High oil prices provide opportunities for risk underwriting

The high price of oil in recent years has led to rising investment in the energy sector, providing opportunities for risk underwriting, according to a Swiss Re advisory panel.
“Those insurers and reinsurers with specialist skills across many disciplines, as well as superior financial strength, are best positioned to take advantage of the accelerating investment being made in the conventional and renewable energy markets,” Swiss Re CEO Jacques Aigrain said in an online posting.
Aigrain said the natural catastrophes that hit the Gulf of Mexico region in 2004-05 have significantly increased the demand for risk protection. He said the overall loss to the oil and gas industry in 2004-05 is estimated to be US15-20 billion, making the 2005 hurricane season the biggest insurance event in history for the oil and gas industry.
“Since then, risk perception and the awareness of loss potentials among energy companies have increased significantly,” Aigrain said. “The demand for catastrophe cover in the energy sector currently exceeds the appetite of the insurance market, and there is growing interest in transferring risks to the capital market through catastrophe bonds.
“At the same time, the underwriting of energy-related risks has become more challenging due to increased project complexity and the changes in the risk landscape.”
Swiss Re has devised a variety of reinsurance and capital markets measures to manage volatility. For example, it has used insurance-linked securities that transfer catastrophe risks to the capital market and provide investors with an alternative asset class.
“Another recent example is a hurricane hedge Swiss Re put in place, using oil and gas financial instruments to hedge US onshore hurricane risks,” the company said in a press release.