Energy Insurance Markets Defy Economic Laws

Energy

One of the strangest features of the energy insurance market that we address in our recently released 2012 Energy Market Review is how the market is seemingly defying the basic laws of economics. These state that an increase in supply—in this case capacity—should lead to a decrease in price. So if capacity is on the increase, how come rates are not going down?

Let’s take the upstream market first. In our Review we show that overall capacity levels are now nearing the $5 billion mark. Even offshore construction, historically often regarded with trepidation by a significant portion of the market, has shown a marked increase from this time last year. In practical terms, we can now say that for the most attractive business requiring the maximum capacity that the market can offer, programme limits of $4 billion for operating business and $3.6 billion for offshore construction business are now achievable at a realistic price.

Energy Market Review (April 2012)

Read the Energy Market Review (April 2012)

In the downstream market there is now as much officially stated capacity in the International arena as there was at the height of the “great soft market” of 1997-2001, although the reinsurance market capacity to protect this portfolio is nowhere near as robust and competitively priced as it was 12 years ago. Despite this increase in capacity, in our Review we report modest rating increases in the upstream market, with flat conditions prevailing in the downstream market. So how do we explain this market discrepancy?

What’s Behind This Anomaly?

It’s not possible to produce a glib explanation, but some of these factors are likely to be behind this anomaly. On a macro level, insurance generally remains a safe haven for capital, and with interest rates the way they are, there seems to be a lack of alternatives for capital providers. Secondly, again on a macro level, it’s possible that with recent losses having been absorbed by the industry without any significant capital withdrawal, investors may have more confidence in the market’s ability to ride out trouble than in the old days before 9/11.

On a micro level, however, we can be more definitive—in both upstream and downstream markets, capital is being deployed more selectively. These are intelligent markets that do understand the risks they assume, and capacity remains very much in the hands of the same select group of leaders, who have basically been in place during the last five years or so.

So this factor in itself is enough to restrict competitive pressures; furthermore, the capacity increases include some significant increases from regional markets, especially in the downstream sector. These markets are for the most part not leaders, and although some of them have the ability to write on a global basis, they rarely do so. Then of course there is the recent loss record, which has been sufficiently alarming in itself recently to offset the theoretical effects of increased capacity. So theoretical stated capacity might be up, but it’s being used selectively.

I’ll be blogging about some of the other subjects we discuss in the Review over the course of the next week or so.

About Robin Somerville

Robin is the Communications Director for the Willis Towers Watson's Natural Resources Industry Group and is based i…
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