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Capacity in the global energy markets leaps to highest level this century | Canadian Insurance
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Capacity in the global energy markets leaps to highest level this century

May take more than a few catastrophic losses to provoke capacity withdrawal: Willis

Heavily over-capitalised global (re)insurance markets combined with a glut of new capacity from non-traditional providers–such as pension funds, hedge funds and investment banks–has increased competitive pressures in the energy insurance market to unprecedented levels, according to Willis Group Holdings plc.

Total theoretical upstream market capacity now stands at $5.7 billion (USD) and the equivalent downstream total is now at $4.6 billion (USD), according to Willis’s annual Energy Market Review. Meanwhile, statistics from Lloyd’s of London suggest that the overall energy premium pool available to insurers may be reducing for both markets.

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Given these conditions, Willis expects it may take more than a run of catastrophic losses to provoke any significant capacity withdrawal from the energy sector.

In 2013, the energy loss record was no worse than average, noted the Willis report. On the upstream side, the Willis Energy Loss Database recorded only a handful of losses in excess of $200 million (USD), while on the downstream side, although there have been three serious incidents in Argentina, the USA and Canada, the loss record continues to improve.

At the same time, the report notes that the energy industry itself might be sitting on an uninsured cyber-attack “time bomb.” While insurance cover is readily available for non-catastrophic cyber-attack losses to data and intellectual property, it can be much more challenging to access cover for a truly catastrophic event involving physical loss or damage or business interruption running into billions of dollars.

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Certain markets, however, have emerged recently with the appetite and capacity to provide energy companies with at least a degree of cyber-attack insurance cover.

“With no obvious alternative investment opportunities emerging, and with interest rates around the world still low in relative terms, capital providers are likely to maintain their funds in the (re)insurance markets where they are currently deployed – at least for the short term,” said Alistair Rivers, global head of Natural Resources at Willis, in a press release.

“Energy market capacity is therefore likely to continue to be available, even if the sector falls into unprofitability.”

He continued: “The difficulty with predicting how market conditions will turn out in the next few years is that this is the first time we have seen capital deployed in the insurance markets that is unlikely to be put off by short term underwriting unprofitability. In previous market eras, we have always found that a major catastrophe or series of losses – for example, Piper Alpha, 9/11 and the 2005 Gulf of Mexico hurricanes – has led to a withdrawal of capacity and harder market conditions. But now we think it will take more than a headline-grabbing loss to precipitate a withdrawal. Capital providers would have to find an alternative haven for their money if they are to withdraw from the insurance arena.”

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