Always hard to predict…or hardly predictable? The Offshore Energy market will pay its toll in 2021 for the US Gulf of Mexico windstorm season – but will there be a winner?

By Axel Ufermann, General Manager, Head of Energy Upstream and Marine, HDI Global Specialty SE, and IUMI Offshore Energy Committee Member

The year 2020 has seen an unprecedented number of windstorms with quite a few affecting oil & gas infrastructures within the US part of the Gulf of Mexico (GOM) prior to making landfall and leaving behind further destruction ashore. For the first time since records began, the Greek letter IOTA had to be used to note the 30th storm of the season. This could be the consequence of climate change, or just an abnormal year (in every respect). Insurance buyers as well as insurance providers in this segment have taken a brace position each time a storm tracked the vulnerable part of the Gulf only to relax a few days later as it turned out to be a non-event for the offshore insurance industry (and minimal damage sustained for the oil & gas companies).

Industry sources suggest the available capacity for US GOM named wind to be in the region of USD 3.5 billion to 4.5 billion (theoretical) on an aggregated basis – distinguishing risks clearly between so called “shelf risks” (defined as assets in shallow water depth on the US continental shelf) and deepwater risks, the latter with definitely more limit available. Brokers have not struggled to place deepwater wind risks but have repeatedly found it harder to place shelf wind offerings.

The offshore wind market has been on a dwindling downwards trend ever since, with retailers and wholesalers fighting over market share. In the absence of any major windstorm hitting the oil patch – for over a decade - this was quite an easy offering for buyers. Pricing ideas and the mantra of wind limits and retentions relating to sums insured that have been established in consequence to the two disastrous storms hitting in 2008, are now only a fraction of what was intended. On the underwriting side, only minor competition was noted and a quite homogenous panel of markets has written the wind risk ever since, with only marginal change to its composition. Thus, as in gambling, one could argue that these writers have accumulated enough in the pot to pay for the next windstorm damage. But how much could this be – consider the mis-match above - and bearing in mind this abnormal year: how many times could this happen in one season?

Now, given the very extraordinary year with the yet-unknown impact of COVID, the inter-linked rollercoaster ride of the commodity price and the rather grim economic outlook, insureds may consider their options. Insurers may face increased reinsurance costs due to the above-mentioned reasons, despite the fact that windstorm is mostly run on a net basis by offshore insurers.

Oil & gas companies (not considering the majors who run their own captive or do not buy wind insurance at all) are mainly driven by the commodity price which has been down significantly this year. They will focus on wind insurance and ask if the product available is satisfying their needs at the given price, bearing in mind they could not collect much in the past years. Does the market need a new set of products? Can insureds still pay the (increased) bill? Food for thought, lengthy discussions and strategic considerations.

No doubt the 2021 offshore windstorm renewal season will be not only challenging for all sides but most likely bring surprises. It is yet as hard to predict as the extent of the next windstorm season itself!