The energy insurance and reinsurance market is continuing to soften, as the effects of high competition levels and excess re/insurance capacity are felt acutely in the sector, according to Willis Towers Watson (WTW).
WTW’s latest report on the energy market suggests that the challenges the sector is beset by are a “new normal” and this applies to insurance and reinsurance as well as the industry itself.
“The abundance of (re)insurance market capital, the driving dynamic behind market conditions now for nearly a decade, is likely to remain dedicated to the industry – no matter what individual sector loss records produce,” the broker explains.
Capacity continues to rise for energy risks, with much of the primary and facultative energy coverage actually sourced from reinsurers today.
Upstream market capacity has risen US$7.56bn to US$7.72bn, International Downstream from US$6.19bn to US$6.5bn and International Liabilities from US$3.2bn to US$3.3bn, while at the same time demand has not increased sufficiently to soak this up without it affecting prices.
This is despite $5 billion of upstream energy losses in 2015, the highest for five years, while 2016’s downstream losses have eclipsed those experienced in 2015, at $2.58 billion.
Lloyd’s of London related premium income from energy risks has dwindled down to $700m, from $1.06bn, between 2014 to 2016, as demand and the impact of reinsurance capital from outside the market made itself felt.
WTW believes that energy markets profitability is on a knife-edge, “We believe that should the current loss record deteriorate by only a small degree during 2017 then this might well be sufficient to threaten their viability.”
However a bottom to this market could be in sight, WTW said, explaining that while rates continue to soften in energy re/insurance as of April 2017, “This deceleration may transition into a broader bottoming out of market conditions should individual portfolio loss records deteriorate further late in the year.”
However, WTW notes that unless there are capacity withdrawals the softening situation is likely to continue for some time, unless the loss ratio worsens further.
Neil Smith, Willis Towers Watson’s Global Product Leader for Natural Resources Lines, explained; “The long term outlook for Energy insurance buyers remains uncertain. History teaches us the market conditions in these lines of business can change rapidly and should this prove to be the case, buyers will need to ensure that they have the right strategy in place to ensure the continued viability of their risk transfer programmes.”
The “perfect storm” that faces the energy re/insurance markets continues, with capacity at record levels, profitability continuing to be seen and losses, particularly natural catastrophe and Gulf windstorm, remaining relatively low.
Some question the viability of energy coverage at the current lows and it could only take a single loss to turn this market, particularly in some areas such as the Gulf where still a few markets hold the reinsurance keys.
With the energy re/insurance market at lows, WTW notes that buyers may seek to lock-in multi-year coverage at these softened prices and expanded terms.
“History teaches us the market conditions in these lines of business can change rapidly. Should this prove to be the case, buyers will need to ensure that they have the right strategy in place to ensure the continued viability of their risk transfer programmes,” Smith explained.