U.S. - Energy & Marine

Printable Version

In the first quarter of 2009, the energy insurance market was challenged by “the perfect storm” of 2008, i.e., the combination of hurricane losses, operational losses, and financial losses. As we enter October, we wait to see if we continue to avoid U.S. Gulf of Mexico named windstorms (named windstorm) in 2009. The good news is that it appears the financial market is showing some indications of recovery and the 2009 named windstorm season is anticipated to be milder than predicted.

Hot Topics

U.S. Gulf of Mexico Named Windstorm

Named windstorm coverage was the talk of the first half of 2009. At the end of 2008, the market struggled to put forth a product for the 2009 named windstorm season. Buyers and brokers alike found the products drastically overpriced for limited coverage. The majority purchased named windstorm coverage on a much different basis than 2008—purchasing much higher retentions, lower limits, and higher premiums. Others purchased named windstorm coverage only on select assets or simply chose to selfinsure all together.

Zurich withdrew from the named windstorm market in 2009. This was a significant blow to the energy insurance market as Zurich participated in a broad spectrum of offshore programs; their departure placed increased pressure on the remaining markets, which are estimated to have approximately 50 percent of the named windstorm capacity from 2008.

One differentiation was underwriters’ view of deepwater assets. Generally, viewed as a much lower named windstorm risk compared to shelf assets, markets provided better terms, limits, and pricing.

Lockton is proactively assessing the named windstorm market for 2010. Given no major named windstorm losses this year, we anticipate underwriters will be better prepared to address client needs. If not, offshore energy companies will revisit the cost-benefit analysis comparing risk transfer versus risk retention, given the low commodity prices and the high cost of coverage. Alternative options such as captives, catastrophe bonds, and mutualization will continue to be explored.

Market Reports

Upstream

The first half of 2009 was extremely difficult for the offshore sector of the energy industry. Commodity prices continued to fluctuate resulting in balance sheet issues for many clients. The reduction in commodity prices and the tightening credit market also led to less activity and a cloudy future, which has forced most companies to operate within cash flow. These issues are coupled with the significant losses from Hurricane Ike in 2008.

One bright spot has been the competition brought to the onshore control of well (COW) markets. This was driven by an increased desire by offshore underwriters to spread their risk. Rate reductions and improved terms and conditions are commonplace. Offshore COW remains a challenge. Underwriters took a major step to break out named windstorm from the operational rates because named windstorm is now charged at a pure rate on line (ROL). The separation between operational and named windstorm risks has not been consistent as some underwriters historically did not identify a specific named windstorm rate. For this reason, it is difficult to assess where true operational rates are coming in because some will show decreases while others will show increases.

Named windstorm has been a completely different issue. Named windstorm is now only offered on an annual aggregate basis. ROLs for named windstorm have been very hefty along with significantly higher retentions and reduced coverage. For example, we have seen underwriters requiring sublimits for COW, physical damage coverage (Making Wells Safe, Extended Redrill and Resultant Plugging, and Abandonment Expenses), and physical damage coverage on specific assets (pipelines and umbilicals) on a per-well or per-occurrence basis. ROLs are generally in the range of 15 percent to 30 percent.

Downstream

The downstream property market was challenging through the first half of 2009. Underwriters were driven to obtain rate increases and some named windstorm retention increases where applicable, which made renewals difficult for clients with favorable loss histories. The real challenge going forward is that there appears to be no consensus, and most placements are patchwork structures because some following markets are not accepting the lead terms. This has been very evident in vapor cloud exposed (VCE) risks such as refineries. Capacity exists to finish programs and pricing can be managed, yet sporadic, with the final placement more complex and expensive. If named windstorm capacity is required, modeling for CAT continues to create challenges because underwriters all feel their models are correct and rely heavily on the results. Business Interruption has been a hot item for most refiners because of the fluctuation in commodity prices. Most non-CAT exposed property programs reflect slight increases to as high as 100 percent depending on engineering and loss history. U.S. Gulf of Mexico CAT-exposed properties are seeing at minimum 10 percent to 15 percent increases.

Casualty/Excess

The upstream casualty market remains competitive because capacity continues to not be an issue. The influx of new capacity from Bermuda has kept the market honest and helped maintain pricing. Furthermore, maintaining “as expiring” terms and conditions for most operations, with the exception of offshore named windstorm-related removal of wreck (ROW) coverage, is standard. For example, offshore ROW coverage has been narrowed significantly to make sure there is no coverage for “voluntary” ROW. The upstream casualty market is generally led by St. Paul/Travelers, Chartis, and Zurich with some other players such as Liberty, Chubb, and several Lloyd’s facilities, through wholesalers, coming to the table on specific risk profiles. Given the exceptions above, Primary Liability has remained competitive in providing 5 percent decreases to 5 percent increases from expiring with the excess being driven by the primary program outcome.

Much like the upstream casualty market, the downstream casualty market remains competitive at least in excess layers. However, the lead General Liability and first Umbrella/Excess continues to be led by only a few key players, i.e., Chartis, Zurich, and sometimes ACE, depending on the exposure. James River has stepped in to offer up alternatives, but their coverage form is untested and they carry A- paper. We have seen slight decreases to 10 percent increases for the primary programs; with the excess following the underlying.

Bermuda offered increased capacity from AWAC ($50 to $75 million) and Argo ($25 to $50 million). Iron-Starr, Torus, and Canopius are new entrants. This new capacity has increased excess liability competition globally because Bermuda is generally more flexible. Once considered primarily an excess of $75 to $100 million player, they are now securing programs at lower attachments.

Marine

The marine market reflects increased lay-ups and decreasing ship values as a result of the economic downturn. As with most energy sectors, owners have been working to cut costs where permissible. Piracy was the talk of the first half of the year because of the continued hijackings. Coverage for this exposure reflects significant increases if operating in what are considered dangerous waters.

Hull & Marine/P&I

This market remains competitive. However, with the recent news that WFT has lost their reinsurance and is now unable to quote new or renewal business, there will be decreased competition in this market. Decreased competition results in hardening conditions, at least in the short run. Rate increases are likely imminent but more obvious for those leaving WFT.

Cargo

Ocean Cargo remains extremely competitive with many market options. We forecast a flat renewal and possibly some small decreases depending on whether or not it is new business.

Excess Marine Liability

The Excess Marine Liability market is experiencing an increase in competition, which will bring pressure on pricing. A couple of the new entrants include Mosaic with Lloyd’s security and Burnett & Co. with QBE paper.

Market Movement

Swiss Re and Torus have opened underwriting offices in Houston, Texas.
Chaucer is offering liabilities and energy package policies.
Mosaic has opened an office in New York to underwrite Excess Marine.
Zurich is no longer writing Gulf of Mexico named windstorm.
WFT has lost their reinsurance so no renewal or new business will be accepted.
Argo Re has increased their liability capacity to $50 million.
AWAC has increased their liability capacity to $75 million.

Key Security Rating Changes

Berkshire Hathaway (Downgraded by Moody's from Aaa to Aa1)
AEGIS (Downgraded by A.M. Best from A to A-)

All estimated pricing ranges are subject to an individual insured's specific risk profile and loss history.

Please contact your Lockton Representative for further information regarding any information contained in this market update.

	John Rathmell President—Marine and Energy Producer Houston, TX Tel: 713.458.5204 E-mail: jrathmell@lockton.com
	Bobby Bierley Vice President Account Executive Houston, TX Tel: 713.458.5410 E-mail: bbierley@lockton.com