Energy and power insurance market update

02 July 2019

The divergence of the upstream and downstream sectors, which we reported in our last quarterly newsletter market update, continues. The downstream market’s hardening has been driven by a combination of poor loss record over a number of years and withdrawals and cutbacks in capacity, which is in contrast in the upstream market, where the loss environment has been benign in recent years, and there has been no discernible withdrawal of capacity.

At the time of writing, a massive fire and explosion has just occurred at a refinery in Philadelphia which on the face of it looks likely to be another multi hundreds of millions of dollars loss to the already beleaguered downstream market, that is only likely to strengthen downstream insurers resolve to continue to push rates up, and further limit insurers appetite for refining risks.

Upstream Energy

Compared to their colleagues in downstream property, international casualty, marine hull and cargo, upstream insurers have had a quiet first six months to the year. Leaders have not been able to impose rises of much more than 2.5% rises on good record renewals, and in certain circumstances are struggling to obtain any rise at all.

On Gulf of Mexico named windstorm renewals the market was generally unable to secure increases. In this extremely balanced supply and demand sub sector there was one major buyer who stopped buying to self-insure, that led to a signing down battle on several accounts some market scrambled for income to feed already paid for minimum premium reinsurance arrangements.

The spike in the offshore construction market seen last quarter (as insurers’ appetite to chase rates down waned) has now solidified, with leaders being more interested in the rapid loss deterioration in the 2017 year of account as opposed to defending market share. The following markets are hesitant to fill their books with long tail projects and can be quick to decline, making it difficult to complete large projects where there is no captive or mutual involvement.

North American onshore oilfield equipment losses (mainly associated with fracking) has resulted in some huge rises being quoted (in some cases multiple times the expiring premium) on upstream land renewals.

The Lloyd’s premium income figures as set out below for upstream energy property / control of well and construction, all too clearly shows the effects in the 2014 – 2017 slump in the oil price and the overcapacity supplied by upstream insurers:

2014 USD 1,818,911,487
2015 USD 1,321,088,530
2016 USD 1,097,466,011
2017 USD 964,838,502
2018 USD 728,539,921

However, we do detect a touch more confidence from insurers in the future.

The continuance of the good loss records has helped keep senior management and regulators scrutiny to manageable levels. With the recent uptick in the oil industry activity, which has helped bolster the overall upstream premium pot which had fallen to a record low, there is now sufficient income to allow insurers to walk away from business they do not like the terms of, which was a rare occurrence in previous quarters.

This is likely to allow underwriters to maintain discipline and prevent a wholesale return of rate reductions again. Clients and brokers have been able to achieve their aims in the first six months of 2019 but the gradient is definitely steeper than before.

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Downstream Energy

It has proven to be a bruising second quarter for customers and practitioners as insurers continued to harden their market positioning. The median rate increase in the first quarter came through slightly above 10% and this has now moved up by a further 5 points through the second quarter and looks likely to accelerate as the year goes on.

As with any reference to a median there are outliers to this and where significant capacity is needed to be replaced increases have been significantly higher. There remain differences in regional hubs rating, with Asia still in single digits increase, whilst the Middle East remains slightly behind London’s pace but is getting closer.

There remains an abundance of overall capacity but the stress within the critical capacity segment of primary, quota share and Nat Cat commitments has strengthened underwriter discipline and caused rates to continue to move upwards.

Much of this market stress has been caused by the actions of one particular lead insurer that has been drastically cutting large capacity shares throughout their renewal book. 

The pattern of these actions over the last quarter has appeared strategic across their global proposition. 

While it is totally appropriate for any insurer to correct their proposition to safeguard their capital it is a reminder to customers and brokers alike to be prepared and consider alternative options as part of the renewal strategy process.

 

A further knock on effect of the prevailing market is that business is being shopped around late in the placement stage. This has led to a resource issue within a number of insurers who have been swamped with submissions; with underwriting time lines becoming compressed placements have become exposed to opportunist behaviour.

