Energy Platform Insurers Seen In Better Shape Than 2005

Energy insurers, with the lessons of the 2005 hurricane season behind them, are in a better position to withstand losses from offshore energy fields, according to a brokerage expert.

Bruce A. Jefferies, resident managing director, Aon Risk Services, Natural Resources Group, a unit of Chicago-based insurance broker Aon Corp., said, “Underwriters believe that with all of the changes in exposure and underwriting methods and rating, the insurance industry can weather, so to speak, a major storm without sustaining a marketwide underwriting loss.”

He commented as some energy companies were involved with personnel evacuations at offshore platforms as a precaution against Tropical Storm Gustav, which was expected to elevate to hurricane strength and move into their vicinity in the Gulf of Mexico.

Mr. Jefferies said multiple storms in a year “would put some pressure on the market, but with aggregate windstorm limits, and limited or no business interruption coverage, the total losses to the market could not approach those sustained during [Hurricanes Katrina and Rita in 2005].”

He said by e-mail that since 2005, insurers in this sector have undergone a “complete overhaul of the underwriting practice and rating of offshore energy property.” He said they realized they could not withstand another storm that produced losses of 10 times their premium income as they did in 2005.

To meet this challenge, deductibles were increased from $500,000 to $5 million per occurrence. Rates increased 10 times 2005 rates. Despite declines since, rates remain five times what they were prior to 2005.

The insurers also adopted windstorm modeling to better estimate risk, he continued, and limited aggregate amounts per year for any one insured rather than any one occurrence. Coverage was also “significantly reduced.”

With rate increases and limitations on business interruption and contingent business interruption coverage, few energy producers now purchase the coverage, he said, noting that if it is offered it is “uneconomical.”

Many offshore energy producers, he said, feel they can recoup their losses in production through increases that result from price spikes.

Oil rigs and platforms have been constructed to higher standards under guidelines issued by the U.S. government’s Minerals Management Services, Mr. Jefferies noted. Older and smaller offshore production facilities that were lost and replaced after the 2005 season were built under these higher standards, “so they should be more resistant to damage from future storms,” he said.

Gustav, he said, could “be a good test of how the revised program structures and coverages perform for the oil and gas companies and the insurance companies.”

Minerals Management reported that by Thursday a total of three platforms and rigs were already evacuated. Energy production was not affected.

Tropical Storm Gustav was reported to have taken a total of 59 lives in Haiti. The National Weather Service expected Gustav to reach the Gulf Coast sometime Tuesday morning as a major storm with sustained winds possibly as high as 120 mph.

Officials in New Orleans and surrounding parishes began evacuations of some residents yesterday.

Meanwhile, forecasters said Tropical Storm Hanna could become a hurricane by Sunday and strike the Bahamas aiming toward Cuba or Haiti.

Highline Data, a unit of National Underwriter parent company Summit Business Media, put out a report that examines the risk to top carriers writing federal flood, homeowners multiple peril and private automobile physical damage insurance in five Gulf Coast states: Alabama, Florida, Louisiana, Mississippi and Texas. The five together represent more than one-fifth of the nation’s premiums written across these lines of business. The report also examines the percent of each of the top 50 carriers’ total books of business for each line that may be jeopardized by Gustav.

State Farm is the carrier with the greatest amount of premiums at risk with 26 percent of its total book of business, or $6.9 billion, covering flood, homeowners and private automobile.