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Climate risk to transform energy sector: Willis Towers Watson

16th April 2020 - Author: Matt Sheehan

Analysts at Willis Towers Watson (WTW) have suggested that climate change risks and environmental social governance (ESG) will have a transformative effect on the energy insurance industry in the coming years.

Energy insurance and reinsurance imageAs part of its annual Energy Market Review, WTW noted that the recent oil price war and the reduction in demand for hydrocarbons due to the COVID-19 pandemic will also have a significant impact on future energy industry risk management strategies.

“We cannot underestimate the immediate challenge faced in the loss of demand as a result of Covid-19 and the impact of the recent oil price war, notwithstanding the agreement now reached by OPEC+ to cut production by 10% of global supply,” said George Nassaouati, Head of Natural Resources in Asia at WTW.

While it is still too early to forecast exactly how these factors will play out, WTW highlighted potential effects on the energy industry, including reduced capital expenditure, a reduction of exploration and production activities, lower refining margins and lower Business Interruption valuations.

“That being said, there is no doubt the world will eventually recover from COVID-19 and the energy industry will recover from the oil price war,” Nassaouati continued. “But there is one issue that is here to stay on a permanent basis and that is climate change, and the transformed risk landscape that now confronts the energy industry.”

ESG formed the key theme of WTW energy market report, which argued that achieving a satisfactory ESG rating will be critical in enabling energy companies to attract and maintain the support of key stakeholders in the future.

“In these unprecedented and uncertain times, there is no denying that the last 12 months have been challenging ones for the energy industry,” Nassaouati commented.

“However, it is the issue of climate risk and wider ESG factors that will have a significant impact on the future shape of the industry. In short, today’s energy businesses must commit to incorporating ESG standards and climate change into their risk mitigation strategies in order to ensure a sustainable future.”

The report also showed that capacity in the upstream energy market has reached a record high of $8.73 billion, up from $8.10 billion in 2019. But downstream energy has seen capacity decline for the second successive year, down to $5.978 billion from last year’s $6.428 billion.

The run of benign loss years in upstream has also continued, with only three losses in excess of $100 million during 2019. Downstream, meanwhile, has had a significant number of losses over $100 million, with one major loss significantly above $1 billion.

Overall, WTW concluded that the upstream market remains profitable in overall terms, although it acknowledged that premium income levels are still low by historical standards, and certain sub-sectors of the market, such as offshore construction, have been hit by attritional losses.

For downstream and liability insurers, their portfolios remain firmly in the red and the way back to profitability remains uncertain.

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