London, 21July 2009
The onshore and offshore energy construction market reached a tipping point at the culmination of the first six months of 2009, according to Marsh, the world’s leading insurance broker and risk adviser.

In its latest Energy Market Monitor, Marsh states that downward pressure on insurance rates in the sector is now being created by low claims activity, relatively low project activity levels, and increasing insurance capacity in the first half of 2009.

Paul Nicholson, Energy Construction Leader in the Marine and Energy Practice at Marsh, commented: “Basic supply and demand rules will undoubtedly come into play in the second half of 2009. Underwriters are behind on their premium budgets with little investment income to supplement their cash flow, meaning that we should expect increased competition for risks that are considered non-catastrophe exposed.

"There remains a lack of large onshore construction project flow in the markets, caused by delays in projects obtaining final investment decisions. As a result, with around $2.3 billion of global capacity available, there is a lot of demand to write those projects that are introduced into the market, which is keeping rating competitive and deductibles stable.

"However, rating levels for project extensions and project cost increases are being negotiated hard by insurers. Detailed risk assessment is required to manage potential additional premium implications. The few, but significant, delay in start up (DSU) claims in the second quarter for onshore construction projects are not adversely affecting the rating for DSU, but have increased the due diligence around this component of the risk.”

Marsh’s report notes that a further hardening of the offshore construction market, anticipated for 2009 as a result of substantial loss experience in 2008, has been slower in pace and scope than expected.

Mr Nicholson continued: “The drastic slow-down of offshore construction project activity seen in first few months of 2009 is not expected to be a long-term trend. The rise in oil price and new revenue generated by projects’ achieving completion over the course of the year, will help to maintain necessary funding for many planned works, which will have a knock-on effect in the insurance market.

"While pipeline and subsea rates and deductibles continued to rise in early 2009, especially in respect of large diameter pipe and deepwater projects, both these and platform rates seem to have stabilised. The focus remains on vessel costs and mobilisation/demobilisation, with the market looking to protect itself from the experiences of the third quarter 2008.

"The current perception that rates have now reached a sustainable level has attracted insurance capacity back to the sector and the past few months have seen a significant increase in appetite for offshore construction.”