In many cases a lack of experience of, and reaction to prevailing market conditions within both broking and underwriting fraternities have made the process more torturous than might otherwise be the case.

Market claims in the first half of the year has not been headline standard but it has been attritional. The aggregated position for year to date is in the USD 1.1 billion region with some considerable Nat Cat exposures remaining out there to yearend.

Insurers continue to seek rating adequacy and a balancing of portfolios and they desperately require this process to continue through 2020 and into 2021 to achieve their required sustainability levels.

There appears a tacit level of tolerance to rate increases within the customer base because they have benefited greatly from a falling market over a number of years and there is appreciation of a common interest in a sustainable market. However such tolerance is likely to be tested should certain sections of the market act without a modicum of care for established business relationships.

The outlook for the remainder of the year is more of the same to further hardening. Policy extensions and wordings are under scrutiny as insurers look to tighten up on soft market excesses.

There is a concentrated effort to contain business interruption values that are often under declared. In addition some insurers are already running into premium income cap issues with the dynamics of further capital requirements likely to cause constraints on supply.

Customers should prepare well in advance of placements to establish strategy and engage with a range of markets including those that have been somewhat ignored during the extended soft market cycle.

Power

PowerThe power generation market is going through a period of transition. Renewable energy assets are generating more electricity than their fossil fuel counterparts around the globe. This is mainly due to the installation cost per MW of solar and wind significantly reducing. The same is true of the power insurance market that has experienced a prolonged period of rate reduction despite experiencing heavy losses both in terms of size and volume.

The trend across local and insurance hub markets globally is that there is still significant capacity for conventional power assets, which has so far stalled any significant power market rate increases. Insurers have argued that rate increases are much needed to stabilise profitability. The need for change was reiterated when Lloyd’s highlighted power to be an underperforming class of business as part of a 2018 performance review along with six other classes.

Nearly all local insurance markets are now experiencing or expecting single digit increases for clean non-CAT exposed assets with potentially double digit increases for those with a challenging loss history or significant CAT exposure. There is a shift in underwriting strategy away from premium growth to risk selection combined with rate increases. As clients look for alternative options to compare with their local offerings, London and other central hub markets are able to offer further options under the current environment.

The trends observable in the conventional power market have also been evident in the renewable energy market. The renewable market has also experienced persistent losses, particularly natural catastrophe along with significant attritional machinery breakdown.

The availability of adequate capacity combined with generally lower sums insured and policy limits had thwarted the attempts by individual insurers to impose premium rises or otherwise tighten-up conditions of coverage during 2018.

However in the last 6 to 9 months there has been evidence of underwriters successfully introducing premium increases and achieving restriction of coverage that was expanded during the period of market softening.

Cyber Issues

Cyber events are becoming more widespread both in targeted and untargeted attacks. Power is no exception. Therefore cyber coverage has developed into standalone specialist coverage and curtailed in standard all risk policies, which now provide limited coverage compared to what was once available.

Underwriters are instead promoting separate cyber coverage, developed to include coverage against non-physical damage losses and indemnity for loss mitigation response expenses. Marsh JLT Specialty recently published an article on power generation cyber risks after discovering a disparity between many risk managers’ perception of cyber coverage, and that which is actually available.

Energy Casualty

US Liabilities

US liabilitiesThe offshore energy casualty market continues to push for modest rate rises in addition to rating for exposure increases. There has been no change in the capacity in London, but as the likes of Chubb and AIG in Bermuda look to reduce their exposure in certain casualty programs (see below) it is creating more opportunity for London markets with ‘fill-in’ placements, especially on midstream and utility business.

This reduction in Bermuda capacity is making it hard for those Insured’s buying significant limits to complete their towers without paying more to do so, than those utilising less than the maximum available limit in the market.

US onshore exploration and production (E&P) capacity is still over-subscribed with US domestic ‘for interest limit markets’ (not scaling limit to working interest in a well like London does) meaning London does not get to see much of this business.

