Hurricane Coverage Seen Shaky For Offshore Rigs, Refineries

NU Online News Service, May 28, 3:41 p.m. EDT

Offshore energy operations are facing Monday's hurricane season start with big coverage problems including deep cuts in capacity and huge premium increases, an insurance broker said.

Bertil Olsson, energy leader for Marsh's U.S. Energy, Mining and Power Practice, said during a media conference call with executives from Marsh & McLennan Companies Inc., that there is "a very delicate market situation."

He said there are a lot of questions surrounding how both clients and insurers will cope with another bad hurricane season if that sector again suffers heavy losses as it did last year.

Hurricane Ike, which struck the Gulf of Mexico in early September last year, wiped out about 60 percent of production of oil and gas for the rest of the year and 20 percent of refining capacity, said Mr. Olsson. He added that 8 percent of production still remains off line, but refining capacity quickly recovered.

For the 2004-2008 time period the estimate of insured exposure in the Gulf of Mexico has generated about $4 billion in premiums and $12 billion in claims, he noted.

Last year's losses dropped capacity by 30-40 percent and has drawn premium price increases anywhere from 20 to 100 percent depending on location of risk and market capacity, said Mr. Olsson. Retentions are up and insured value has dropped "drastically."

"Most clients have not been able to buy what they have traditionally; some can not afford to buy more than the basic coverage and some see limited value in the products offered and are self-insured," said Mr. Olsson.

The drop in oil prices means less cash for oil and gas producers, and with less insurance coverage, he said the situation for the energy industry will be "who will pay for the repairs?

"What we are looking at here are clients who have less coverage. Some have elected not to insure, and the insurance markets on the other hand are struggling to provide a reasonable product at terms that the insureds and themselves find [viable for the] long-term," observed Mr. Olsson.

"I think it is fair to say that if we have no major storms, then everyone will be okay. But if the wind blows the wrong way, then it will be very challenging for both the insureds and insurers," he said.

Discussing the reinsurance market, Kevin Stokes, executive vice president, member of Guy Carpenter's executive sales group and head of the firm's Florida Operating Committee, said catastrophe renewals at the beginning of the year were up 10 percent, which constitutes 50 percent of the firm's catastrophe portfolio.

April 1 renewals saw increases of around 13 -14 percent. He said the increases were not surprising in a tightening insurance market.

However, Florida reinsurance renewals were not as steep as expected, averaging around 15 percent, he said. July renewals are expected to average out at the same level.

In the aggregate, capacity is down, noted Mr. Stokes, but it remains available in Florida at a higher price.

Concerning client preparation for the hurricane season that officially begins June 1, Gerry Yurkevicz, associate partner in the energy practice of Oliver Wyman, said there is more analysis and risk assessment of the impact of a hurricane on a company's system. There is more planning and work to define roles in the event of a storm and preparedness training.

Companies are searching for ways to fortify their locations and make them less susceptible to destruction should a hurricane strike, he said.

Last week, the National Weather Service issued its 2009 Hurricane season outlook for May saying it expects a near normal hurricane season in the Atlantic, with 9-14 named storms, 4-7 hurricanes and 1-3 major hurricanes.