Aon has said that 2005 has been the worst year on record for the energy insurance industry. However, it added that the market is capable of weathering the storm.
Aon said that energy losses were largely a consequence of the $1.3bn loss at the Suncor Canadian oil sands facility, which occurred in early 2005, and the $3.5bn to $5bn in estimated losses from hurricanes Katrina and Rita in the Gulf of Mexico.
Magne Seljeflot, chairman, Natural Resources Global Practice Group, said: "Our estimate of global premium income for the energy sector is in the order of $3.5bn for this class, so simple arithmetic clearly demonstrates a significant net loss to underwriters.
"However, the energy insurance market, like the energy industry itself, is accustomed to this boom or bust cycle, and we are confident insurers will ‘trade through' and look at the opportunities in the inevitable hard market we will be facing in 2006.
"Disregarding the hurricane losses, the energy insurance market has performed quite well in 2005. One would therefore assume the key focus for underwriters for 2006 will be to look at limiting their exposure to the Gulf of Mexico storm exposures; or to impose dramatic increases in premium or aggregate limits for this exposure – so as to better balance their book of business.
"Outside of the Gulf of Mexico we would anticipate more moderate price increases as insurers will be competing for market share and volume to recoup some of their losses. We would anticipate a very good market environment for insurers in the near term, and this will inevitably be a tempting opportunity for potential investors in the sector to offer new capital and capture the benefit of this window of opportunity."
The firm also said that it expected to see a significant rise in reinsurance costs for all insurers, leading to increased operating costs for direct writers and the possibility of a shrinkage of the current global capacity which is estimated to be slightly in excess of $2bn both for onshore and offshore exposures.
