In the aftermath of hurricanes Harvey and Irma, the thoughts of our colleagues in the energy sector and insurance market are quite rightly directed towards the human tragedy that’s unfolding as new details of the death and destruction wrought by these hurricanes become increasingly apparent.
But in addition to reflecting on the human cost, energy companies must now consider how they could be impacted by the reaction to these events by the insurance and reinsurance markets. Are these dreadful events going to mean higher insurance prices for the energy sector?
It’s of course far too early to make an accurate prediction – after all, we still have over two months of the hurricane season to run. But that shouldn’t prevent us from analysing what might happen in the months ahead.
Why the markets might turn…
Certainly the impact of Harvey and Irma is bound to extend well beyond the energy arena and their effect on the global (re)insurance markets is likely to be significant, at least in the short term:
- Current RMS forecasts put insured losses from wind, storm surge and inland flooding from Harvey at $25–35 billion, while their latest comparable figures for Irma suggest something in the region of $25-40 billion. That’s a potential total of $75 billion — not quite the Armageddon scenario which might have materialised had Irma inflicted a direct hit on Miami, but very sizeable for a market that continues to suffer from dwindling premium income streams.
- Some energy insurers, particularly within the Downstream sector, underwrite energy business as part of a wider general property portfolio — a portfolio that’s likely to be significantly impacted by both Harvey and Irma.
- It’s understood that several major (re)insurers are already returning to the global reinsurance and retrocessional reinsurance markets to purchase additional “top-up” reinsurance protection.
- As of September 11 when this article was written, there was still ample opportunity for further hurricanes of a similar magnitude to threaten the Caribbean and Gulf of Mexico regions during the remaining weeks of the hurricane season. Depending to a large extent on how the rest of the Gulf of Mexico hurricane season unfolds, a withdrawal of capacity from the global (re)insurance markets may well be a possibility.
- Past form suggests that major natural catastrophes such as Harvey and Irma are likely to be seized on the major global (re)insurers as a rationale to increase prices, regardless of the actual eventual effect on balance sheets and profitability ratios. Indeed, those buyers with October 1 or November 1 attachment dates may well experience a short-term “knee-jerk” reaction in the market place.
- Should the global reinsurance market be successful in obtaining significant price increases for their reinsurance treaty protection next January, then the direct energy insurance markets, bearing in mind their already wafer thin margins, are likely to have little choice but to pass these increased costs on to their customers.
..and why they may not
Notwithstanding these issues, let’s consider several other factors that might mitigate the risk of a significant market upturn:
- On the Upstream side, the offshore energy infrastructure in the Gulf of Mexico seems to have got off remarkably lightly from these two storms. Apart from a drillship that came adrift and some possible damage to a platform rig, as of September 11, we’re unaware of any other direct Upstream losses from either Harvey or Irma.
- While it’s still very early days and further losses (particularly to stacked rigs and equipment in the Houston/Galveston area) may eventually materialise. But there is nothing to suggest offshore losses on the scale of hurricanes Katrina and Rita in 2005.
- At the moment, the continued over-capacity in the Upstream market is enabling buyers with good loss records, risk profiles and spending power to continue to achieve worthwhile premium reductions. Even if reinsurance prices for Upstream insurers rise in January, the net effect may only stall the softening process rather than generate an actual upswing in Upstream market rating levels.
- On the Downstream side, there’s been a significant impact on refinery production, with a number of major facilities shut down in the aftermath of Harvey. However, the final bill to the insurance market from downstream losses emanating from Harvey is likely to be very modest because any recoverable insurance claims will only be from policies which have been specifically endorsed to cover named windstorm, a practice that is by no means widespread for cost reasons.
- Furthermore, a significant number of major oil companies owning refinery infrastructure in the region are members of energy mutual Oil Insurance Limited, further reducing the exposure to the conventional Downstream market.
- Although there may be more resistance to the softening market dynamic in the Downstream market following hurricane Harvey that in its Upstream counterpart, the reality of excess capacity will continue to dampen any momentum towards a sustained upturn in rating levels.
We should remember that historically the energy markets have tended to react quickly to major events such as these to arrest price softening and have then fallen prey to the laws of supply and demand shortly afterwards. However, the general property market experience following Rita and Katrina was a little different, in that market hardening appeared after the event and escalated for a while as the magnitude of losses suffered became clear.
That said, the reality in 2017 is the global (re)insurance markets remain heavily over-capitalised. Global catastrophes and other underwriting losses may certainly lead eventually to some market withdrawals, and there’s a chance that reinsurance treaty prices are likely to be impacted, at least in the short term. But so long as capital continues to flood into the market, any market upswing following the Gulf of Mexico hurricane season is likely to be relatively short-lived, with market fundamentals unlikely to change in the long run.