LONDON, April 8, 2014 (GLOBE NEWSWIRE) -- Theoretical insurance capacities in both the upstream and downstream oil and gas insurance markets have increased to the highest levels seen this century, according to Willis Group Holdings plc (NYSE: WSH ), the global risk advisor, insurance and reinsurance broker.
Heavily over-capitalised global (re)insurance markets combined with a glut of new capacity from non-traditional providers - such as pension funds, hedge funds and investment banks - has increased competitive pressures in the energy insurance market to unprecedented levels, according to Willis's annual Energy Market Review.
Total theoretical upstream market capacity now stands at US$5.7 billion and the equivalent downstream total is now at US$4.6 billion, according to the report. Meanwhile, statistics from Lloyd's of London suggest that the overall energy premium pool available to insurers may be reducing for both markets.
Given these conditions, Willis expects it may take more than a run of catastrophic losses to provoke any significant capacity withdrawal from the energy sector.
In 2013 the energy loss record was no worse than average, noted Willis's report. On the upstream side, the Willis Energy Loss Database recorded only a handful of losses in excess of US$200 million, while on the downstream side, although there have been three serious incidents in Argentina, the USA and Canada, the loss record continues to improve.
At the same time, the report notes that the energy industry itself might be sitting on an uninsured cyber-attack time bomb. While insurance cover is readily available for non-catastrophic cyber-attack losses to data and intellectual property, it can be much more challenging to access cover for a truly catastrophic event involving physical loss or damage or business interruption running into billions of dollars. Certain markets, however, have emerged recently with the appetite and capacity to provide energy companies with at least a degree of cyber-attack insurance cover.
Commenting on energy insurance market conditions, Alistair Rivers, Global Head of Natural Resources at Willis, said: "With no obvious alternative investment opportunities emerging, and with interest rates around the world still low in relative terms, capital providers are likely to maintain their funds in the (re)insurance markets where they are currently deployed - at least for the short term. Energy market capacity is therefore likely to continue to be available, even if the sector falls into unprofitability."
He continued: "The difficulty with predicting how market conditions will turn out in the next few years is that this is the first time we have seen capital deployed in the insurance markets that is unlikely to be put off by short term underwriting unprofitability. In previous market eras, we have always found that a major catastrophe or series of losses – for example, Piper Alpha, 9/11 and the 2005 Gulf of Mexico hurricanes – has led to a withdrawal of capacity and harder market conditions. But now we think it will take more than a headline-grabbing loss to precipitate a withdrawal. Capital providers would have to find an alternative haven for their money if they are to withdraw from the insurance arena."
About Willis
Willis Group Holdings plc is a leading global risk advisor, insurance and reinsurance broker. With roots dating to 1828, Willis operates today on every continent with more than 18,000 employees in over 400 offices. Willis offers its clients superior expertise, teamwork, innovation and market-leading products and professional services in risk management and transfer. Our experts rank among the world's leading authorities on analytics, modelling and mitigation strategies at the intersection of global commerce and extreme events. Find more information at our website, www.willis.com , our leadership journal, Resilience , or our up-to-the-minute blog on breaking news, WillisWire . Across geographies, industries and specialisms, Willis provides its local and multinational clients with resilience for a risky world.
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