Risk: Gulf wind and energy

Risk: Gulf wind and energy: "Like the oil platforms that were ravaged by hurricane Ike, the Gulf of Mexico wind storm book lies in ruins, writes Lauren MacGillivray.

It wasn’t supposed to be like this. By the time Ike hit land in September 2008, it had weakened to a Category 2 storm, according to the Saffir-Simpson hurricane scale. But it blew hurricane winds over a 125-mile radius and tropical storm winds over a 255-mile radius.

Fifty-four oil platforms were destroyed and a further 95 damaged as Ike overtook hurricane Ivan as the third most expensive insured loss in the past 10 years, at $15bn or £10.8bn (see bar chart, overleaf).

With the market’s capacity expected to be about 30% lower than it was last year – depending on fresh capacity from Berkshire Hathaway – broker Willis has used its latest Energy Market Review to warn that the future of Gulf of Mexico wind storm insurance is in jeopardy. As the report notes, these policies account for a quarter of upstream insurers’ premiums (see chart, right).

“Faced with an even more limited and expensive product, we understand that some energy companies are likely to question the viability of continuing to purchase this cover,” says the report. “Given the potential disconnect between supply and demand for Gulf of Mexico wind insurance products, it is little wonder that market pessimists are forecasting the end of Gulf of Mexico wind as a viable insurance class.”

The report adds that several energy insurers have found their initial loss estimates to be “wholly inadequate”, concluding that Gulf of Mexico risk is “more confused, volatile and expensive than ever before”.

“It is clear that Ike was no normal Category 2 storm and, in terms of the number of platforms damaged, this is a very sizeable event,” says Paul Dawson, underwriter for energy at Beazley Syndicate. “We shouldn’t be surprised that we will be paying a substantial claim.”

On top of this, reinsurance capacity for direct insurers in this market is set to be as little as 70% of last year’s total.

What’s the solution? Willis believes one answer is to introduce a capital market instrument. This would allow reinsurance companies to transfer risk into the capital markets via private investors, allowing them to generate more capacity to the direct market, which may fix the supply and demand imbalance."

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