Energy insurers have sustained their worst loss year ever, but the market is capable of weathering the storm according to the latest analysis by London-based Aon Limited insurance brokerage.
The company said losses in the energy insurance market are largely a consequence of two events. It said the fire at the Suncor oil sands plant in Alberta Canada, in January had generated a market loss in excess of $1.3 billion.
Aon said it estimates Gulf of Mexico losses from Hurricanes Katrina and Rita will cost energy insurers from $3.5 billion to $ 5 billion.
In addition, Aon said energy insurance mutual insurer OIL is widely predicted to post losses in the order of $1.75 billion to $ 2 billion for the year with $ 1 billion in loss coming from Katrina alone.
Commenting on recent industry events, Magne Seljeflot, chairman, Natural Resources Global Practice Group said: "Our estimate of global premium income for the energy sector is in the order of $3.5 billion for this class, so simple arithmetic clearly demonstrates a significant net loss to underwriters.
"However, the energy insurance market, like the energy industry itself, is accustomed to this boom or bust cycle, and we are confident insurers will "trade through " and look at the opportunities in the inevitable hard market we will be facing in 2006."
Mr. Seljeflot added that "Disregarding the hurricane losses – the energy insurance market has performed quite well in 2005. One would therefore assume the key focus for underwriters for 2006 will be to look at limiting their exposure to the Gulf of Mexico storm exposures; or to impose dramatic increases in premium or aggregate limits for this exposure – so as to better balance their book of business."
According to Mr. Seljeflot, outside of the Gulf of Mexico his company anticipates more moderate price increases with insurers competing for market share and volume to recoup some of their losses.
"We would anticipate a very good market environment for insurers in the near term, and this will inevitably be a tempting opportunity for potential investors in the sector to offer new capital and capture the benefit of this window of opportunity."
He noted that it appears the weather pattern has changed over recent years, compared to the post war period, leading to a significant increase in frequency as well as severity of tropical storms in the Gulf of Mexico.
According to Mr. Seljeflot, insurers have not yet compensated for this increased exposure, "Otherwise, the current pricing models for energy insurers appear to be performing well."
Aon also said that it expected to see a significant rise in reinsurance costs for all insurers, leading to increased operating cost for direct writers and the possibility of a shrinkage of the current global capacity which is estimated to be slightly in excess of $2 billion both for onshore and for offshore exposures
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