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Insurance Cost of National Energy Companies will Decrease by about 20 Per Cent

Dubai : 24 February 2010

According to Marsh, a leading global insurance broker and risk adviser, National oil companies (NOCs) throughout the world could benefit from lower overall costs of risk over the next few years as a consequence of lesser number of natural calamities and abundant insurance capacity.

Jim Pierce, Chairman of Marsh’s Global Energy Practice said that a reduction in global demand for energy coupled with lesser natural calamities and increased risk management techniques provide NOCs with opportunities to save large amounts on their insurance spending over the coming two years. When energy demand starts to increase and NOCs re-examine previously shelved infrastructure projects, this could lead to considerable savings.

Speaking at the launch of a report, entitled “The 100 largest losses”, at Marsh’s National Oil Companies conference in Dubai on Tuesday, Pierce said NOC’s insurance costs could go down by 20 per cent for both the refining (downstream) and exploration and production (upstream) sides of their businesses in the background of smaller number of natural disasters, abundant insurance capacity and more sophisticated risk management methods.

Companies involved in both onshore and offshore energy construction projects also stand to benefit from prevailing market conditions.

Marsh expects to see a reduction of between 10 per cent and 20 per cent by June this year for exploration and production insurance cover, with an additional decline of 15 per cent by June 2011 in the event there are no major calamities.

Marsh said that for the refining, or downstream, side of the business, the declines will be even more prominent with reductions of up to 25 per cent by June this year and an additional reduction of 10 per cent by June next year. He also expects insurance rates for both onshore and offshore construction projects to reduce five per cent by June, another five per cent by January next year and an additional 10 per cent to 15 per cent by June 2011.

He said that it is significant that oil, gas and chemical companies make use of improved risk management methods as there would be more energy sector megaprojects. The era of the $50 billion project has arrived and with it the potential for any big loss to be very expensive.

Pierce said that companies that have created the highest levels of risk management will benefit the most. Energy insurance underwriters increasingly desire to see highly comprehensive risk management plans before they offer the best terms. He said NOCs that better administer total cost of risk, which is the combined cost of retentions and premiums for actual risk transfer, will be the ones that benefit most from the surplus of underwriting capital available in the 2010-2011 energy insurance market.

The third National Oil Companies conference in Dubai seeks to recommend NOCs on how best to deal with the increasingly complex risks they face.

Andrew Reid, Staff Writer, Gulf Jobs Market News
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