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Across all sectors of the Energy Market – Upstream, Downstream, Power and Mining – insurance conditions are hardening globally, and we expect this trend to continue through the first half of 2009. While the most significant driver for this is the wider financial crisis, other factors such as the magnitude of quantum of risk losses throughout 2008, the devastation caused by Hurricane Ike and the expectation of difficult reinsurance renewals have contributed to a substantial loss in catastrophe capacity.
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Outlook on Capacity
Pricing in the insurance and reinsurance market is a combination of capital availability, investment gains/losses and catastrophe losses. In 2009, we expect minimal new entrants into the market. This is due to a shortage of capital, reducing the competitive pressures on pricing.
We may even see withdrawals from the classes, due to volatility in the energy insurance market. In addition, consideration is likely to be given to mergers and acquisitions, to bolster balance sheets. The counteracting factor to this is that increasingly, international underwriters with a heavy focus on the US and Europe may turn to Asia to secure a balanced portfolio, notwithstanding the losses that Asia itself has experienced in 2008.
The cost of capital is more expensive than 12 months ago. Several factors are likely to characterise the outlook on capacity:
| Lack of new entrants due to scarcity of capital, resulting in less competitive pressures on pricing |
| Due to the sterling’s devaluation, Lloyd’s are urging syndicates writing US businesses, that have capital deployed in sterling, to review their exposures and capital requirements. |
| Original pricings are being increased to compensate for the loss of investment income, which is where insurers traditionally make their profits; loss ratios without investment may be as much as 100%. |
| Capital depletion from the insurance industry is roughly equivalent to two Hurricane Katrina losses. Reinsurers’ capital and surpluses have eroded to such an extent that they have to write less business than they did in 2008. This has made them more selective as to what they do write, further accentuating the hardening. |
| The Gulf of Mexico windstorm capacity may decrease by as much as 50%. If some do decide to exit the market due to management scepticism about the class, reinsurance demands, or other factors, the total capacity can be expected to decrease even more significantly. |
| Insurers have less capital and surpluses, making them more risk averse. |
Outlook on Renewals
So far this season, renewals have been characterised by various combinations of the following market trends:
| Push for more meaningful price increases |
| Push for meaningful deductible increases across geographies |
| Tightening of policy conditions |
| Severe curtailment of control of well coverages for the upstream exploration and production sector |
| Underwriters' reluctance to write business interruption, particularly contingent business interruption without comprehensive information and complete understanding of the risk exposures. |
| Potential for named locations only on the big schedules |
Due to uncertainties in both the direct and reinsurance markets, the market has yet to achieve consensus on the insurance policy terms and conditions that will be imposed in 2009.
Major 2008 Losses in Asia (exceeding US$10 million)
Offshore Sector
| Month |
Description |
Location |
Loss Estimates |
| Jan |
Blowout |
Thailand |
$ 40,000,000 |
| Jan |
Blowout |
Thailand |
$ 40,000,000 |
| Feb |
Construction Loss |
Indian Sub-sea project |
$ 60,000,000 |
| Feb |
Capsize |
Topsides on barge offshore India |
$ 30,000,000 |
| June |
Construction Loss |
Indian Sub-sea project |
$ 27,500,000 |
| June |
Construction Loss |
Indian Sub-sea project |
$ 35,000,000 |
| Aug |
Construction Loss |
Vietnamese Sub-sea project |
$ 13,000,000 |
| unknown |
Construction Loss |
Indonesian Sub-sea project |
$ 115,000,000 |
| unknown |
Construction Loss |
Malaysian Sub-sea project |
$ 75,000,000 |
| unknown |
Construction Loss |
Taiwan Sub-sea project |
$ 60,000,000 |
| unknown |
Construction Loss |
Iranian Sub-sea pipeline buckle |
$ 55,000,000 |
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$ 550,500,000 |
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Onshore Sector
(Downstream Energy / Mining / Power Losses)
| Month |
Description |
Location |
Loss Estimates |
| 1st Quarter |
Flood |
Australian mines (x2) |
$ 1,600,000,000 |
| 1st Quarter |
Flood |
Australian mines |
$ 400,000,000 |
| Mar |
Fire / Explosion |
Korean Chemical Plant |
$ 35,000,000 |
| Mar |
Fire / Explosion |
Korean Chemical Plant |
$ 150,000,000 |
| Mar |
Fire / Explosion |
Korean Chemical Plant |
$ 60,000,000 |
| Mar |
Machinery Breakdown |
Korean Petrochemical Plant |
$ 10,000,000 |
| Mar |
Fire / Explosion |
Taiwanese Steel Plant |
$ 50,000,000 |
| Apr |
Fire / Explosion |
Indian Petrochemcal Plant |
$ 15,000,000 |
| Apr |
Fire / Explosion |
Taiwan Chemical Plant |
$ 10,000,000 |
| June |
Contingent BI |
Australian Chemical Plant |
$ 100,000,000 |
| May |
Fire / Explosion |
Indian Refinery |
$ 15,000,000 |
| May |
Fire / Explosion |
Indian Refinery |
$ 10,000,000 |
| May |
Earthquake |
2 Chinese Chemical Plants |
* |
| June |
Fire / Explosion |
Taiwanese Steel Plant |
$ 50,000,000 |
| June |
Fire / Explosion |
Australian Gas Pipeline |
$ 180,000,000 |
| June |
Contingent BI |
Australian Gas Pipeline suplying the mining industry** |
$ 750,000,000 |
| Sept |
Machinery Breakdown |
Thailand Refinery |
$ 15,000,000 |
| Sept |
Contingent BI |
Thailand Refinery |
$ 20,000,000 |
| Nov |
Machinery Breakdown |
Thailand |
$ 30,000,000 |
| Nov |
Flood |
Philippines Power Loss |
$ 100,000,000 |
| Dec |
Fire / Explosion |
Australian Refinery |
* |
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$ 3,600,000,000 |
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* Expected to be in excess of USD10m
** mid point of estimated range from USD500m to USD1bn
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