|  The staggering rise in oil prices in the first half of this year has impacted almost every related industry, with the notable exception of insurance. As a matter of fact, in the last 10 years, the oil price has risen by almost 1,000 per cent. And yet insurance rates have not kept pace. If anything, rates seem to be heading the opposite direction, causing concern to insurers who may accuse brokers of driving insurance rates to new lows. Insurers often forget or do not realise that the broker merely loads the gun.It is the underwriters who pull the trigger.
One positive effect of the high oil prices has been a strong renewed interest in oil exploration. (At US$140 per barrel the economic justification is easily demonstrated for previously uneconomic fields). However in the last decade, major oil discoveries have not been prevalent. For the first time in a decade Russia’s oil production declined. The UK sector oil production has declined 25 percent since 2001. Norway’s production decreased a whopping 43 percent. Alaska’s Prudhoe Bay has seen its oil production decline by 65% since reaching its peak 20 years ago. Indonesia has parted company with OPEC, having gone from exporter to net importer. Saudi Arabia seems to be at the end of its tether too, with King Abdullah prudently cautioning recently with regards to new discoveries: “Leave it in the ground… with grace from God, our children need it.”
All of these point to one conclusion – we have not seen the end to the rise in oil prices. The economic resurgence of China and India, coupled with the general desire by developed nations to maintain economic robustness and a certain standard of living will only further fuel this trend, unless ingenuous and radical advancements in alternative energy revolutionise things.
Impact on Insurance Industry
You would think that awash with so much cash and diminishing supplies multiplying the risks to the industry, oil companies would be a little more predisposed to invest in risk management and insurance. Things just aren’t that simple.
Though construction activities are plentiful and asset values have generally been adjusted upwards to reflect higher replacement costs, too much new and innocent capacity has kept pressure on the rates, leading to a dramatic reduction.
New entrants, targeting market share, are offering cheaper prices and are attracted by relatively high rates compared to property risks. They are blindsided however to the increased exposures presented by the industry. Traditional players with a long-term view to risk and risk management are sidelined. Add to this a new, emerging force in the form of national and quasi-national insurance companies from Asia who are writing more international business into less restrictive treaties compared to a few years ago and the result is that insurance and risk management disciplines are reduced to being necessary expenditures that are in essence self-defeating in their implementation.
Over the last two years, the industry has maintained its profitability as a result of reduced loss activity. However the Laws of Probability and Murphy’s dictate that with increasing construction projects and limited human resources, we are more than likely to encounter murky waters, as operators, attracted and funded by the increased revenue from oil production venture into greater water-depths. Prior to the tragic incidents in China and Myanmar that are currently being assessed by insurers, reinsurance providers were exposed to incidents across all sectors totaling an estimated US$6bn. Nearly 50% of the losses relate to the mining sector, but the offshore sector is not without losses. As a result, the profits of prior years are unlikely to be realised in 2008.
In the coming months and years there is plenty of evidence to support yet further increases in the oil prices. Some analysts predict prices of US$200 per barrel, but there is no firm evidence or commentary from underwriters to suggest that the battle for market share amongst insurers has abated to a level whereby insurance rates are due to rise. |
Queries/Comments? Write to us.
|