For the first time in a number of quarter’s updates, we are seeing a real divergence in individual ‘Energy’ sectors. In the recent past the same dynamic has applied to Upstream, Downstream, Marine Energy and Casualty, being an oversupply of capacity.
This oversupply has trumped the other main dynamic being prevailing loss record (profitability, or lack thereof) as competition results in losses being overlooked or ignored short term (or even medium terms in some cases).
The Upstream sector on the face of it appears to be in rude health as losses have been remarkably light (albeit we caveat that it is a very fragile balance between the sector’s overall premium pot and loss record). On the other hand losses in the Downstream sector seem to now be trumping capacity. Meanwhile the Marine sector is seeing the impact of several Lloyd’s syndicates’ withdrawal from the generally unprofitable class.
At 2018 year end, brokers have continued to reap acceptable renewal terms for clients on the back of excellent upstream loss records and a varied choice of leaders and more than sufficient capacity options.
OIL’s decision not to implement an additional USD 100 million of limit has also been a helpful break to commercial insurers in not removing from the market another tranche of attractive property and OEE risks. The real bright spot for insurers this year has been a renaissance in the North Sea. New Insureds who do not possess captives and want to buy coverages including large Loss of Production Income sum insureds at base deductibles have replaced previous non buying oil majors.
Drivers of premium income such as the Sliepner Riser clash and the Johan Svedrup Complex’s extraordinary capacity requirements are helping reinvigorate a business proposition that had been waning due to negative changes in the oil and gas industry. However, these record breaking huge verticals are built on weak foundations due to lack of spread in the overall book and a still thin underlying premium base.
Whilst the North Sea does give a decent boost of income it probably only helps counter balance the lack of offshore drilling which has cratered the values of drilling rigs and the number of days they spend at sea drilling plus construction still constrained by the oil price. Insurers have, since 2009, engineered out the harshness of Windstorm risk from their books and it is now the North Sea and the intricacies of business interruption contingencies where a material market loss is most likely to come from.
Akin to Napoleon and Eisenhower whose preferred generals were said to win battles as a result of good luck rather than skill, many modern day insurance underwriting outfits have enjoyed profit driven by serendipity rather than a perfectly formed smart business and pricing model. Regression to a harsher mean will almost certainly happen at some point and therefore long term deals are our procurement recommendation for clients.
We would continue to caution that the business model in upstream is fragile. Lloyd’s of London is a more fearful and therefore more cautious place than in the past.
The Performance Directorate of Lloyd’s instigated by Jon Hancock has imposed some strict measures to control the performance of the bottom decile of the market. This will have a disciplining impact, encouraging upstream class behaviour to not deteriorate further and so run the risk of suffering a shut-down of their books of business causing the collateral redundancies experienced in the Non Marine Property, Cargo and Hull arenas.
However, for now the first quarter next year will see the continuance of the 5% plus rate rise “skirmishes” during renewal discussions. Clients seeking a like for like reduction from incumbents are less likely to succeed than in the same period of 2018 but insurers are also sullenly acknowledging their desired 5% rise is probably going to be a best case outcome on most of the desirable business.
As we conclude the 4th Quarter the optics for Downstream underwriting results for 2018 have taken a turn for the worse. The market looks set to absorb something in the region of USD 1.2bn in property damage and business interruption losses in September and October alone.
Market estimates place total downstream losses at approximately USD 3.75bn for the year to date which far exceeds the class annual premium pool of approximately USD 1.75bn. Following on from the poor results in 2017 where Nat Cat had a profound effect on losses, 2018 is demonstrably worse and is dominated by operational fortuities.
Management oversight and pressure to turn rates around is now significantly more acute. In the 3rd Quarter we experienced flat rates with some modest uplift although there was no consistency in terms of how or why these were being applied.
In the 4th Quarter a line in the sand seems to have been drawn by insurers in terms of not accepting business, which short of material reason, shows anything less than a nominal rate lift. Of course the boundaries have been tested and insurers have at last walked away from business even where there have been historical ties and relationships.
