Why have we stuck our neck out in our recent EMR Newsletter and suggested a further softening in the global energy insurance markets?
Let’s take downstream first. After all, we’ve had some pretty horrendous downstream losses recently, which have provided the rationale for downstream insurers to maintain the modest hardening that was becoming evident by mid-April for the majority of the downstream book.
But regardless of the losses that are being reported, premium income targets still need to be met and most downstream insurers are now focusing on preferred programs in order to do so—most of these preferred programs feature a wide spread of risk, a benign loss record and plentiful premium income in areas free of natural catastrophe risk. Competition for this business has therefore actually intensified, as insurers look to maintain their market share.
Should capacity levels remain buoyant—and to date there are no signs of any withdrawals from the market at the end of 2013—it may be the case later in the year that, faced with the need to maintain premium income targets, insurers may be forced to compete once again—even for the less attractive parts of the downstream portfolio.
When it comes to upstream, a significant number of these insurers also have premium income targets to meet and will be hoping that additional sources of income, such as new construction business, will materialise shortly.
However, if this business is insufficient to match their income targets, then we may well see a renewed competition for new business in the final quarter of 2013. The case for a further market softening is fueled by two additional factors:
- If another Gulf of Mexico windstorm season comes and goes without a major energy loss, insurers are likely to record another highly profitable year in 2013, which will naturally increase competitive pressures across the sector.
- The pressure on insurer “signings” continues, which may also exacerbate the current softening dynamic. Such has been the interest of the majority of the upstream market in increasing their market share of this class that a significant number of the choicest upstream programs have been heavily oversubscribed. As a result, the actual “signed” lines that some insurers have received have been considerably reduced. This issue has been increasingly frustrating for insurers as they seek to keep their income targets on track.