Willis Energy Review Warns High Commodity Prices Increase Insurance Exposures

January 18, 2008

In its latest energy review, Willis warns that “sharp increases in the price of oil, steel, building materials and contractor day rates have resulted in significantly increased exposures to energy insurers.”

Even though loss levels in the energy insurance sector have remained relatively low for a second successive year, “there is now real apprehension in the market as rating levels continue to soften significantly,” said Willis.

The Willis Energy Market Review revealed that the “superheated” commodity prices have resulted in increased replacement cost valuations and have provided extra scope for longer and costlier delays in the event of an accident. “The potential for more severe losses in the energy industry has therefore been enhanced, at a time when many asset values remain unrevised for insurance purposes,” Willis stated.

Phillip Ellis, Chairman of Willis Energy, called the situation “dangerous,” as more expensive losses are bound to arise at some stage in the future. “While some companies are operating their assets in ways that are far superior to the past, for others the run of good luck is just that,” Ellis observed. “It is very hard for us to accept that this run of low loss activity will continue indefinitely. Ultimately, something will break.”

He said Willis clients should continue to re-examine their risk exposures and asset valuations, in order to ensure that they remain in a position to be properly indemnified by insurers in the event of more severe losses in the future. He also urged brokers and underwriters to “innovate and improve our offerings to such an extent that our clients’ appetite for them continues to grow.”

The comprehensive Willis review also examines developments in energy-related sectors and issues including: Reinsurance, Upstream, Downstream, OIL membership, Construction, International Liabilities, US Excess Liabilities, Terrorism and Directors and Officers Liability. The full Willis Energy Market Review can be found at: www.willis.com/Extras/Publications.aspx

Source: Willis Group Holdings – www.willis.com.

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