Willis Energy Review: Hardening Market Tempered by Increase in Overall Market Capacity, Downturn in Energy Industry
-- Long-Term Solution to “Insoluble” Gulf of Mexico Wind Risk Problem May Lie in Capital Market Products
Using New Willis Hurricane Index --
London, UK, March 3, 2009 – With capacity levels up at the start of 2009, the energy
insurance market remains relatively stable, despite insurers seeking rate increases and the energy industry trying to
maintain profitability and reducing asset values in the face of plummeting commodity prices and demand, a
new report from Willis Group Holdings (NYSE: WSH), the global insurance broker, has found. Willis Energy
held a press briefing and webcast in London today on these and other key findings.
The latest Energy Market Review from Willis reports that, with little or no withdrawals from the energy
insurance market in January 2009, stated capacity levels for energy risks have increased by approximately five
Insurers, meanwhile, are seeking rate increases to shore up long-term profitability in this sector, as recapitalization becomes
an increasingly expensive prospect. Since the third quarter of 2008, underwriters’ profitability has been buffeted
by larger-than-expected windstorm losses from Hurricane Ike and a reduction in investment income due to the
global financial crisis. Added premium that was generated by higher asset values, brought on by
the “superheated” commodity prices of the past, is now coming under pressure as those asset values
fall. Without that prop to offset a soft market, insurers now are seeking to maximize
underwriting profitability through higher rates.
The prospect of a hardening market, while tempered in the short-term by increased market capacity, will also
face resistance from energy companies as they seek to shore up their own profitability in the
face of plummeting demand and crude oil prices that are now a third of their 2008
peak. These developments have implications for future capital expenditure plans and existing asset values, and
could lead to reduced premium income for energy insurers.
Commenting on the relatively stable energy insurance industry market conditions thus far in 2009, Alistair Rivers, Willis
Energy CEO, said, “Although in general terms our markets are beginning to harden, we estimate that
overall capacity levels for energy business have actually increased for 2009; this has, for the time
being, tempered the extent of any hardening dynamic, despite the macro-economic factors currently at work in
the insurance industry.”
Gulf of Mexico Windstorm Risk
The Willis report noted that, with Hurricane Ike overtaking Hurricane Rita to become the third most expensive
event in insurance history, a number of key energy insurers have found that their initial loss
estimates for this windstorm have proved wholly inadequate, leaving their Gulf of Mexico wind portfolio in
tatters. In the aftermath of Hurricane Ike, the report concludes that Gulf of Mexico Windstorm risk
is more confused, volatile and expensive than ever before. Buyers are facing the prospect of
paying increasingly higher prices for the limited cover available while being asked to retain an increasingly
significant share of this risk on their own balance sheets.
Willis said the market is expected to offer approximately 30 percent less capacity for Gulf of Mexico
wind risk than in 2008, although this is likely to be shortly augmented by fresh capacity
from Berkshire Hathaway. The report also highlights a potential long-term answer for Gulf of Mexico wind
risk in the form of new capital market solutions based on the Willis Hurricane Index, which
offers a parametric windstorm “trigger” that more closely correlates with actual losses sustained than previous products
of a similar nature.
“Should such a capital market instrument prove attractive to Energy market reinsurers, it may serve to underpin
the supply of more plentiful and consistent risk transfer capacity for Gulf of Mexico wind risk
in the future,” said Rivers. “Achieving this ultimate solution to a seemingly insoluble risk management problem
for the energy industry will require the goodwill and understanding of everyone involved: risk managers, catastrophe
modellers, brokers and the capital market specialists, insurers and reinsurers. To date, this understanding has not
always been in evidence; however, the needs of the energy industry now require us all to
step up to the plate,” he said.
The comprehensive Willis review also examines developments in energy-related sectors and issues including: Reinsurance, Upstream, Downstream, OIL
membership, Construction, International and US Excess Liabilities.
Willis Group Holdings Limited is a leading global insurance broker, developing and delivering professional insurance, reinsurance, risk
management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around
the world. Willis has more than 400 offices in nearly 120 countries, with a global team
of approximately 20,000 Associates serving clients in some 190 countries. Additional information on Willis may be
found at www.willis.com.