In February the Gryphon A floating platform in the North Sea partly broke loose from its anchorage under pressure from rough seas. Coming on top of the Deepwater Horizon loss last year, it has been an expensive year-and-a-half for the upstream energy market and may even halt the softening in this specialty market.
“We understand that Maersk’s Oil’s Gryphon A Floating Production Storage and Offloading (FPSO) vessel is likely to be shut down for a considerable time after sustaining significant damage in a storm during the middle of February,” said Willis in a recent energy market update. “It is reported that the FPSO lost its dynamic positioning system in heavy storms and veered 180 degrees when four of 10 anchor chains broke, allowing the vessel to move off its position. All wells were immediately closed in and subsequent surveys from planes, vessels and remotely operated vehicles under the water confirm no oil was sighted.
“Due to the capacity requirements of the operator’s programme, we believe the placement was written by the vast majority of the market. However we also understand that it was layered, which may mean that some insurers will have missed the loss, despite the loss falling within the 2010 year of account.”
Willis said that initial reports suggested potential physical damage loss of about $100m to $150m and a potential business interruption loss of $300m to $400m. These figures have since been increased to $300m and $500m respectively, for a total loss of $800m.
Despite the energy market being greatly over-capitalised, Willis says the losses may halt the slide in pricing in the market.
“Combined with the events in Japan, this has now brought about a shift in market conditions and as yet we have no way of knowing how long this shift will last,” said Willis. “We can say that, for the moment, the loss has been sufficient to stall any anticipated market softening, and in the short term at least there may be specific attention to FPSOs, in particular where the business interruption exposure is to be insured. We can also say the loss is likely to instigate some stability into the market for the first six months of 2011 – when upstream insurers book approximately 75% of their premium income.
Willis warned, however, that it is always possible that a “rogue” insurer that has not been hit by the Gryphoon A loss may try to gain market share by competing on price.
The broker’s report said that the dynamics of the reinsurance market have changed since the Japan earthquake which will have affected upstream insurers renewing their treaties at April 1.
But it is not clear that Deepwater Horizon, Gryphon A and the Japan earthquake will be enough to force a meaningful turn for the upstream energy market. This market in particular is hard to turn. Lloyd’s has pointed out that the upstream portfolio has not been truly profitable for years. This has not stopped capacity creeping up since hurricanes Katrina and Rita in 2005.
Willis says capacity has virtually doubled since 2006 and now stands at an all-time high of $4.36bn. It noted that a big contributor to this year’s capacity increase has been the introduction of Berkshire Hathaway as a supporting insurer on a “full-follow” facility basis for brokers, including Marsh and Willis.
The Gryphon A loss is the latest in a series of losses for the upstream energy market this year and last. It is the second largest loss after the Deepwater Horizon disaster last year, which Willis pegs at a loss of $2.6bn, although not all of this is insured.
The broker noted the wide geographical spread of losses in 2010 and 2011. “It will perhaps have come as a bit of a surprise to some insurers to see onshore losses of nearly $70m from an explosion of a rig in Italy and nearly $30m from an accident involving a Mobile Offshore Production Unit whilst in dock in France. These statistics simply confirm that the upstream loss record continues to retain the capacity to surprise.”
Willis said that the $4bn of upstream energy losses in 2010 represent the third largest loss in the past 20 years after the hurricane-affected years of 2005 and 2008. However, it says that 48% of the Deepwater Horizon loss was uninsured. “So in reality, insured losses are more likely to amount to approximately $2bn, once other uninsured losses are taken into consideration.”
It concluded: “So in reality, 2010 – despite including both Macondo