International (Non-US) Liabilities

For International (non-US) liabilities there are still more markets available than for US liability, so upstream, downstream and integrated placements are being rated solely off exposure changes, with less pressure to show a rate increase on accounts where the market views their current premium as adequate.

However, despite this, accounts that are deemed to be ‘sub-adequate’ by insurers are going through a rating correction process that is resulting in large rate increases on a one-off basis.

Oil and gas accounts are under particular scrutiny from management with insurers raising deductibles/ attachment points and imposing more stringent conditions than seen in the last few years.

Canadian E&P continues to be an extreme example of the above, with increases and a lack of capacity driving the market upwards.

Marine Liabilities

The marine liability market is still looking for a nominal ‘market rise’ at say 2.5% before any exposure adjustments. There has been no change in this sub-sector in the number of available markets which is still in its abundance.

Bermuda

The Bermuda excess liability marketplace has seen the start of a hardening market in recent months aimed at correcting perceived insufficient pricing following a number of losses over the last few years. Action has been taken in the form of reduction in line sizes and a general push in rate (in addition to premium from exposure increases) across all sectors.

Utility accounts are taking the brunt of the increases. California wildfire continues to be a major issue with markets drastically cutting limits and increasing prices in an attempt to manage exposures with a number of markets refusing to write California wildfire altogether.

Marine Exposures

Marine exposuresAs we reach the mid-point in the year a clearer picture is emerging concerning the London marine insurance market. The push for a hardening of rates triggered at the start of the year has now manifested itself fully with market rises being the starting point, being adjusted for claims record and risk management practices of each individual assured.

Capacity is also showing signs of reducing within Lloyd’s which again has served to bolster the hardening position being taken by insurers. The brunt of the hardening of rates has been felt on traditional “blue water” tonnage which has been viewed as chronically under-priced during the many years of the soft market.

The Lloyd’s review of the profitability of its syndicates still continues in the background and has proven to be a constant review rather than a one off correction.

Brown-water tonnage is still a more favourable write for many London insurers, however, local domestic markets have also shown a keen interest in winning back orders on these accounts and competition for such accounts remains strong.

Lloyd’s syndicates are forensically analysing their books, on a monthly basis and are looking to show more selection in their risk taking appetite with many tonnages simply not being seen as attractive.

The overseas market is continuing to show signs of slowly falling into line with London, with several syndicates closing their overseas offices, most notably with Talbot and Ascot closing their offices in Singapore. There are however, small pockets of overseas markets still looking to increase market share.

The attacks on two tankers on june 13th in the Gulf of Oman has created a heightened instability and tension within region. The attack happening near the strategically important Strait of Hormuz is causing concern and it’s something owners, brokers and insurers are monitoring very closely to ensure a proportionate approach is taken with regards to the increase in War Risk additional premiums for such transits.

The marine liability market has enjoyed a more stable environment over the first six months of the year, and although profitable, they are keen to join their other classes of business in seeking nominal rises on all renewals.

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  • John CooperJohn Cooper

    John joined JLT in 1987 having spent three years with Leslie & Godwin (now Aon) in the Marine Hull Technical Department.

    John gained extensive knowledge in the technical design and servicing of energy related insurance programmes covering physical damage, business interruption, control of well and liability exposures for a wide spectrum of energy clients including oil & gas lease operators, mobile rig contractors, oil & gas service companies, and major integrated oil companies.

    At JLT Risk Solutions John sat on the "Energy Executive Committee" that oversaw the management and strategy of the Energy Business Unit. In January 2005 John moved from JLT Risk Solutions to Lloyd & Partners where he has responsibility for managing the Energy team. He sits on the Energy & Marine Executive Committee and is a strategic advisor to the LPL Board.

    He is also a broker consultant representative to the London Joint Rig Committee and has worked on a consultancy basis with Oil Insurance Limited (OIL). In the combined Marsh JLT Specialty, Energy and Power team, John now performs the role of Global Chief Client Officer.

    If you would like to talk about any of the issues raised in this article, please contact John Cooper, Global Chief Client Officer on +44 (0)20 8108 9542.

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