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Downstream energy rates set to improve after difficult 2018: JLT

8th January 2019 - Author: Matt Sheehan

Rates in the downstream energy sector look set to improve in 2019 as re/insurance companies finally take a stand against increasingly poor underwriting results over the last few years, according to analysts at JLT.

Coal Energy PlantThe re/insurer’s latest quarterly energy report noted that management oversight and pressure to turn rates around has become significantly more acute following a disappointing fourth quarter in 2018.

The market is expected to incur total downstream losses of $3.75 billion over 2018, of which $1.2 billion relates to property damage and business interruption losses for the months of September and October alone.

These losses far exceed the class annual premium pool of $1.75 billion, JLT observed, and are demonstrably worse than the results of 2017, when natural catastrophes had a profound effect on losses.

Moving into 2019, there are likely to be withdrawals from the class unless the rating environment is changed, with many companies hoping to achieve between a 10% and 20% lift in rate across the book in 2019.

Analysts found that, while rates had generally remained flat during Q3 2018, in Q4 insurers appeared more determined to only accept business that offering at least a nominal rate lift.

JLT’s analysis echos recent comments by broker Willis Towers Watson, who argued that price increases in the downstream sector are inevitable following years of unprofitable returns and major losses.

Market premium in the downstream energy sector also continues to be impacted by mergers and acquisitions (M&A) activity, but crack spreads are now dramatically improving and may result in spikes for earned premiums on business interruption if sustained.

JLT claimed that this would bring into focus client perceptions of program limit adequacy and cause those with less risk appetite around earnings to adjust accordingly.

The report noted that, for companies who have tracked the downstream market through its extended soft cycle, expectation should be for modest rate increases on top of an attractive base environment.

However, for those that have taken a more aggressive or opportunistic view during the same period, 2019 will likely prove to be somewhat tougher, analysts suggested.

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