Consolidation most pertinent theme in energy market

25 January 2019

The energy market remains favourable for buyers, but further consolidation and Lloyd’s performance review could result in increased discipline and reduced choice for buyers.

The upstream energy market has seen relatively benign conditions in 2018, and many insurers are, amazingly, reporting their best loss ratios ever for this class.

Eerily, despite an uptick in oil and gas industry activity, loss frequency and severity levels remain low, while the two largest outstanding contentious losses in the market have been closed out on favourable terms for insurers.

Benign conditions have helped soften rate rises sought by the upstream market following Hurricanes Harvey, Irma and Maria in 2017.

On average, there are increases of around 2.5 per cent for clean renewals – half the 5 per cent average rise previously insisted upon.

Upstream energy is one of the better performing classes at Lloyd’s, but the upstream market is subject to a number of underlying pressures, namely a much diminished pool of premium and an oversupply of capacity.

Another factor playing out in the background is Lloyd’s performance review, which has caused many Lloyd’s syndicates to withdraw or cut back on some classes of business.

The downstream market remained relatively flat going into the fourth quarter of 2018, with rates at renewal of plus or minus a few points. 

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As of the third quarter, large losses in the downstream market approximated $1.5 billion, notably from two refinery operational incidents and from a major earthquake affecting the oil producing region of Papua New Guinea. 

Within the past month, we have begun to witness more resolve from downstream underwriters, and single digit rate rises are beginning to become the norm on loss free accounts.

Consolidation is perhaps the most pertinent theme in the energy market, with mergers and acquisitions (M&A) activity in all areas from clients to insurers and the distribution chain. 

Further M&A among insurers will ultimately result in a tightening of discipline in the market and a reduction of options for clients in terms of their distribution chain.

For more information contact Jim Pierce, Energy, Power & Mining Global Specialty Head on +1 713-325-7619

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