Marsh foresees complex energy insurance market

The global energy insurance industry will likely enter a period of what insurance broker Marsh coined a “harft” (neither hard nor soft) climate towards 2012 as recent market fundamentals offer complex signals.

In a report published this month, Marsh said the energy market has become more challenging. Among the complexities that currently surround the market is the fact that some underwriters plan to reduce capacity – the supply of insurance available to meet demand – next year while some have already cut their capacity as early as this year.

Meanwhile, current market trends also point to some insurance companies actually looking to expand their services and create new dedicated capacity.

Jim Pierce, Global Chairman of Energy Practice at Marsh, said in a statement that the capacity is in a state of instability.

“We have entered a period where the energy insurance market is much more difficult to read. The fundamentals still point to a soft environment, but the reality of the marketplace is much more complex,” he said.

According to the Marsh report, about 90 per cent of offshore energy insurance has already been renewed for this year, but the market is still waiting for two significant indicators: the renewal of underwriters’ reinsurance programmes at the end of this year, and the possibility that there will be no Gulf of Mexico windstorm losses during the hurricane season, which usually ends around the middle of November.

Rising competition brings down costs

“We believe that energy [insurance] rates will hardly rise at all, as much as underwriters would like this not to be the case, as they are convinced that their reinsurances will effectively be paying a rise, either by increased costs or retentions,” the insurance broker wrote.

Marsh expects, that underwriters will write more business to generate income. This in turn will create competition and lead to the reduction in underwriting costs.

Likewise the hurricane season has been relatively subdued this year, which meant there has not been any major windstorm in the Gulf of Mexico, the Marsh report said.

Gulf of Mexico is considered an important indicator in the oil market because its offshore oil production alone accounts for about 29 per cent of total crude oil output in the United States, while offshore natural gas output represents 12 per cent of the total US gas production, according to the US Energy Information Administration (EIA).

The EIA also notes that the Gulf of Mexico has over 40 per cent of the United States’ petroleum refining capacity and 30 per cent of its natural gas processing plants.

Marsh said insurers who include windstorm risks could expect to generate good yields this year as there will not be any major claims.

“Premiums have not reduced this year, there were no new players in the market and underwriters did not need to increase their capacity; in previous years, some underwriters had bought expensive reinsurance programmes that were not economically sound,” the company reported.

Growth slows in GCC insurance markets

In a separate report published on Monday, Standard & Poor’s said that while the Gulf Cooperation Council’s insurance market continue to post growth, its performance has been sluggish as the global economic downturn starts to affect the region.

“In the region’s maturing markets, larger companies are building markets at the expense of smaller competitors. Mid-size firms are falling away, leaving a split in the region between large and small insurance companies. The abundance of small players with insufficient underwriting expertise continues to cause more risk-aware companies difficulty; the resulting fierce competition is unsustainable, in our view,” the ratings agency said.

Amidst this climate, S&P gave the general GCC insurance market a stable credit ratings outlook because regional insurers and reinsurers continue to enjoy strong capital adequacy, asset liquidity and technical earnings, the report mentioned.

While most of the insurance sectors in the six-nation Gulf bloc received a stable outlook, Bahrain and Oman were slapped with a negative outlook. S&P said Bahrain’s insurance sector rating was heavily influenced by the kingdom’s faltering sovereign rating.

“The Bahrain-based insurance companies we rate have been profitable at both underwriting and net profit level in the half-year 2011, and show strong capital and at least good liquidity. However, we currently limit the financial strength ratings on primary insurers based in the kingdom whose operations are chiefly domestic,” the company said.

Oman’s insurance market, meanwhile, still bears the brunt of two natural calamities – the cyclones Gonu in 2007 and Phet in 2010 – which forced the sector to adjust their policy risk covers and asset selection.

“We believe that insurers have made the necessary changes to their business models and that the resulting drag on market development has eased. Nevertheless, the market overall is very competitive, and technical earnings are unimpressive,” S&P said.