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Hardening of energy market limited by positive factors: WTW

21st June 2022 - Author: Kassandra Jimenez-Sanchez

Positive factors continue to limit the hardening of the market dynamic in upstream and downstream energy insurance, according to a WTW report.

Oil rigAccording to the broker’s 2022 Spring update, while downstream energy insurance buyers are yet to enjoy a soft market, the very best programs have now broken the no-reductions barrier.

“Positive factors are now outweighing the negative for buyers in this market, with continued insurer profitability and increased capacity”, the report noted.

These factors include an additional $500m of realistic market capacity now available for North American risks; an increased premium pool; a loss record that continues to be moderate; and the fact that downstream underwriters are facing additional pressure from their management to increase premium income throughput, just to mention some points.

However, the report notes that there are some negatives that will continue to ensure the downstream energy market does not become a truly soft market. 

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The fact that there are no major threats from fresh insurance capital to the positions currently held by the established market leaders is preventing further competitive pressure. In addition to this, underwriters are sticking firmly to the policy wordings and clauses generated by the previous hard market. 

In the case of the upstream energy insurance market, the report notes that the hardening dynamic continues to flatten, but concerns over reduced exploration and production (E&P) activity and lack of market leadership alternatives are generally preventing actual rating reductions.

Some positive factors include, capacity reaching a new record with no sign of withdrawals, now standing at some $7.25bn for the most attractive programs; $100+ per barrel oil will lead to some increased activity and higher loss of production income (LOPI) values, generating some additional premium income to the market, and the overall benign loss record and profitability have been maintained — for now. 

Some negative factors mentioned in the report  include insurers worrying over significant incurred but still unquantified losses; the fact that premium income from the contractor portfolio has been particularly impacted by COVID-19 and the new underwriting focus on ESG criteria. This income is unlikely to return to the market as the green energy transition accelerates.

In addition to this, there is still a significant degree of management/Lloyd’s scrutiny of major upstream programs and a consequent pressure to adhere to established underwriting philosophies.

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