Energy Insurance Sector Capacity, Competition Soaring, Willis Finds

Capital providers are increasingly attracted to the energy sector, Willis said, because of the profitable underwriting results posted by the vast majority of property and casualty insurers in the last year. Those results have been bolstered by a lack of major natural catastrophe losses, an upturn in energy industry activity and the worldwide recovery in oil prices.

The brokerage said that in the absence of a major catastrophic loss, a softening rate environment will likely continue into the foreseeable future and could lead to an even more competitive market in 2010.

The broker's annual review found that 2009 was a relatively benign year in the energy insurance industry with $3.75 billion in losses against an estimated global energy premium income of $5 billion.

With the entry of new capital, 2010 global capacity for upstream energy (the exploration and production phase) is at a ten-year high of more than $2.7 billion for construction risks and more than $3.4 billion for operational risks.

Capacity for downstream risks (energy operations after production and up to the point of sale) is also back up to 2000 levels, Willis said, with a fresh injection of capital resulting in almost $3.5 billion of international market capacity and more than $2.8 billion of North American market capacity.

"This may be one of the best buyer's markets in some years, but buyers should be cautious about the long-term implications of abandoning existing market relationships in search of the lowest price," Alistair Rivers, chief executive officer of Willis Energy, said in a statement.

"The volatility of the energy sector is such that a big loss is always looming around the corner, threatening to turn a soft insurance market into a hard one overnight. It will be those buyers who have continued to invest in long-term partnerships who will be best positioned to navigate the market cycle," Mr. Rivers cautioned.

The reports other findings include:

o Global upstream capacity is up 60 percent in four years, with capacity in Lloyd's increasing by 90 percent, from $891 million in 2006 to $1.68 billion million in 2010.

o The Willis Energy loss database recorded 14 upstream losses in excess of $20 million in 2009, the largest being the $750 million loss at the Ekofisk field in the North Sea.

o The fledgling Singapore insurance market was especially hard hit by upstream losses in 2009, in particular the Montara Field loss, along with a series of other losses in the Asia Pacific region.

o The absence of a major storm in the Gulf of Mexico in 2009 means the jury is still out on the market's new Gulf Wind model. Several potential buyers decided not to purchase the Gulf of Mexico wind product, which they saw as little more than an increasingly expensive "handkerchief" cover for their massive exposure.

o Just 12 international downstream losses of more than $10 million are recorded in the Willis Energy Loss Database for 2009, with North America also experiencing 12 losses at this level. The biggest international loss recorded was $160 million from a three-day fire at a Puerto Rico fuel storage facility. In North America, the top loss was from an explosion at a Delaware oil refinery that cost insurers $60 million.

Yesterday, Marsh released a report saying that the energy losses from the earthquake in Chile would cost insurers no more than $350 million, not including any future contingent business interruption claims.

The report also noted that terrorism insurance has total capacity between $1.2 and $1.5 billion, but while "clean businesses" can secure a drop in rates, loss impacted risks have seen little or no improvement in price.

The full Willis report is online at www.willis.com.