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September 2012 Bermuda Re/insurance
“Underwriters have to maintain full transparency regarding potential clash scenarios on property losses and liability losses, as well as connected coverages.”
retention levels of primary insurers. “Reinsurers don’t really want to be paying losses below $200 to 300 million in original values, so what they are trying to do is price themselves out of those areas, ensuring that primary markets are writing sensibly and that losses kick in at a higher retention level.” He said that the major issue for reinsurers was the prospect of their paying for significant levels of attritional losses. “Insurers need to take on more of the risk themselves and instil greater integrity over the lines they are writing,” said Summers. This would help to reduce exposures and involve reinsurers only in major events—something that, Summers said, should really be their focus.
Vogler said that “values and exposures in the energy market have
constantly increased in the last decade”, with little sign of this upward development abating. “Thus far, the re/insurance market has reacted by making more capacity available whenever it was necessary, but this cannot be sustained forever.” In the face of rising exposures and asset values, “underwriters will have to focus their attention ever more closely on getting the right price for the exposure they are taking on”, said Vogler.
“With a client base that, to a large extent, is financially strong and therefore able to retain a substantial amount of exposure themselves, the ability to charge risk adequate premiums is not an easy one for reinsurance underwriters”, said Vogler. “If insurers see rates increase beyond a certain point, they may opt to self-insure, thereby taking additional premium out of an already relatively small market. It is a fine line between charging the right price and making sure the clients continue to buy”, he said.
Vogler concluded that the industry needs to pay close attention to the pricing environment. “The energy reinsurance market has made significant efforts in recent years to achieve a rating level that allows the industry to offer a sustainable product and, I believe, with a certain success.”
Lessons from Deepwater
Those who—like Vogler—are cautioning against over-exposure need only consider the implications of Deepwater Horizon. The 2009 event was a cautionary tale for the sector and its effects have been lasting. As Berg indicated, Deepwater Horizon was an “eye-opener for risk managers and insurers with regard to the increasing liability exposures in all
areas where environmental issues are concerned”. The event halted what had been sliding pricing in the marine energy sector, said Vogler, and encouraged more players to “buy more operators’ extra expense cover”. Rivers said that OCIL likewise experienced rising demand for higher limits in the face of the Gulf of Mexico losses, particularly in the face of shrinking coverage from London and Bermuda as those markets gave energy liabilities a wide berth.
However, despite suggestions that the event might prompt the US government to introduce mandatory liability coverage for the sector, political attention shifted away from the Gulf of Mexico incident and the idea of imposing mandatory coverage was shelved. Reinsurers did express interest at the time in the potential of providing mandatory coverage, with a number of significant markets making known their intention to extend capacity, but Washington never proceeded with the idea. Nevertheless, as Berg made clear, “the public and local governments react extremely sensitively to any threat of damage to the maritime environment”. He added that the industry faces a similar—if less severe—incident following the grounding of the Rena on a reef off New Zealand, “for which the costs for wreck removal and other liabilities now exceed more than $300 million”. Recent events have encouraged a “strong trend towards purchasing higher liability insurance limits”, said Berg, with the energy sector keen to re/insure its exposures.
Mandatory preparations Despite mandatory coverage—particularly as it relates to
environmental liability—not in the end materialising following Deepwater Horizon, it is apparent that the political will to introduce such measures may yet return. Rivers said that interest had died away in the face of an election year—the Obama administration’s attention evidently piqued by the rise of Romney—but Washington’s appetite for mandatory coverage could yet re-emerge. Vogler said that should another incident like Deepwater Horizon occur the potential for a renewed push for mandatory coverage for offshore energy would be significant. He said that from a re/insurance standpoint “any coverage that is mandatory can be an interesting product, depending on the structure and pricing”. He added that it remains unclear how such a market might develop—whether governments would step in to control pricing or whether a specialist market would be created—indicating that there are a “number of options that need to be considered should mandatory cover be put in place”.
Bolted shut
Washington wasn’t alone in considering responses to events in the Gulf of Mexico. At Lloyd’s, Tom Bolt’s office of performance management responded to Deepwater Horizon by restricting marine energy underwriting at Lloyd’s. The move “reduced limits offered on individual risks as a method of reducing aggregated exposures to
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