Energy producers “have struggled” to get insurance covering Gulf of Mexico windstorm: Willis Towers Watson
January 25, 2016 by Canadian Underwriter
Print this page Share
Eight years after Hurricane Ike damaged most homes in Galveston, Texas, the insurance market’s capacity to cover windstorm for energy firms in the Gulf of Mexico is less than 4% of the actual exposure, while the “vast majority of energy companies remain inadequately protected” against cyber risk, Willis Towers Watson plc suggested in a recent report.
Energy companies in the Gulf of Mexico “have struggled to buy protection for the hurricane season, even though climate change threatens to increase the risk of severe weather events,” wrote Nick Dussuyer, global head of natural resources industry Willis Towers Watson. “Capacity for this type of exposure in the market is thought to be about (US)$750 million, compared to a potential overall windstorm exposure of more than (US) $20 billion.”
Dussuyer made his comments in a paper titled Taking Cover: How An Insurance Shortfall Leaves The Energy Sector Exposed. London-based Willis Towers Watson began operating Jan. 4 after the merger of commercial brokerage Willis Group Holdings plc with consulting firm Towers Watson & Co.
Hurricane Ike made landfall Sept. 13, 2008 in Galveston Texas, Guy Carpenter reported in January, 2009. When it made landfall on the continental U.S., Guy Carpenter suggested, Hurricane Ike had wind speeds of up to 177 kilometres per hour and about 75% of homes in Galveston sustained damages.
“Before landfall, Ike’s path through major oil and gas producing facilities in the Gulf of Mexico prompted the closure of 13 of Houston’s 17 oil refineries (representing a fifth of U.S. refining capacity),” Guy Carpenter noted in 2009. “According to recent information from the U.S. Minerals Management Service (MMS), approximately 1,450 of the 3,800 oil and gas production platforms in the Gulf of Mexico were exposed to hurricane conditions during the passage of Ike. Of these, 54 have been confirmed as destroyed.”
Swiss Re reported in 2009 that Hurricane Ike caused US$20 billion in insurance claims.
In his paper for Towers Watson, Dussuyer noted that losses from Hurricane Ike, “particularly those suffered by upstream operators, far exceeded insurers’ estimates and there followed an immediate concentration of capacity, a massive increase in rates, and a virtual tripling of insurance retentions.”
Other areas in which energy firms tend to be underinsured are in drilling risk, supply chain and cyber, Dussuyer added.
For the past 10 years “almost all policies” issued by the upstream and downstream energy insurance markets “have contained a cyber exclusion, reflecting underwriters’ inability to assess and quantify cyber risk given their lack of expertise in the area,” Dussuyer stated. “Instead they leave it to cyber specialists who offer limited stand-alone cyber products, but generally only with limited covers as the market remains small. Hence, despite some recent developments in the London market to improve matters, the vast majority of energy companies remain inadequately protected.”
To insure drilling risk, underwriters tend to assess risks based on each foot drilled, or the value of the well Dussuyer suggested. He added that the energy industry “really needs an entirely fresh product if it is to accurately assess the drilling risks of different energy companies face in different environments, and charge premiums accordingly.”
To cover supply chain risk, risk managers for energy firms “lack the appetite to spend two years or more assessing their supply chains in the way the insurance market demands as they do not have the resources to do so,” he wrote.
Have your say: