The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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With the start of the US hurricane season on 1 June approaching, April and May will be crucial months for renewal discussions on Gulf of Mexico (GoM) windstorm cover. And all the indications are that negotiations this year will be just as fraught as those in 2009.

This time last year tensions were high following the severe losses brought by Hurricane Ike the previous autumn, bringing the market to a crisis point after a hellish period of losses. Since 2004 there had been some $11.75bn in insured losses compared to only $5.35bn in premium income. Taken across the period, the loss ratio for pure GoM windstorm had been running at 300 percent.

"In 2009 the GoM was the wonder child and the international market was the black sheep"
Dominick Hoare

Faced with such a poor record, some underwriters such as Zurich and Advent decided to exit the market altogether, with others on the buying side also deciding to shun commercial cover.

In 2009 a number of buyers with operations in the GoM, including Anadarko Petroleum, Diamond Energy Services and Nobel Drilling, decided to effectively self-insure for wind cover. Others, including Apache Energy and Williams Energy Services, reduced their spending on wind insurance.

Even those bigger players with traditionally higher retentions also curtailed their use of the commercial market. Exxon Mobil, with $500mn placed only 30 percent of its risk in the market at renewal.

Multiples of five
And the nature of cover on offer for GoM windstorm changed significantly in 2009, with terms being overhauled. This led to retentions increasing by multiples of five or more for the medium-sized independents that have historically purchased the bulk of wind cover.

Other changes included limits being curtailed in some instances to an estimated 12.5-25 percent of total insured value. Further restrictions have been imposed in the form of sub-limits for individual wells, potentially lowering the amount that could be claimed for recovery of well, plugging and abandonment, and control of well.

And although in the end the winds didn't blow in the GoM, the offshore market generally still had a difficult year, according to Dominick Hoare, joint active underwriter at Watkins Syndicate. He explains that instead of the rest of the market subsidising the GoM, last year it was really the other way round.

Hoare said: "In 2009 the GoM was the wonder child and the international market was the black sheep. The Timor Sea blow-out and explosion contributed to a total loss of some $1.9bn, which was barely matched by $2bn in premium."

The nature of cover this time round is still a serious issue, he adds: "The problem is how we make it a sustainable product. Post-Ike we have had to build into our rating a frequency of about one a year, and we need people to buy that product."

"2009 was a great result but we needed it. If we had another year like 2008 the product would have been over and dead," he said. "But we have to continue to make this work. We have to maintain technical returns, but I think we have to be more creative."

Modest reductions
Although the signs at present are that the market is likely to move on retentions and is unlikely to offer anything other than modest rate reductions, there are nonetheless indications that there is plenty of room for manoeuvre in other areas.

One place where there might be changes, according to John Cooper at Lloyd & Partners, is the operators extra expense sub-limits introduced last year, with the potential for a blanket sub-limit for a platform instead of individual wells.

Other areas for possible change include offering what are known as "soft credits" for buyers. A typical credit could be a renewal incentive bonus payable at inception but returnable next year if cover is not renewed, or a no-claims bonus that would be returned in the event of a specific loss trigger.

Another suggestion is that the "swings" of old may also make a return. Such a way of writing works by paying a proportion of the premium below 100 percent up front, with the premium figure increasing incrementally in the event of a loss or losses.

The key question is whether players will once again look to self-insure.

"I think a significant majority of those who did not buy cover last year will come back and look at their options," said Hoare. While some may come back, others may think that now is the time to walk away.