Energy and Power Market Update

Energy and  Power Market Update

UPSTREAM ENERGY
Compared to their colleagues in downstream property, international casualty, marine hull and cargo, upstream insurers have had a quiet first six months to the year. Leaders have not been able to impose rises of much more than 2.5% rises on good record renewals, and in certain circumstances are struggling to obtain any rise at all.

On Gulf of Mexico named windstorm renewals the market was generally unable to secure increases. In this extremely balanced supply and demand sub sector there was one major buyer who stopped buying to self-insure, that led to a signing down battle on several accounts some market scrambled for income to feed already paid for minimum premium reinsurance arrangements.

The spike in the offshore construction market seen last quarter (as insurers’ appetite to chase rates down waned) has now solidified, with leaders being more interested in the rapid loss deterioration in the 2017 year of account as opposed to defending market share. The following markets are hesitant to fill their books with long tail projects and can be quick to decline, making it difficult to complete large projects where there is no captive or mutual involvement.

North American onshore oilfield equipment losses (mainly associated with fracking) has resulted in some huge rises being quoted (in some cases multiple times the expiring premium) on upstream land renewals.

The Lloyd’s premium income figures as set out below for upstream energy property / control of well and construction, all too clearly shows the effects in the 2014 – 2017 slump in the oil price and the overcapacity supplied by upstream insurers:

2014 USD 1,818,911,487
2015 USD 1,321,088,530
2016 USD 1,097,466,011
2017 USD 964,838,502
2018 USD 728,539,921

However, we do detect a touch more confidence from insurers in the future.

The continuance of the good loss records has helped keep senior management and regulators scrutiny to manageable levels. With the recent uptick in the oil industry activity, which has helped bolster the overall upstream premium pot which had fallen to a record low, there is now sufficient income to allow insurers to walk away from business they do not like the terms of, which was a rare occurrence in previous quarters.

This is likely to allow underwriters to maintain discipline and prevent a wholesale return of rate reductions again. Clients and brokers have been able to achieve their aims in the first six months of 2019 but the gradient is definitely steeper than before.

DOWNSTREAM ENERGY

It has proven to be a bruising second quarter for customers and practitioners as insurers continued to harden their market positioning. The median rate increase in the first quarter came through slightly above 10% and this has now moved up by a further 5 points through the second quarter and looks likely to accelerate as the year goes on.

As with any reference to a median there are outliers to this and where significant capacity is needed to be replaced increases have been significantly higher. There remain differences in regional hubs rating, with Asia still in single digits increase, whilst the Middle East remains slightly behind London’s pace but is getting closer.

There remains an abundance of overall capacity but the stress within the critical capacity segment of primary, quota share and Nat Cat commitments has strengthened underwriter discipline and caused rates to continue to move upwards.

Much of this market stress has been caused by the actions of one particular lead insurer that has been drastically cutting large capacity shares throughout their renewal book.

The pattern of these actions over the last quarter has appeared strategic across their global proposition.

While it is totally appropriate for any insurer to correct their proposition to safeguard their capital it is a reminder to customers and brokers alike to be prepared and consider alternative options as part of the renewal strategy process.


A further knock on effect of the prevailing market is that business is being shopped around late in the placement stage. This has led to a resource issue within a number of insurers who have been swamped with submissions; with underwriting time lines becoming compressed placements have become exposed to opportunist behaviour.

In many cases a lack of experience of, and reaction to prevailing market conditions within both broking and underwriting fraternities have made the process more torturous than might otherwise be the case.

Market claims in the first half of the year has not been headline standard but it has been attritional. The aggregated position for year to date is in the USD 1.1 billion region with some considerable Nat Cat exposures remaining out there to yearend.

Insurers continue to seek rating adequacy and a balancing of portfolios and they desperately require this process to continue through 2020 and into 2021 to achieve their required sustainability levels.

There appears a tacit level of tolerance to rate increases within the customer base because they have benefited greatly from a falling market over a number of years and there is appreciation of a common interest in a sustainable market. However such tolerance is likely to be tested should certain sections of the market act without a modicum of care for established business relationships.

The outlook for the remainder of the year is more of the same to further hardening. Policy extensions and wordings are under scrutiny as insurers look to tighten up on soft market excesses.

There is a concentrated effort to contain business interruption values that are often under declared. In addition some insurers are already running into premium income cap issues with the dynamics of further capital requirements likely to cause constraints on supply.

Customers should prepare well in advance of placements to establish strategy and engage with a range of markets including those that have been somewhat ignored during the extended soft market cycle.

POWER

The power generation market is going through a period of transition. Renewable energy assets are generating more electricity than their fossil fuel counterparts around the globe. This is mainly due to the installation cost per MW of solar and wind significantly reducing. The same is true of the power insurance market that has experienced a prolonged period of rate reduction despite experiencing heavy losses both in terms of size and volume.

The trend across local and insurance hub markets globally is that there is still significant capacity for conventional power assets, which has so far stalled any significant power market rate increases. Insurers have argued that rate increases are much needed to stabilise profitability. The need for change was reiterated when Lloyd’s highlighted power to be an underperforming class of business as part of a 2018 performance review along with six other classes.

Nearly all local insurance markets are now experiencing or expecting single digit increases for clean non-CAT exposed assets with potentially double digit increases for those with a challenging loss history or significant CAT exposure. There is a shift in underwriting strategy away from premium growth to risk selection combined with rate increases. As clients look for alternative options to compare with their local offerings, London and other central hub markets are able to offer further options under the current environment.

The trends observable in the conventional power market have also been evident in the renewable energy market. The renewable market has also experienced persistent losses, particularly natural catastrophe along with significant attritional machinery breakdown.

The availability of adequate capacity combined with generally lower sums insured and policy limits had thwarted the attempts by individual insurers to impose premium rises or otherwise tighten-up conditions of coverage during 2018.

However in the last 6 to 9 months there has been evidence of underwriters successfully introducing premium increases and achieving restriction of coverage that was expanded during the period of market softening.