Energy Industry Taps Bermuda Capacity

"The insurance buying landscape in 2001/2002 has been marked by loss of capacity, inability to control programs, unfair or irrational pricing, coverage restrictions and exclusions, and the uncertainty, in general, of future coverage," he added.

"Some of the members of OIL and OCIL found that they simply could not buy stand-alone coverage for business interruption or excess property exposures, or for the traditional wrap programs that stand alongside or on top of OILs coverage," Mr. Kline said.

The industry faced terrorism exclusions, restricted proof of indemnity, scheduling and limitation of values, higher retentions and sub-limits, he noted.

Faced with those problems, "the energy companies looked back at themselves and said, Weve done this before. If the need is that great, why not provide our own capacity?" according to OIL Chairman Rudd Marlowe.

What the industry had done before was to form Bermuda-based mutual insurance companies that would underwrite the risks of their energy industry members in response to severely tightened market conditions.

In 1971, OIL was formed by 16 original shareholders following extreme shortages of commercial insurance covering such substantial risks as catastrophe coverage for onshore and offshore property and pollution. As of Dec. 31, 2001, OIL had 63 members, assets of $2.8 billion and shareholders equity of $1.3 billion.

In 1986, OCIL was formed to provide directors and officers, and excess liability coverage for the energy industry. As of Dec. 31, 2001, OCIL had 65 shareholders, assets of $884 million and shareholders equity of $376 million.

A third companion company, TOPS Insurance, was formed in 1993 to write total-loss-only coverage for offshore structures, mainly situated in the North Sea. Having fulfilled its purpose, TOPS was voluntarily liquidated in 1999.

"The energy industry has been the pioneer in providing long-term mutual solutions for its insurance needs," said Jack L. Wesley, president and chief executive officer of sEnergy. "The latest vehicle formed by the industry, sEnergy, provides an elegant solution for those needing excess property damage and business interruption protection."

sEnergy has been initially capitalized at $225 million. The companys founding shareholders, along with OIL and OCIL, are:

Borealis, based in Copenhagen, Denmark.

CITGO Petroleum, based in Tulsa, Okla.

Duke Energy, based in Charlotte, N.C.

El Paso, based in Houston, Texas.

Lyondell Chemical, in Houston, Texas.

NOVA Chemicals of Calgary, Canada.

Petro-Canada, also in Calgary.

Phillips Petroleum in Bartlesville, Okla.

Sasol, based in Johannesburg, South Africa.

Statoil, based in Stavanger, Norway.

Tesoro Petroleum of San Antonio, Texas.

Valero Energy, also in San Antonio.

sEnergy began binding coverages with a May 1 attachment date. "The majority of sEnergys members have attached coverage already, and the balance will in the months ahead," said Mr. Kline. "We are actively marketing the company to the current roster of OIL and OCIL members and the insurance brokerage community. Were pleased with our progress so far."

sEnergy is providing per-occurrence limits of $200 million on a broad form, without annual aggregate. Minimum business interruption attachment is the greater of $50 million or 30 days. Property damage attaches at a minimum of $255 million, increasing in $5 million increments. A five-year post loss funding model is being used.

The company is currently writing gross for net, without seeking reinsurance. Mr. Kline confirmed that "our discussions with our members revealed a determination to go it alone, with no dependence on reinsurance or reliance on the commercial markets, to take control of our own destiny. sEnergy allows our members to do just that."

Mr. Marlowe said that sEnergy has been "widely welcomed by our members, who are very supportive of the concept. The investors, including OIL and OCIL, felt that even if they themselves may not have had an immediate need, sEnergy would be hugely valuable for the industry."

sEnergy is managed by Oil Management Services, Ltd., of Hamilton, Bermuda, which also provides complete management and administrative services for OIL and OCIL.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.