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Stromboli online - Volcanoes of the World
Issue 98 - 22nd April 2010
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Insurers await the details as Gulf rig continues to burn
The energy insurance market is bracing itself for a major loss after an explosion and subsequent blaze on board a semi submersible rig off the cost of the US. At present the rig’s owners Transocean say they have no idea of what caused the explosion on the Deepwater Horizon which is drilling for BP on part of the Mississippi Canyon Block 252 known as the Macondo prospect, in 1,500m (5,000ft) of water, off the Louisiana coast. Transocean press spokesman Greg Panagos, said the rig had been drilling at the time but was not in production. The cause of the blast is still unclear he said. "Our focus right now is on taking care of the people," Mr Panagos added. According to the US Mineral Management Services statistics the fire is the latest in 509 recorded on oil platforms in the Gulf of Mexico since 2006. US Coastguard evacuated 17 workers from the rig and the hunt continued for 11 missing staff. Seven of those rescued were described as being critically injured. The Deepwater Horizon was built in 2001 by South Korea's Hyundai shipyard, the semi-submersible rig is 120m (396ft) long and 78m (256ft) wide, according to Transocean. It also set a world record in September for the deepest oil and gas well when it drilled down 10,685m (35,055ft) at another BP site in the Gulf of Mexico. "It's one of the more advanced rigs out there," Mr Panagos said. The incident comes at a time when a leading expert warned the energy underwriting community that the coming decade would see E&P projects in ever deeper and more complex environments with the risks that go with it also set to rise. Professor Minoo Patel, Director at BPP Technology Services, in a speech to the AEGIS London Energy Conference said new records would continue to be broken for water depths for drilling and production. While these deep water operations will be expensive, Professor Patel explained that oil production operators were working hard to reduce costs and increase reliability. He added:: “Oil and gas field developments are reservoir led: you have to work at the water depths at which you find the oil and gas. The North Sea was relatively shallow but there is an exponential change going on in terms of drilling in deeper and deeper water in the Gulf of Mexico, offshore Brazil and other areas around the world. Oil field developments over the last decade have shown that the types of platforms needed to produce from deep water are not converging to a standard type; every development uses a customised platform, different in key respects from its predecessors. This raises very important questions on the balance between an oil field operator’s development risk and the risks taken on by an insurer. All the stakeholders need to have technological insight and agree processes by which risks and business interruptions are minimised.”
Insurers set for claims dust up after Ash starts to clear
With Aon forced to postpone it Middle East Energy Conference this week and with hundreds of thousands of travellers still unable to complete journeys insurers are only now starting to count the cost of the Eyjafjallajökull volcanic eruption which left Europe under a blanket of high level ash and grounded global air travel for the best part of a week. European compensation rules have been suspended due to the “extraordinary situation” but it has led to different approaches by airlines and a great deal of criticism of insurers over what they will and will not cover. Broker Marsh said the impact of the disruption both to passengers and the movement of goods would have a long lasting impact as airlines sought to move their planes back to where they needed to be. Marsh added: “Organisations should review the terms and conditions of their insurance policies to determine what coverages may apply. Additionally, they should closely document all related financial losses to support any claims to be made under their applicable policies. “ It said: “All Risks property insurance policies, which provide cover for ‘all risks’ detailed in the policy except those explicitly excluded, are in general not currently set up to respond to the type of losses arising from the volcanic eruption. As a result, very few insureds – including airlines – will be able to make a claim unless physical damage to an insured property can be demonstrated.” The International Air Transport Association (IATA) estimated that the Icelandic volcano crisis cost airlines more than $1.7 billion in lost revenue through Tuesday—six days after the initial eruption. For a three-day period (17-19 April), when disruptions were greatest, lost revenues reached $400 million per day. “Lost revenues now total more than $1.7 billion for airlines alone. At the worst, the crisis impacted 29% of global aviation and affected 1.2 million passengers a day. The scale of the crisis eclipsed 9/11 when US airspace was closed for three days,” said Giovanni Bisignani, IATA’s Director General and CEO. He added “As we are counting the costs of the crisis we must also look for ways to mitigate the impact. Some of our airport partners are setting industry best practice. London Heathrow and Dubai are waiving parking fees and not charging for repositioning flights. Others airports must follow,” said Mr Bisignani. “I am the first one to say that this industry does not want or need bailouts. But this crisis is not the result of running our business badly. It is an extra-ordinary situation exaggerated with a poor decision-making process by national governments. The airlines could not do business normally. Governments should help carriers recover the cost of this disruption,” said Mr Bisignani.
ILS issuance set to rise on the back of improved returns
Catastrophe bonds provided significantly increased returns for investors during the first three months of the year according to Aon Benfield Securities, the investment banking division of Aon Benfield, in its quarterly report on the market. The report Insurance-Linked Securities – First Quarter Update 2010 found that returns for the three months to March 31 averaged 3.4% across all ILS products, compared to 0.95% in the same period of 2009. It added the 12 months ended March 31, investor returns surpassed 13% – significantly greater than the 2.6% seen in the 12 month period to March 31 2009. Whilst ILS returns were less than the gains witnessed in the benchmark S&P 500 index over the 3-month and 12-month timeframes, the cumulative returns for ILS since January 2008 have exceeded other benchmark indices. Paul Schultz, President of Aon Benfield Securities, said: “With issuance low in the first quarter, investors looked to the secondary market to grow their portfolios and manage inflows. This demand for bonds continued to push prices to levels unseen in previous years. Towards the end of the quarter, investors gained an optimistic view of the forward calendar, and the tide shifted to a more balanced market with investors looking to rebalance portfolios and release capital for new deals. Short-dated bonds exposed to U.S. Wind traded quite actively for this reason.” Two ILS transactions came to market during Q1 with a total issuance value of $300m. The conservative collateral standards developed in the ILS market in early 2009 are still being utilized, with both transactions featuring U.S. Treasury Money Market Fund collateral. According to Aon Benfield Securities data, the total value of catastrophe bonds maturing during 2010 will approach $5bn. “Investors will be seeking to purchase new issues to replace these maturities, which will maintain liquidity in the ILS market,” said the report.
Insurance worker who stole £1 million jailed
A UK Court has jailed an insurance executive for six years for a long running fraud which netted him £1.1m. The court heard how Terrance Thackrah bought a four-bedroomed detached villa with its own pool in northern Cyprus where he moved with a Thai wife that he met on the internet. He acquired a number of top of the range cars after setting up the scam in his role with the insurance division of the Royal Bank of Scotland. As part of his role with the insurer Thackrah was responsible for the payment of commissions to brokers and third party sales companies. He set up banks accounts for two bogus firms and diverted money into the two accounts which was due to be paid to bone fide intermediaries. His defence lawyer told the court in Yorkshire that the 58 year old had started the scheme because he could not believe how easy it was to do. He was only caught after former work colleagues became suspicious of his new lifestyle and alerted the authorities. He started the scam in 2004 and retired on a full pension from the company two years later at which point he divorced his wife and left for Cyprus with his new wife. However after he retired he kept the bogus accounts in place and the fraud continued. He lived in Cyprus but would return to the UK to see his daughter from his first marriage and was arrested trying to flee the country with his current wife Jarawadee. Police allowed his wife to board the plane and have since not been able to contact her and none of the £1.1 million has been recovered. Judge Peter Hunt said: “This was dishonesty on a very serious scale – the breach of trust was obscene.”
Jon Guy
Editor
Global Broker & Underwriter
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