and is solely dedicated to writing onshore risks, the report said.

Special Reports /

BP Oil Spill To Alter Energy Market Dynamics, Marsh Says

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