NU Online News Service, April 8, 12:44 p.m. EDT
The earthquake in Japan and two other major losses for insurers have put the brakes on the soft-market pricing trend in the energy insurance market, says a report from Willis Group.
According to the Willis Energy Market Review, released yesterday during the firm's North American Energy Conference in San Antonio, Texas, insurers are reassessing their positions, taking stock of the losses they have endured during the first quarter of this year.
"Any softening dynamic on risks not already quoted in either market has been brought to an end…" the report says. However, it cautions that due to abundant capacity among upstream (stock-owned companies) and downstream (mutual companies) insurers, soft-market competitive pressures could resurface later in the year.
Currently, Willis says the energy market is in limbo except for specific lines of business affected by recent losses.
The report notes that besides the disaster in Japan this year, there was an estimated total loss of over $1 billion from a fire at the upgrading plant of a Canadian oil sands operation in January. In addition, there was an estimated total loss of $800 million from Gryphon A, a floating production storage and offloading vessel in the North Sea in February.
Before the Tohoku earthquake, the worst loss for upstream insurers was the Deepwater Horizon disaster affecting operators extra-expense coverage. That disaster was notable because a limited amount of that loss was insured. However, it has caused upstream insurers to increase rates for standalone operators extra-expense and marine third-party liability market.
The report asks, "2010 is going to be the worst non-windstorm-affected underwriting year of the last two decades—but with premium income still at a historic high, will this affect the underlying softening dynamic?"
With all these losses, however, Willis says it still may not be enough to change market direction.
Willis says "capacity is currently at an all-time record level of $4.3 billion in the upstream market, while the downstream market is also recording a ten-year high at $3.7 billion."
"While rates in the energy insurance industry have stopped decreasing for the time being, the continued profitability of both the upstream and downstream markets for insurers and the abundant capacity this brings, means that it is still possible for the softening dynamic to re-assert itself as the year progresses," comments Alistair Rivers, CEO of Willis Energy, in a statement.
"While this is great news for buyers, what the sheer scale of the Macondo [Deepwater Horizon] disaster has taught us is that more capacity isn't always the answer. As an industry, we need to devise new solutions involving the conventional insurance market, capital markets, mutuals and governments," he observes.
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