With a range of major individual risk and catastrophe event losses, 2004 was a difficult year for the energy industry, and its insurers. As we reported last year, the early part of 2004 saw four large risk losses although none was of significant concern to Lloyd’s. In a repeat of last year’s events, January 2005 saw the petrochemical company Suncor suffer a major loss at one of its plants in Canada the value of which is estimated at between $500m and $1bn; a reminder of the high values at risk and the inherent volatility of this type of insurance.

A sought–after account

These events aside, there’s still a large amount of capital ready and willing to pursue this business, and pricing in the on–shore energy market remains under pressure. Lloyd’s gross premium writings from its on–shore energy account are expected to have peaked in 2003 and 2004.

Hurricane Ivan: wind of change?

The off–shore energy market, the larger part of Lloyd’s energy portfolio, was also coming under competitive pressure in the course of 2004, even before the largest loss the sector has ever suffered. Hurricane Ivan tore across the Gulf of Mexico damaging drilling and exploration rigs, and causing under–sea mud slides, which damaged pipelines – resulting in an extended interruption to oil production. Occurring when it did, with oil prices at or near historical highs, this business interruption will prove to be a significant element of the overall industry losses which may reach $2.5bn in total. This clearly exceeds the most recent major off–shore loss in 2001, the sinking of the Petrobras oil rig off the Brazilian coast which cost the insurance industry just under $500m.

Although this is the largest loss to the off–shore sector, it remains to be seen how the industry will react in terms of pricing and the terms and conditions under which coverage will be offered in future. In such a volatile and catastrophe–exposed account, underwriters need to maintain substantial margins.

The results achieved in Lloyd’s Energy account reflect the underlying strong profitability of the business and underwriters’ ability not to unbalance their accounts through over–exposure to a single event such as Hurricane Ivan. Once again, prudent reserving in prior years has allowed for releases to be made, enhancing the accident year result.