Major insurance losses take more than 3 years to work through the accounting system.
This helped hide recent losses in energy industry underwriting, says insurance broker and risk adviser Sedgwick Energy Ltd., London.
Recent major losses included $1.4 billion on the Piper Alpha platform explosion in the U.K. North Sea in July 1988 and $1.3 billion for the Phillips Petroleum Co. petrochemical complex explosion at Pasadena, Tex., in October 1989.
Losses have reduced the number of companies prepared to underwrite energy projects. Worldwide capacity to underwrite new oil and gas risks peaked about 1987 at $3.25 billion, said Christopher Mundy, marketing manager at Sedgwick. He estimated current capacity at $2.17 billion.
"However, nothing is uninsurable if the price is right," Mundy said. "The oil and gas industry is still attractive to underwriters, having comparatively few catastrophes on an annual basis. The industry's basic level of safety is quite high, but when a serious accident happens it is huge."
The scarcity of potential underwriters is increasing the importance of risk assessment in new developments.
"The critical number from the insurance viewpoint is the ultimate loss from a project," explained Robert Robertson, director of Sedgwick's engineering services division.
Underwriting a $350 million project is easier than, say, one with an $800 million ultimate loss. A number of companies may be prepared to underwrite $350 million, so the price will be competitive. But perhaps only one company may be prepared to underwrite an $800 million project.
"The bigger the estimated ultimate loss, the less room there is for maneuver in negotiation of insurance costs," Robertson said.
Oil companies can often lower the ultimate loss rating by carrying out risk analysis and adjusting designs as required to reduce the effect of an array of crises on the bottom line.
"Usually, Sedgwick is called in as a consultant during the design stage of a project to help minimize the ultimate loss rating," Robertson said. "Recently, however, a client asked us to lay out a refinery."
Having said nothing is uninsurable, Mundy admitted underwriting environmental losses is a problem. The difficulty for insurers is defining how damaging a project is to the environment and how unacceptable this will be in the future.
"Now the,only liability is for socially unacceptable environmental damage," Mundy said. "In 20 years we might become liable retroactively for pollution considered acceptable until then."
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
