Lloyd’s Offshore Energy Market Draws Lessons From Deepwater Horizon
By Robert O'Connor | |
A.M. Best Company, Inc. |
The 2010 Deepwater Horizon oil rig disaster in the
The explosion and blowout of the BP oil rig in the
In the view of
"More often than not, people go broke from a failure to understand their aggregations rather than a failure to charge an adequate price," Bolt said.
Offshore energy was among six areas highlighted by Lloyd's when it released its current three-year strategic plan in
Bolt was reluctant to make specific predictions on offshore energy premiums, lest he fall foul of
"Offshore energy insurance premiums are trending up around the world," he said.
Deepwater Horizon has been followed by a flurry of litigation that tested the system of operating agreements that has long been part of the offshore energy insurance sector. Under these agreements, insurance payments were subrogated among the owners of the main economic interest in a well and the other participants in the project. These agreements protected the insurer from having to pay out more than once on a claim, Bolt said.
BP's attempt to be designated as "an additional named insured under the policy" offered a challenge to that structure, Bolt said, adding early indications from
The legal maneuvers over Deepwater Horizon caused Lloyd's to look with some concern to the strength of its
Bolt described the offshore energy market as "pretty important for us."
Most of Lloyd's syndicates underwrite energy risks, and much of this involvement is relatively small, he said. "About 80% of the energy premium gets written by the 11 largest syndicates."
The overall energy market "has not been profitable" for Lloyd's, Bolt said. In 2010, Lloyd's took in 120 million pounds (
The total will depend on how the Deepwater Horizon payout is allocated. And that, he added, will depend on decisions made by courts in
Bolt agreed that capacity is ample. "It's maybe shrinking a little bit in response to loss activity and people focusing where they allocate their capacity in a tough market," he added.
He also pointed to the appeal of insurance in an environment where investment returns are weak. "So until interest rates rise and other fixed income opportunities get better, I think we'll still have a bit of capacity in the marketplace," he said.
"Lloyd's itself as a market is a significant player in the offshore energy market," Thomas said. "Most of the diversified syndicates writing in Lloyd's would have some exposure to offshore energy."
Although there have been big single-risk losses, results over the past three years have benefited from benign hurricane activity in the
Deepwater Horizon, together with other large losses such as Maersk Gryphon, has led underwriters to increase what are known as attachment points where possible, raising the levels of risk retention by clients, she said. There is a growing trend also among insurers to make greater use of engineers within the underwriting process.
As a result of Deepwater Horizon, Thomas said, "there has been a real focus from the
Lloyd's warned that 2012 business plans that do not include this demarcation would not be approved, Thomas said.
The sense within the Lloyd's management that aggregation was not fully understood coincides with the close look Lloyd's will be giving the offshore energy market during the first half of 2012, she added.
As a marine liability insurer, the
"There is still pressure in the reinsurance market to see rate increases, certainly for members or programs which have claims obviously day to day," Groom said.
"So we're not doing anything particularly differently from what we did before," Groom said. "But we are conscious that we need to take our reinsurers along with us, make sure that they understand what we're doing."
Groom recalled his first reaction to the Deepwater Horizon disaster as relief that it was not the
Groom sees an increase in the long-established practice of the oil companies pushing as much liability as they can onto subcontractors, where most of the
"Our clients operate in relation to oil fields rather than owning them," Groom said.
Lloyd's has a current Best's Financial Strength Rating of A (Excellent).
(By
Copyright: | (c) 2012 A.M. Best Company, Inc. |
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