Brokers are using actuarial modelling to help buyers take advantage of a more competitive market, says Willis

Capacity in the energy insurance sector is at a ten-year high and is helping to drive down prices and increase competition among insurers, according to a new report by Willis.

The latest Energy Market Review from Willis titled, “On the Edge of an Abyss?”, also finds that actuarial techniques are now being used more frequently to test premiums, optimise retention levels and maximise the benefits of using captive insurance companies.

Capital providers are increasingly attracted to the energy sector, Willis said, because of the profitable underwriting results posted by the vast majority of property/casualty insurers in the last year. Those results have been bolstered by a lack of major natural catastrophe losses, an upturn in energy industry activity and the worldwide recovery in oil prices. Willis said that, in the absence of a major catastrophic loss, a softening rate environment will likely continue into the foreseeable future, and could lead to an even more competitive market in 2010.

The broker’s annual review found that 2009 was a relatively benign year in the energy insurance industry with US $3.75bn in losses against an estimated global energy premium income of US $5bn.

With the entry of new capital, 2010 global capacity for Upstream energy (the exploration and production phase) is at a ten-year high of more than US $2.7bn for construction risks and more than US $3.4bn for operational risks.

Capacity for Downstream risks (energy operations after production and up to the point of sale) is also back up to 2000 levels, according to Willis, with a fresh injection of capital resulting in almost US $3.5bn of International market capacity and more than US $2.8bn of North American market capacity.

Commenting on the findings, Alistair Rivers, chief executive of Willis Energy, said: “This may be one of the best buyer’s markets in some years, but buyers should be cautious about the long-term implications of abandoning existing market relationships in search of the lowest price. The volatility of the Energy sector is such that a big loss is always looming around the corner, threatening to turn a soft insurance market into a hard one overnight. It will be those buyers who have continued to invest in long-term partnerships who will be best positioned to navigate the market cycle.”

Rivers said Willis is increasingly using sophisticated actuarial techniques to help clients quantify their risks. “Those who can prove their risk quality to insurers will stand to gain much more from the market than those who cannot. We are working closely with every client to maximise the opportunity that the softening market brings to reduce insurance costs by whatever means possible.”