As we move into 2019 there is an indicative level of acceptance that unless the rating environment changes there will be withdrawals from class. This should now be expected and by way of example we recently experienced one insurer who appeared so concerned with the exposure levels that they even declined to put a price on the risk.
Quite extraordinary given that it was an established Energy market being offered a major structured program with a number of risk appetite options available. Generally insurer expectations are to achieve between a 10% and 20% lift in rate across the book in 2019 although there will be a considerable amount of discretion on how these median target increases are achieved.
M&A continues to impact market premium but encouragingly, and certainly within North America, crack spreads are dramatically improving for refiners and if sustained earned premiums on business interruption will spike. This is good news, as long as rating adequacy is achieved. It also brings into focus client perception of program limit adequacy and whereas many clients base their risk transfer around asset EML’s those with less risk appetite around earnings may be looking to adjust accordingly.
In terms of customer focus there remains a significant overhang of capacity albeit ever more fragile than before. For those who have tracked the market through the extended soft cycle, expectations should be for modest rate increases on top of an attractive base environment. For those having taken a more aggressive or opportunist view during the same period and those that have avoided any meaningful repayment of their losses back into the market it is likely to be somewhat tougher. 2019 could be a Rubicon moment for the Downstream market.
For US Domiciled Insureds the market is essentially flat but with insurers looking for increased premium if there is increased activity. One London Excess Liability Insurer has ceased underwriting with effect from 1 January 2019 in this class.
Notwithstanding key international (non-US) casualty underwriting teams reviewing their portfolios and placing an emphasis on moving away from under rated business, we have not seen much change in appetite or rating as surplus capacity continues to be in the abundance. In the New Year, we may see the market harden after some of the reinsurance renewals.
Canadian Onshore Exploration & Production/Downstream/Midstream sectors still continues to remain a challenging market with no real change in capacity or appetite.
The Marine Liability/Ports and Terminals market is generally trying to push rates up on the back of poor underwriting results.
The London marine market seems to be somewhat chaotic and undisciplined as 2018 draws to a close. Some Underwriters, particularly some of those in Lloyd’s, with a generally younger workforce, have not have seen a hardening market in their careers before, and may at times seem to be frozen like ‘rabbits in a car’s headlights’ acting inconsistently in their approach regardless of whether the accounts they are being presented with have performed well in the past or clearly require remedial underwriting action.
Whilst the recent restrictive actions of the Lloyd’s Performance Management Directorate have significantly reduced the number of syndicates going forward writing Hull, the overall market capacity for marine risks remains relatively unscathed as syndicate withdrawals from marine have generally been smaller capacity providers who may have written insufficient volumes of business previously in order to achieve a critical mass sufficient to survive the softest market in living memory.
Obviously the above situation allows for opportunistic Underwriting from those Underwriters who can ‘keep calm and carry on’ and the general consensus now is one of a properly hardening market in London albeit with erratic and inconsistent underwriting decisions.
The ripples from London’s general behaviour in marine are now starting to be felt overseas, driven not so much by corporate dictates but more through simply seeing an opportunity to put upward pressure on rating and thus overall world-wide Hull markets could now be consistently categorised as hardening.
Different approaches seem to be being applied by different markets with American Underwriters, defaulting to type, and on underperforming risks simply declining to participate whilst still chasing down good performers with competitive premium levels. Far Eastern markets are applying simply generalised rate rises across the board, albeit invariably less than those being applied in London.
European markets, and Scandinavia in particular, remain the most consistent, however the parameters of their underwriting appetite remains generally quite narrow.
We end the year with an extremely confused market and we do not think that the position will calm down any time soon – the current overall position could be compared to the winter weather being experienced by many with large storms surging through the market and then abating for a brief time with calm bright sunshine appearing, only to change within a matter of days again.
If any owners thought that over the past few years the necessity of using the services of a professional and well experienced broker were overrated they should think again in markets such as these.
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If you require any further information, please contact John Cooper, Managing Director on +44 (0)20 7466 6510 or email firstname.lastname@example.org.