The increased unpredictability and severity of natural catastrophe events will continue to be the key challenges for the energy insurance sector, according to Timothy Lee, Energy and Engineering Underwriter, Munich Re Syndicate Singapore.
In an interview with Reinsurance News, Lee noted that the energy insurance market continues to harden, although at varying degrees.
“In the upstream space where Munich Re Syndicate is one of the leading risk carriers, this hardening is limited due to excess market capacity,” he said.
He explained that in addition, the upstream sector has seen an overall decline in exploration and production activities and insured values due to the impact of COVID-19, and oil price volatility.
“Whilst the sector remains broadly profitable in the last few years, we are seeing greater frequency of attritional losses, which threaten the diminishing premium pot available to the market.
“However, oil price is starting to improve from its 2020 lows and Munich Re is beginning to see the early signs of more activities resuming.
“Topics relating to ESG and energy transition initiatives are now important points of discussion with energy clients as we are seeing more of them making ESG commitments in their respective regions,” he continued. “In addition, we are now seeing standard versions of the Communicable Disease and Cyber Exclusion clauses now being adopted by the market.”
When asked what capabilities set Munich Re’s portfolio apart from the rest, Lee said that whilst its focus is on the upstream and midstream segment of the energy value chain, it’s also able to offer integrated energy products.
“We are also actively expanding our footprint in the renewable energy space. There is huge growth potential in this sector and by doing so, we are supporting and partnering with our clients in the energy transition process,” Lee explained.
Munich Re Syndicate is a participant of the Lloyds’s Asia Onshore Renewable Energy Construction Facility, which is a collaboration of certain syndicates based in Singapore to provide increased market capacity of up to US$100 million.
In late 2019, the syndicate launched the Engineering and Equipment portfolio in Singapore, focusing on the small and medium-sized enterprise (SME) sector.
In addition to traditional covers, Munich Re designed a worldwide installation product to combine international marine risk with engineering risks, which can be used across a broad range of industries, including subcontractors working in the energy sector.
“We are also able to consider non-traditional distribution channels and aim to collaborate with a select panel of like-minded partners. We are already seeing strong opportunities given increased localisation and digitalisation of the SME Insurance sector,” he added.
Lee expects the contribution of renewables to the energy mix to increase significantly, although oil and gas will remain an important source of energy for some time and Lee stressed that Munich Re remain committed in supporting its energy clients.
“We see this shift as a natural progression as many of our energy clients are already active in renewable energy projects by leveraging their technical expertise whilst tackling the issue of decarbonisation.
“From a technological perspective, the reliability and performance have broadly improved. However larger and newer technologies are being developed rapidly. This have in some instances led to outsized insurance claims arising from prototypical / unproven design,” he said.
He expressed the importance of the sector needing to raise design standards to cope with projects developed in harsher and unpredictable natural catastrophic conditions.
“Overall, we see the shift towards renewables as an opportunity to adapt to the evolving needs of our clients and to diversify our energy portfolio,” said Lee.
COVID-19 has accelerated the insurance industry’s transition toward renewable energy and Munich Re has seen a focus on “green recovery” by many governments as part of their net-zero commitments.
Lee explained that recovery and stimulus measures are getting greener.
“The insurance sector, being a key pillar to the world’s economy, has therefore been fast tracked towards renewable energy.
“We are seeing an increase in new market capacity in this space. What is interesting is that the renewables energy sector is made up of a hybrid of underwriters coming from different backgrounds – property, power, energy, marine, engineering – lending their own knowledge and experience to pivot into this sector.”
When asked what challenges he expects the energy insurance sector to face, Lee explained that the increased unpredictability and severity of nat cat events are the most prominent and are likely to remain so moving forward.
“In addition, the energy insurance sector is increasingly focused on how we can take positive action to support our clients towards a lower emission environment.
“There have been high level discussions on how the underwriting community can develop a consistent framework to assess ESG risks in a highly complex industry.”
He concluded by explaining that COVID-19 and the resulting travel restrictions have affected the traditional way of how businesses are conducted, which relied heavily on physical meetings and international travels for client roadshows and meetings.
“In addition, it is now more difficult for marine warranty surveyors and loss adjustors to conduct on-site surveys, including accessing offshore installations and well sites.
“Whilst remote surveys are possible, they are not as effective compared to traditional site-based model.
“The sector will need to review how this process can be improved as risk engineering remains a key component to the sector.”