Commodity Prices Seen As Top Risk For Energy Sector

NU Online News Service, Feb. 25, 9:23 a.m. EST

Risk managers in the energy sector rate commodity price fluctuations as the top peril their industry faces, according to a poll released by insurance broker Aon.

Its findings were contained in a report titled "2010 U.S. Industry Report: Energy," which noted that "commodity markets have seen dramatic volatility; price volatility is a tremendous concern and a sizable risk for both sellers and buyers."

"When prices cannot be stabilized, cost structure, budget, inventory and production can all be affected," Aon noted.

For all industries, commodity price risk came in fifth.

Failure to attract or retain top talent and regulatory-legislative changes rounded out the top three as equal concerns for risk managers, while business interruption ranked fourth and political risk-uncertainties and climate change rounded out the top five.

When it comes to readiness to handle these issues, only business interruption received 100 percent score.

Natural resource scarcity, which ranked seventh along with environmental risk, was the closest to being at a full readiness level with a score of 90 percent.

Commodity price risk received a readiness score of 88 percent among risk managers.

Concerning their choice of insurance carrier, risk managers ranked financial stability as the most important concern in selecting an insurer in both the energy sector and all industries.

Additional capacity is ranked as the second highest priority in choice of carrier. The report noted that several Aon clients purchased higher casualty limits because of additional market capacity.

Aon said companies are seeking more flexibility from carriers and want these companies to "recognize and reward internal risk management through lower premiums."

The majority of Aon's energy clients maintained their deductibles and retentions for property, casualty, and directors and officers liability. The exception was natural catastrophe exposed accounts, which took larger deductibles.

Clients have also taken advantage of the competition in the insurance marketplace for directors and officers liability coverage by re-evaluating their coverage and purchasing higher limits and adding or increasing broad form A-side limits that apply where the corporation does not indemnify directors and officers.

Property insurance, for non-catastrophe exposed risks, is expected to continue its soft trend on rates, Aon said, and companies with offshore exposures "will seek significant relief from the terms and conditions" of last year's policies in the wake of the quiet hurricane season.

The report is online at www.aon.com.