The energy industry is showing signs of seeking alternatives to the traditional commercial insurance market, according to a brokerage firm report issued today.
The "Energy Market Review," issued by Willis Group Holdings Limited in London, said that there is more movement toward self-insurance, captives and mutual insurers as risk management tools.
"Buyers are increasingly looking outside of the commercial insurance market for alternatives," said Phillip Ellis, chairman of Willis Global Energy, in a statement. "Add to this the gap that exists between the price of insurance products and the quality of risk being underwritten, and the challenge facing brokers is clear: We need to rapidly innovate, price and offer products and services that reflect and transfer the risks our clients truly face."
The buyers are looking for more long-term commitments from insurers to provide a less volatile pricing environment and products tailored to their individual needs, the report said.
For their part, insurers, after a benign hurricane season providing a profitable book of business, are looking to protect what they have, Willis said. Competition is especially intense for programs that "do not test current market capacity and are located in regions free from natural catastrophe risk," the report said.
Outside of catastrophe risk areas, the report points out that there are signs of lowering rates, with the market softening next year due to the combination of increased capacity, reduced demand from buyers and strong profitability for insurers.
Capacity may grow in 2007, driven by new reinsurance vehicles, but it will remain scarce in relation to the pre-Katrina and Rita market availability, according to Willis
Oil Insurance Limited, the energy industry's major mutual insurer, announced in November that nine members were withdrawing from the program, representing 12 percent of gross weighted assets of the pool.
Despite these withdrawals, Willis said the program appears steady, with the remaining members committing to support the mutual.
OIL lost more than $3 billion from Hurricanes Katrina and Rita in 2005, but sustained a $195 million loss so far this year from a mining explosion, the report said.
The full report is available at www.willis.com/Extras/Publications.aspx.
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