The 2005 hurricanes that smashed Gulf of Mexico oil production and refinery facilities also impacted the energy industry's insurance coverage, causing dramatic rate increases and loss of availability, a brokerage expert advised yesterday.
James R. Pierce Jr., managing director and chairman of global marine and energy practice for New York-based Marsh, gave a chilling assessment of the insurance picture for oil and gas risks.
Speaking during a market update discussion sponsored by his company, he said premium increases are up as much as 400 percent and dramatic reductions in capacity are having serious implications for energy producers' risk management strategies.
With the July 1 renewals, Mr. Pierce said upstream insurance, covering production exposures and expiring policies, for both onshore and offshore risks are seeing severe restrictions on wind risk with premium increases between 200- and 400 percent.
Downstream risks, meaning refinery and production plants, are facing wind storm aggregate limits also, something the industry has not seen before. The facilities are also experiencing dramatic premium increases, said Mr. Pierce.
Where once there were billions of dollars in capacity available, the amount is in the hundreds of millions, allowing a single company to secure $100-to-$200 million aggregate, a fraction of the assets involved, he related.
Mr. Pierce explained that for the energy industry this means there will be enough coverage for one event, but may mean none for the second.
This lack of capacity, said Mr. Pierce, is affecting the oil and gas industry in delaying merger and acquisition activity as businesses reconsider the accumulation of more assets.
The industry's major insurer, Oil Insurance Limited (OIL), a mutual insurer with 85 members, has lowered the aggregate occurrence from $1 billion to $500 million, he said.
"This has sent shock waves through the membership as they now have to look for additional coverage," observed Mr. Pierce.
The shock extended itself to another 14 members of the mutual insurer who were involved in an excess facility through OIL that provided $200 million in coverage in excess of $250 million per occurrence. Mr. Pierce said the facility, late last week, ceased underwriting.
"These companies are now in a position where they will have to completely revamp their risk management strategy," he said.
One "very large offshore operation," he noted, which suffered losses during the past hurricane season has decided to self-insure its risk after the imposition of wind storm aggregate limits.
"There is tremendous distress in the offshore and upstream sector, and huge pricing pressure, unlike anything we have ever seen," said Mr. Pierce.
With limits on market capacity, Mr. Pierce suggested that energy risks seeking renewals in the third and fourth quarter should consider extending current policies past their expiration date into 2007 because there may be no market capacity left for their risks by renewal time.
"This may mean [the insured] will pay more money and there may be some uncomfortable negotiations, but it is a good risk management strategy and it will take the pressure off any future shortfall," he advised.
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