Gulf of Mexico Wind Remains Energy Reinsurance Outlier

Offshore oil fields and onshore refineries in the Gulf of Mexico are the reinsurance industry’s own Bermuda Triangle even after an attempt to change underwriting standards, according to a report released yesterday from Willis Group.

According to Willis’ annual Energy Market Review, capacity for the Gulf of Mexico windstorm will become more limited and expensive than ever.

Ironically, the report blamed the quiet North American Hurricane season since reinsurers were unable to validate the underwriting changes the made in following the disastrous 2008 hurricane season.

“The complete absence of [Gulf of Mexico] wind activity last year has meant that the new underwriting strategies unveiled in the wake of Hurricane Ike have yet to be tested,” the report says. “Indeed, some insurers have privately suggested that it would have been much more to insurers’ advantage if there had been a [wind event] – but at a level which would have validated the much higher retentions…”

Last year the few insurers and reinsurers that continue to write windstorm coverage for the region imposed higher retentions on buyers and continued to push up rates in order to gain an underwriting profit.

The changes were made following the 2008 hurricane seasons that included Hurricane Ike. Ike was reportedly responsible billions damages to offshore oil rigs and refineries.

However, Willis points out that those clients that did consider buying cover in 2009 did not look favorably on the new underwriting practices.

“Several potential buyers had decided that, given their particular risk profiles, the Gulf of Mexico wind insurance market product in 2009 amounted to little more than an increasingly expensive “handkerchief” cover for this exposure and consequently decided not to purchase insurance” the report explained.

Rather than buy cover, several refiners and oil companies decided to forgo risk transfer and retain the risk on their balance sheets.

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