Suncor’s oil sands loss could cost reinsurers $1 billion

In a notice addressed to property and casualty insurers, federal regulator The Office of the Superintendent of Financial Institutions (OSFI) cautions that the insured loss relating to a fire that broke out in early January of this year at Suncor’s oil sands plant located in northern Alberta could result in some companies reserves falling below the minimum capital test (MCT) ratio. The insured loss tally resulting from the oil sands fire will likely be in the order of $1 billion, OSFI observes, of which the majority of the cost will be carried by federally licensed reinsurers. The regulator also notes that there will likely be significant retrocession (coverage purchased by reinsurers to reduce their full exposure) charges relating to the event. "The insured Suncor loss is of a magnitude that it may severely stress individual companies’ capital adequacy positions," OSFI says.Although insurers were aware in early 2005 to the likely cost implications of the oil sands loss, OSFI says it recognizes that reporting of such losses as a first quarter event may lead to an adverse impact on companies’ MCT/BAAT ratios as they encounter delays in obtaining head-office capital contributions and securing funding from reinsurers/retrocessionaires. As such, the regulator says it is willing to "exercise some flexibility" regarding the supervisory target level expected of companies in order to allow them to absorb unexpected losses. We would expect, however, that any resulting capital shortfalls, upon discovery, will have been corrected without delay."Suncor’s Alberta oil sands plant has been running at half capacity since the outbreak of the fire in January. It is expected to be fully operational by September of this year. However, the energy company reported a significant drop in its 2005 first quarter net earnings which clocked in at $98 million compared with last year’s first quarter profit of $216 million.