The energy sector is established fac territory, but broadly soft rates mean canny reinsurers are focusing on offshore and renewable sectors to achieve growth

Opportunities in the softening and loss hit energy market are not in the obvious places. An industry consortium for offshore liabilities is one mooted initiative, while the rapidly growing renewable energy sector is fodder for more inventive players.

The energy sector is classic fac territory, but it faces numerous challenges in the run up to the 1 January renewals, with rising losses and softening rates. By contrast, opportunities are growing in the more niche renewable energy sector.

One of the few classes of business to have bucked the trend for softening prices is offshore energy. Rates rose in the aftermath of the Deepwater Horizon disaster, but the spike is expected to be short-lived, with rates flat or down at the July renewals, according to Guy Carpenter, and anticipation of more of the same ahead as the industry approaches 2011.

A poll of delegates at Aon’s 10th Middle East Energy Conference found that more than half of respondents (53%) thought that it would take a further $5bn-plus energy loss to bring an end to the current market cycle.

The expectation of softening rates comes despite the Deepwater Horizon loss, which is likely to cost the industry as much as $3.5bn, according to estimates from Swiss Re. The loss could have been much higher had BP purchased cover in the commercial market. But the energy giant has its own captive insurer with a per-event limit of $700m, and has set up a $20bn claims fund to pay for legitimate claims arising from the event.

Lloyd’s expects net claims from Deepwater to come in at around $300m-$600m, while Swiss Re and Munich Re are expecting hits of around $200m and $266m, respectively. Hannover Re recently doubled its expected losses from the rig explosion and resulting oil slick to €89m ($125m) from an earlier €40m prediction. Upstream energy insurers have paid out a combined $795m on Deepwater Horizon and the sinking of the Aban Pearl gas platform in the Caribbean in May.

Boosting offshore capacity

In the wake of Deepwater, various industry bodies have suggested ways of increasing capacity for offshore energy projects and for encouraging cedants to buy more cover in the commercial market. Should they prove successful, it is likely to provide a significant boost in demand for the product. As part of a joint venture, brokers Aon and Marsh have proposed a facility – in conjunction with specialist insurer Torus – to provide over $1bn and potentially as much as $5bn of excess liability cover to oil companies.

Separately, Munich Re has proposed an insurance solution for third-party liabilities in the oil industry. Board member Torsten Jeworrek thinks a liability limit of $10bn-$20bn across the industry is achievable if a specific cover is mandated for drilling companies. He suggests the limit currently in place under the Oil Pollution Act in the USA should be increased, with cover relating to clean-up and removal costs, impairment of natural resources and property damage, as well as loss of earnings in sectors such as fishing or tourism. The German reinsurer is willing to double its available capacity per drilling project to $2bn.

Renewable growth

Elsewhere, an increasing number of (re)insurers are getting involved in the renewable energy sector at a time when investment is at an all-time high. “Deepwater really will focus people’s minds on the whole energy industry and the risks involved in extracting oil from deepwater offshore locations,” says Warren Diogo, an underwriter for Ascot Renewco. “So it really does open the door again for renewable energy as people consider that you can generate electricity and supply people’s energy needs from renewable sources in a far more benign way.”

A key challenge, however, is sizing up the risk when underwriting new and often unproven technology, Diogo says. “You’ve got to recognise that each renewable energy technology is quite different and each has its own diverse range of risk issues. If you look at a solar-powered project in the USA, that’s going to present you with a completely different set of concerns and risks compared to an offshore wind farm.

“So you need to have a different underwriting approach for each form of technology,” he continues. “The basic challenge in any new technology sector is that there is very limited operating history and claims data and that’s a fundamental problem that you need to address in how you underwrite this class.”

Along with Ascot, Munich Re and RSA Global Renewable Energy, which have been operating in the renewable space for some time, capacity is being boosted by newcomers to the sector. Lancashire, the Hartford and Sciemus have launched renewable energy offerings in recent months and new products are continually being brought into the market.

One of the most recent is an insurance product from Munich Re that covers a 25-year performance warranty for solar panel systems manufactured by renewable firm SolFocus. The cover is designed to give solar plant operators and investors greater planning security. It allows manufacturers of modules to take the long-term, technical guarantee risk off their balance sheet.

Globally, the renewable energy sector is expected to attract $200bn in investment in 2010, a rise of 23% on last year as government stimulus funds in the USA and Europe are ploughed into renewable projects such as wind turbines and solar panels. Last year, China replaced the USA as the biggest investor in green technology.

“Renewable energy is one of the fastest-growing sectors in infrastructural investments and at least partially takes over the key role in investments in electricity supply,” says Munich Re spokesman Gerd Henghuber. “The insurance industry needs to respond to that development by addressing the specific needs and challenges of this new industry, and by providing tailor-made risk transfer solutions for this industry to the benefit of all stakeholders.” GR