Willis: Uncertainty Stalks Energy Insurance Market

 

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March 3, 2009 Tuesday 11:59 AM EST

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Willis: Uncertainty Stalks Energy Insurance Market

Marc Jones

LONDON

The energy insurance market is hardening, but is facing problems related to the international financial situation, according to broker Willis Group.

"I think there are three main messages," said Robin Somerville, global communications director of Willis Global Energy and author of a Willis report on the energy market. "Firstly, that following Hurricane Ike, the Gulf of Mexico windstorm portfolio for insurers is once again lying in ruins and is becoming possibly the insoluble risk management problem. We do feel, however, that recent developments in terms of forming new capital market instruments relying on a better parametric trigger for measuring Gulf of Mexico windstorm risks may be the long-term solution to the problem of the Gulf of Mexico."

Insurers are also "conflicted and apprehensive for various reasons," said Somerville. "The global economic recession is making sure that they're not getting as much premium income into their books at a time when they need to do so. They're also finding that their drive towards harder insurance market conditions is being tempered by the fact that there's about 5% more capacity out there this year than there was last year, which has meant that the hardening market conditions in energy are gradual rather than steep."

There is also "a conflict of trends," said Somerville. Insurers "want to make sure that they underwrite for profit, but to do so they have to generate enough premium income to make their book sustainable. Which way will they go? Will they go too high and therefore lose out on premium income, or will they go too low and render their book unprofitable? It's a conflicted and apprehensive market."

The Willis report said energy companies will resist the concept of a hardening market as they themselves attempt to hang on to their own levels of profitability as they deal with falling demand for oil as well as the steady drop in crude oil prices over the past year or so.

(By Marc Jones, London news editor: marc.jones@ambest.com)

March 4, 2009

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