It’s part of my job to highlight where Willis thinks the energy insurance markets are headed as we move into 2012. In our most recent Energy Market Review newsletter we’ve highlighted the various factors that are currently contributing to the balanced conditions we are finding in both upstream and downstream markets. We’ve had a look at the fundamentals that are driving both markets, and have come to the conclusion that, although market dynamics are finely balanced at present, the downstream market is more likely to soften before the upstream market does.
Energy insurance buyers naturally want to know where the markets are going to go in 2012, and some cynics might sneer that we’ve dodged the issue in our newsletter by presenting a balanced picture. But anyone who sticks their neck out at this stage of the market cycle to state with any degree of confidence that the markets are heading this way or that is very likely to end up with egg on their face.
Macro Market Turners
So why are we so cautious? Well, as we outline in our newsletter there are a number of “macro” factors that could change market dynamics very quickly. Some of these are pretty much unprecedented – take the Eurozone crisis for example. Swiss Re have just gone on record with their thoughts on the effect of the crisis on European (re)insurer capacity levels. In a worst case scenario, nearly 25% of European insurance market capital could be wiped out. If they are right about that, then we may see a market upswing on the scale last experienced in the immediate aftermath of 9/11.
Or take the issue of Macondo – the jury’s still out on whether or not the insurance policies in place at the time of the loss can be “stacked” on top of each other so that they might all eventually have to respond if each contractor and joint venture partner is held liable in one form or another. If you then blend in the recent natural catastrophe losses (which Munich Re advise amount to USD 310 billion for the first nine months of 2011 alone) and take into account the determination of many senior managers to keep on top of individual underwriter strategies, you can see that the potential for a serious market hardening remains in place.
Capacity is King
That being said, nothing really changes if capacity remains buoyant. Despite some large recent losses (see graph below) – including a significant business interruption loss in the Canadian oil sands, the “Gryphon A” storm damage and the recent sad sinking of a Russian rig off Sakhalin island – nothing in the most recently available Lloyd’s figures suggest that any meaningful capacity withdrawal is imminent.
Meanwhile those insurers writing Gulf of Mexico exposures have had a loss-free year while in the downstream market there are many leaders competing for business which militates against any hardening dynamic. Indeed, it may be that this will be the first market to show signs of significant softening during 2012.
The good news is that by the end of the first quarter of this year we’ll have a much better idea of where both markets are headed. Our annual Energy Market Review is scheduled for an April 17th launch – watch this space for more details!