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

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

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

The Marsh report notes that the market “has reached what we seeas the bottom of the pricing cycle and, as it bounces, prices willgo up and down within that low range.” Marsh also points to mixedsignals being sent by the market. “Everybody agrees that thefundamentals of supply and demand and overcapacity are pointing themarket one way,” according to Marsh. “But in the last few weekssentiment has changed and halted the slide (but for howlong?).”

For upstream risks—which consist of search, recovery andproduction—Marsh says the market is achieving rises on a number ofaccounts of between 5 percent and 10 percent. “Deepwater Horizonwas considered to be a 1-in-20-year event,” Marsh says. “This,coupled with the Gryphon FPSO loss, also considered to be a1-in-20-year event, has left most underwriters with difficultdiscussions with their reinsurers.”

Marsh says underwriters have been making a profit on upstreamrisks 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 lookingfor major increases.”

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

Wind premiums, Marsh says, are remaining flat, with finitecapacity for this coverage, unlike non-wind coverages. “Thislandscape may change next year if the reinsurers are able toinflict their rises on the direct underwriters,” notes thereport.

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

For downstream risks—which involve refining anddistribution—Marsh says the 2011 first quarter saw “the return of afrequency of losses to the insurance market.” For operationallosses, the quarter saw between $1.25 billion and $1.5 billion inlosses, Marsh says.

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

Since the quake, Marsh says, “the general response has been adeclaration by many insurers that there will be no more ratereductions.” Rates are essentially flat, Marsh says, with somemarkets trying to push small increases.

But market capacity remains at a 10-year high, Marsh notes, andthus the market is “conflicted,” dealing with losses but alsoneeding to write business. Future losses will determine theeventual direction of the market, Marsh says, adding that theenvironment 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 valuefor the buyer,” Marsh says.