Willis Review Finds Energy Market Stable but Fragile

Shale Rock (fracking)

Willis Report, "All Fracked Up?", explores the impact of hydrualic fracking on the insurance industry.

The energy market recorded its worst ever year for non-windstorm related losses in 2011 with close to $9 bn in combined insured and uninsured total losses. This is according to our latest Willis Energy Market Review that was released today to coincide with RIMS.

Energy Market Review (April 2012)

Read the Energy Market Review (April 2012)

We found that, discounting windstorm losses, 2011 was the worst year in recent memory for the energy market following unusually large losses in the Canadian Oil Sands and Floating Production Storage and Offloading (FPSO) sectors.

The report is entitled “All Fracked Up” as a majority of the publication is devoted to just how concerned energy insurers should be about the highly contentious issue of hydraulic fracking. We’ve rounded up insurance industry experts to give us their views on the topic.

Addressing the Big Issues

To launch the latest report, we hosted a select group of clients, loss adjusters, underwriters and press in our London HQ today to go through a presentation that you can download here on the “big issues” identified, namely:

  • If capacity is on the increase, how come rates aren’t going down?
  • Is shale gas drilling all it’s “fracked up” to be?
  • What, according to Tom Bolt, Differentiates Lloyd’s Energy offering from its competitors’?
  • How is the upstream market responding to the issue of FPSOs?
  • How is the downstream market responding to the issue of Contingent Business Interruption?
  • Are the Liability markets continuing to harden?

 Despite Losses, Capacity is Increasing

The report found that despite record losses, energy market capacity continued to increase in 2011 as capital providers sought more stable returns in the volatile global economy. Theoretical upstream and downstream capacity increased by over 10% from 2010. However, underwriters are deploying this capital selectively and showing greater differentiation in favor of the most attractive business.

Energy Market Review presentation

Download the Energy Market Review Presentation

The correlation between capacity and rates in the energy market has weakened markedly in recent years, with a significant increase in overall capacity failing to lead to a further decline in rates. Modest rating increases were the norm on upstream business at recent renewals, while the downstream market remains effectively flat, albeit with average rates at their lowest ebb for a number of years.

In a Nutshell

Willis Global Energy CEO Alistair Rivers sums up the current situation in the energy insurance market as follows:

“Conditions in the energy insurance market are stable but fragile. Capacity is at a record level but insurers are deploying it selectively due to past claims volatility.

“Insurers are differentiating even further between the risks they truly value and those they don’t due to the recent losses or lack of underwriting information. It is vital that buyers provide as much information as possible and differentiate their risk profiles to secure optimum terms and conditions from underwriters.

“The offshore market direction remains in the balance as insurers wait for the full picture to emerge on the Elgin platform situation. However, if Elgin is resolved satisfactorily, there is ample opportunity for those buyers that can continue to differentiate themselves from their peer group to obtain much more preferential terms.”

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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