In the absence of major catastrophe losses last year, energy insurers will be under pressure to compete more vigorously in both the upstream and downstream markets for preferred business in 2014, while the excess liability market place remains challenging.
In 2013, for the fifth year in succession, we saw another year free of Gulf of Mexico windstorm losses for the energy insurance markets; however, this is going to do nothing to bring about the harder market conditions insurers are looking for.
The problem insurers in both the up- and downstream markets face is simply one of too much capacity chasing an insufficient amount of premium. With tough premium income targets to meet, pressures on underwriter participation “signings” has increased, with virtually all the major insurers intent on one objective: to maintain (and if possible enhance) their overall premium income from this class, despite a softening rating environment.
Downstream Energy Market
In the Willis Energy Market Review published in April last year, we pointed out the downstream market was possibly on the cusp of a major withdrawal of capacity. At the time, we anticipated the reinsurance market would take a pessimistic view of the recent downstream portfolio performance and insist on more aggressive terms and conditions at the July 1 reinsurance renewal season.
This year, however, despite continuing ongoing losses, we are starting to witness some rate reductions as capacity continues to increase. Without a major incident, we expect these reductions to accelerate as reduced reinsurance costs, oversubscribed programmes and new potential leaders all contribute to an increasingly competitive market place.
Interestingly, with some rates possibly at the lowest they have been since 1992 and with many insurers and reinsurers protesting they are losing money on this class, we can only see this competition lasting for a finite period until insurers that cannot afford to compete finally drop out of the class.
On the other hand, we do see an increasing drive towards cross-selling and package opportunities, which could allow extended competition still further as insurers look to secure closer relationships with their clients and drive other products alongside their large capital commitments for property-type risks.
Upstream Energy Market
In the upstream market, although there have been further attritional losses during the past six months or so, these have not been sufficient to affect the overall softening dynamic in this sector. Indeed, in the absence of a major event such as a Gulf of Mexico hurricane or a total loss of a North Sea oil platform, the market has begun to accept the inevitable demise of the recent supply/demand anomaly and excess of supply combined with a profitable portfolio must eventually lead to a reduction in rating levels.
The majority of the upstream market has been anticipating this development for some time now and as a result a surprising number have increased their capacity for 2014 to try to maintain their overall market share. Overall capacity in January 2014 now stands at close to $5.7bn, representing roughly a 10% increase on 2013’s figure.
As a result, most insurers’ attention is now focused on maintaining their market signings rather than trying to insist on maintaining rating levels. Of course, the difficulty from their perspective is that, since a number of insurers are adopting the same approach, this often leaves them in the same position as they were before. All this jostling for position has left insurers that have not increased their capacity in a difficult position as they seek to meet their premium income targets.
One notable side-effect of the softening conditions is programmes that have for whatever reason been “out of sync” with their peer group may now be able to attract the going rate for these types of risk. Some programmes are therefore likely to benefit from more marked reductions than others, although it is important to point out this would not necessarily signal a change to the overall market trend.
That being said, for programmes that require the participation of the whole market to complete the required policy limit (and there are an increasing number that now do so) the market has continued to show resilience in the face of pressure to reduce rates, with several programmes being renewed recently either at flat rates or at very modest reductions.
Excess Energy Liability Market
The excess energy liability market place is in its fourth year of trying to extract increases in premium from clients; however, the rises sought are now being measured by exposures and individual account increases over this period. Insurers are still maintaining rating levels remain inadequate, given the exposures they are covering. Losses over the past decade have altered the way the insurers treat renewal opportunities and, while the past two years have been fairly quiet in terms of excess energy liability losses, the continued deterioration of notable losses is confounding insurers. In addition to this, the marine and energy marketplace (including certain Bermuda insurers) continue to be plagued by the size of the Costa Concordia loss, now expected to exceed $1.5bn.
Despite the passing of time, the events of Macondo, Sempra and Costa Concordia, together with pipeline liability losses from a variety of sources, have had a lasting effect on underwriting decisions. The catastrophes have been shouldered by marine, offshore energy and Bermuda-based markets, despite the onshore element of some of these losses, as the same companies and syndicates that focus their attention on offshore risks also provided capacity for energy-related onshore risks. In 2014, underwriters must also consider the spate of rail derailments in North America in 2013.
The steady increases in premiums experienced by many buyers may have one silver lining – insurers that had either exited the energy liability arena or had watched from the side lines now believe rates and premiums have reached a level requiring re-examination and selective participation.
In the first quarter of 2014, the market attitude towards the transaction process continues to challenge the buyer. This is reflected in the scrutiny of exposures and conditions, as well as decreases in individual market capacities for their energy portfolio and a continued aversion to lower attachment points.
This post originally appeared in Insurance Day on January 31, 2014.