The level of overcapacity and insurers competing for business means rates are unlikely to harden any time soon.
Falling rates for energy insurance, when the premium and claims equation is in or close to equilibrium, cannot be sustainable over the long term.
In the upstream energy insurance market, a combination of the low oil price and rate reductions has resulted in an estimated 40 per cent reduction in premium income for some underwriters on a year-on-year basis from 2014 to 2015, with further falls to come in 2016.
Widespread lay-ups and substantial decrease in values are decimating the contractor sector. On the exploration and production side, meanwhile, drilling activity has been dramatically curtailed and construction income has dropped to virtually nothing.
More alarmingly for insurers, rates in offshore construction have now plummeted to levels last seen in 1999.
The only real sector showing any resistance to rate reduction is in the US Gulf of Mexico named windstorm arena, but reductions are being achieved, albeit at a lower level.
With forecasters predicting active hurricane seasons for 2016 and 2017, the next two years could be the most dangerous and costly for the US in more than a decade.
Lower premium volumes and abundant capacity forced lead underwriters to give up bigger reductions than they had planned in the first quarter. The sheer scale of overcapacity and the overwhelming number of insurers will ensure that it remains a buyers’ market for the time being.
However, underwriters’ appetite to compete is beginning to wane, and it is becoming harder for insurers to justify the high levels of cover for just a small percentage of limit.
In the downstream market, excess capacity and light losses have also seen underwriting discipline soften, with rate reductions of between five and 25 points. 2016 looks to be extremely challenging for the downstream market, and one that may finally sort out the winners from the losers.
Tip for buyers
The energy casualty market continues to recognise reductions in insureds’ exposures with reduced premiums at renewal. However, the range of premium reductions available will depend on the insureds’ ability to evidence any decreases in exposure.
For more information, please contact John Cooper, Senior Partner and Managing Director - technical of the Energy Division on +44 20 7466 6510 or email firstname.lastname@example.org