Hard market for offshore rigs drives firms to self-insure

ZACK PHILLIPS



Some offshore energy firms renewing their windstorm cover in the Gulf of Mexico have opted to self-insure all or many of their facilities in the face of tough pricing and terms that insurers say are necessary to continue writing the business.

Rates and retentions in the Gulf of Mexico since last summer have increased markedly, while limits and capacity have shrunk substantially, brokers and risk managers say. At the same time, coverage has become more restrictive for older platforms, business interruption and damage to wells, they note. Hurricane Ike caused about $3 billion in offshore damages last year.

``It is the most difficult renewal market I have ever seen since I started in the business in 1986,'' said John Keely, a senior vp and the director of exploration and production at Aon Natural Resources Group of Aon Risk Services Southwest Inc. in Houston. ``Underwriters were faced with having to come up with basically a new business plan that would convince their capital providers and reinsurers…they could write Gulf of Mexico business, withstand another storm like Ike and still produce an operating profit on the account.''

Between 2004 and 2008, offshore energy insurers in the Gulf of Mexico collected $3.7 billion in premium and paid nearly $12 billion in losses, experts say. Underwriters say that deficit, coupled with hardening in the reinsurance market and depleted investment income, meant they had to make dramatic changes or risk the collapse of the Gulf of Mexico windstorm market if a major storm hits the area in 2009.


Some insurers have opted to leave the market. Most recently, Marsh & McLennan Cos. Inc. and Berkshire Hathaway Inc. canceled a planned $500 million windstorm insurance pool, and Zurich Financial Services Group opted in late May to stop writing additional named windstorm cover in the Gulf.

Insurers who stayed in the market have narrowed their coverage and offered less capacity. Market observers say overall capacity is down from about $12 billion last year to between $5 billion to $7 billion in 2009.

Much of the reduction in capacity has manifested in demands that buyers accept dramatically higher retentions on windstorm cover—five to 10 times higher than in 2008, brokers and underwriters say. Insurers have sought to increase overall retentions from about $600 million last year to $1.5 billion this year, Mr. Keely said.

Windstorm limits are about half of what they were last year on average, and rates have doubled or tripled in many cases, observers say.

One offshore risk manager said he'd heard of other risk managers stuck with a 30% rate on line or more. He said that the market conditions had prompted nine of the 28 energy companies he checked on to self-insure or largely self-insure for wind, he said.

Mr. Keely estimated that about one-third of offshore buyers are going without insurance and another third are purchasing less insurance than previously.

Kashe Sambhi, head of energy offshore for Swiss Reinsurance Co.'s Industrial Risk Insurer unit, said about 40% of their renewals have opted not to buy windstorm cover.

Andrew Steptowe, the Houston-based upstream practice leader at Marsh Inc., said that the credit crisis and fallen commodity prices mean that some energy firms cannot afford to self-insure, in which case many opt to insure only their most critical and profitable facilities.

``A lot of people have come to us and basically said, `I don't want to spend a lot more than I did last year. What program can you structure for me on that basis?'''

Cover for loss of production income—the offshore equivalent of business interruption—is scarce, expensive and more restrictive, risk managers and brokers say. The deductible for such policies, which is a waiting period before the coverage kicks in after an event, has increased from about 60 or 75 days in the past to around 120 days in 2009, they say.

``That's four months of down time before you can start claiming,'' Mr. Steptowe said. ``Very few companies have either been able to buy LOPI or have actually purchased it….Underwriters have made that a very unattractive product.''

Underwriters say that a particular problem stemming from Hurricane Ike in 2008 was policies covering well damage, especially those covering low-producing or obsolete offshore facilities. Because they are of lower value, these platforms and rigs typically generate lower premiums, but when toppled they can damage many wells connected to them, necessitating costly repairs. Mr. Steptowe said that for one company last year, a $40 million platform toppled by a hurricane cost an additional $360 million to re-drill 12 wells connected to the facility.


This year, many underwriters have declined to cover the older, so-called sunset properties, or have charged much higher rates to do so, observers say. And whereas underwriters previously generally applied various well intervention coverages as blanket coverage across all of a policyholders' facilities, this year they have applied sublimits on individual facilities, raised rates and demanded more details on each facility, brokers say. That has meant a larger workload for brokers and policyholders, many of whom began renewals early this year in hopes of securing scarce capacity.

Dominick Hoare, joint active underwriter at Watkins syndicate 457 at Lloyd's of London, said that Gulf of Mexico windstorm book of business is sustainable with the new pricing and terms.

``That was our intention and aim: to develop a product that if we have another Ike-style event in 2009, we'd still maintain our target returns,'' he said.