Energy Insurance Newsletter - October 2006 - JLT

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4Energy Market OverviewOur last newsletter reported that all interested eyes were likely to be onthe Atlantic Windstorm Season over coming months. Whilst it would be moreinteresting to provide our readers with news of dynamic developments in theinsurance markets since that report, in truth nothing too much has changed.A QUIET HURRICANE SEASON (SO FAR!!!)As we go to print the hurricane season has sofar been unexpectedly quiet, so much so thatforecasters at Colorado State University haveamended their predictions for the 2006 Atlantichurricane season from “more active than normal”to be “slightly below” average. Apparently,this is due to unexpectedly high concentrationsof dry West African dust, which have sappedmoisture from the atmosphere, eliminating acritical component of storm formation. EarlyEl Nino conditions in the Pacific are also thoughtto be a contributing factor.Nevertheless, there is a some way to go until theofficial end of the season on 1st December andthere are no sighs of relief emanating from themarket just yet. However, generally underwritersseem more at ease with the situation, whateverthe outcome. Steve Catlin, Chief Executive ofCatlin Group, was recently quoted as saying“I’ve been in business 35 years. If I worriedevery time the wind blows, I’m in the wrong job.If we’ve balanced our portfolios correctly, I shouldhave no need to worry”. Likewise Edward Creasy,Chief Executive of Kiln stated “we have re-lookedat our book and underwritten it on the basis thatsevere hurricanes will be a matter of fact for thisyear and going forward”.So even if the rest of the hurricane seasonproves costly there is unlikely to be the dramaticpricing reaction seen in some areas of themarket following Katrina and Rita. As wehave previously indicated, Gulf of Mexico (GoM)rates are probably unsustainable much beyondcurrent pricing. Equally, it would be difficult forunderwriters to impose further rises oninternational (non-Catastrophe) risks as a resultof further windstorm losses.Underwriters are still pricing for medium termincreased activity in Atlantic windstorm. One yearwithout major losses is only likely to take a limitedamount of pressure off the rating environment,not fundamentally change underwriting positions.Nevertheless, an absence of Hurricane lossesin 2006 may well result in an easing in theavailability of windstorm coverage for 2007,raising speculation that buyers may be able tosecure slightly more windstorm coverage for thesame price.On international business, over the last 12 monthswe have seen that the Hurricane losses have onlyhad a limited effect on rating. With underwritersgenerally reporting healthy interim results andcapacity increasing, the functions of supply/demand dictate that, barring a run of other majorlosses, some downward pressure on internationalrates is likely (if not already apparent).Recent press speculation suggests there couldbe as many as four new entrants into the energysector next year. For example Argenta, a Lloyd’ssyndicate which up until now has only writtengeneral property business has now hired anenergy underwriter. Meanwhile Starrtech’smanaging agent CV Starr has recently set upa new Lloyd’s syndicate to write Marine & Energybusiness. Security upgrades, such as the A- ratingwhich AM Best has assigned to Infrassure havealso effectively added capacity for some buyers.
5However, the natural disasters of 2005 coupledwith the man made disasters of 2001 andthe reserving inadequacies of prior years haveperhaps at last resulted in a tighter underwritingenvironment. Whilst attention is clearly focusedon wind, some of the quotes we have pickedup on this quarter demonstrate the market’sawareness that the next major aggregatedloss may result from other exposures, suchas earthquake or flood. Global warmingis adding to this concern. Underwriters arepricing for the changing global and political riskenvironment. Consequently many believe thata flatter insurance market cycle is developing.Whilst downward pressures are developingin some areas, buyers shouldn’t bet onpaying significantly less next year than this,even if their and the market’s overall lossexperience remains benign.UpstreamThe upstream market is, for the most part,stable. As indicated above the outcomeof the current hurricane season will to someextent determine if this stability remains inplace, particularly for catastrophe exposed risks.In general terms accounts with satisfactory lossrecords are experiencing single figure percentageincrease in pricing and/or a tightening of terms.Accounts that have produced more significantlosses can expect tougher treatment, butthe extent of any increase in rates may dependon what that client paid at the last renewal i.e.a further significant rise may be unsustainable.attitude to both pricing and terms/conditionsremaining stable. This attitude appliesparticularly to the larger capacity risks and themore complex sub-sea developments.This stability is being partly driven by underwritersexpectations that there will not be muchrelief when it comes to the negotiation of theirReinsurance protections at the end of this year.DownstreamThere is plenty of capacity in the onshore market(we estimate USD2.15bn), with a number of newplayers and increasing competition for the moreprestigious risks. Whilst there is still a reluctanceto reduce rates, by restructuring programmesor where good justification exists, savingsare being achieved. Even for GoM exposuresthe restrictions on availability of cover is easingslightly. As we go to press we have just placedUSD250m of catastrophe cover for operationsin Louisianna, with no percentage deductiblesand without any levee breach exclusion.The Offshore Construction market has changedlittle since our last review with underwriters
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Page 6 and 7: 6PowerThe rating environment for op
Page 8 and 9: 8News in BriefACE USA has announced
Page 10 and 11: 10not change until the Coast Guard
Page 12 and 13: 12Losses2006 Energy losses of USD 1
Page 14 and 15: 14Lloyd’s2007 CAPACITYEarly indic
Page 16 and 17: 16Political Developmentsin the Ener
Page 18 and 19: 18FOCUS ON:Capital Markets - theCha
Page 20 and 21: 20FOCUS ON:The Impact of Losseson t
Page 22: 22About JLT Risk SolutionsJLT Risk

Energy Insurance Newsletter - October 2006 - JLT

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