Lloyd’s director of performance management, Tom Bolt, has voiced his concerns over the way offshore energy underwriters are managing risks. He warns that the regulatory and legal environment is more onerous for the energy industry post Deepwater Horizon and insurers need to catch up with these changes.

Bolt explained that a review of the class in the Lloyd’s market uncovered concerns with the way risks are assessed and priced and exposures are managed. He warned this approach is “not sustainable” as there is a “material imbalance between premiums charged and exposures assumed”.

The review also demonstrated that a lack of transparency in package policies means risk aggregations are difficult to assess and manage. As a result, it is now a best practice requirement at Lloyd’s that liability coverage is provided on a stand alone basis.

Bolt describes the performance of the offshore energy class as “very disappointing for capital providers” given the large amount of capital needed to underwrite and the modest returns generated. And he questioned whether “better returns could have been made had the capital been deployed elsewhere”.

However, he reaffirmed Lloyd’s commitment to the energy market saying the class continues to be important to Lloyd’s despite its disappointing performance. Lloyd’s underwrites over half of the world’s offshore energy business, the majority of which is for North American risks.

He also recognised the difficulties for energy underwriters who face significant individual losses against a relatively modest premium base and he questioned whether risk prevention is currently good enough for drilling in extreme environments which are inherently more risky.

Pointing to claims of billions of dollars from Deepwater Horizon, Piper Alpha and Maersk Gryphon he showed that the size of claims from individual events dwarfs the premiums received and said “the economics simply don’t work”.

Share Story: