At annual IUMI (International Union of Marine
Insurance) conference in Tokyo, James McDonald, chairman of
IUMI's Offshore Energy Committee warned that the sector was
His warning was based on declining total premium income set
alongside upstream energy large losses for 2015-16 of USD 4.8
McDonald explained: "In recent years it would appear that claims
have exceeded the global premium base and the last two
underwriting years have seen significant losses. The impact of
Hurricanes Irma and Harvey are unlikely to deliver the same
magnitude of loss that resulted from Katrina and Rita in 2005 or
Ike in 2008, but whilst Harvey and Irma appear not to have had
much impact on the offshore sector the year's hurricane season
still has some distance to run".
According to McDonald, the offshore energy underwriting sector
was facing some significant challenges and it was these that were
contributing to the current poor performance:
- Usable capacity had continued to increase since 2006 and was
currently between USD 7-8 billion - many risk values were under
USD 1 billion, therefore they can be covered many times over.
- Coverage given by wordings were "creeping" resulting in risk
coverage widening which would result in claims increasing.
- Prototypical technology (such as FLNG) was advancing and
underwriters had no actuarial experience to price these risks and
there was little idea of how these new technologies would
- Although premium income was reducing, acquisition costs were
increasing and expenses were broadly static meaning that expense
ratios had increased significantly against the reducing premium
- Cyber exclusions were typically included in policies but most
had not been tested in many jurisdictions, meaning it was
difficult for underwriters to assess their cyber accumulations to
a systemic event.
- The low oil price had led to less drilling, less construction
projects and more lay-ups, resulting in less to insure which was
also driving down the premium base.
- Reactivation of rigs, when it happens, was expected to increase
attritional risk due to equipment being recommissioned and a
shortfall of experienced engineers and crew.
- The increase in market capacity had led to inexperienced
underwriters attempting to lead business. It was not certain
whether these markets had the claims resource and experience to
provide the claims service that clients would expect.
With premiums running at a level lower than claims costs,
McDonald was downbeat on future prospects. "The oil price is not
easy to predict, more than 25 years ago we passed the point where
more oil was used than was discovered. Today, we discover only
one barrel for every four we consume. With our global transport
infrastructure relying so heavily on hydrocarbons, we are led to
believe that electricity and LNG will become much more prominent
in the future. Gas might become the new oil, but until then, the
offshore energy insurance sector cannot rely on a rising oil
price as its saviour".