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RPS outlines energy insurance industry impact of OPEC+ output cut

18th November 2022 - Author: Kane Wells

Analysts at Risk Placement Services (RPS) have outlined the effects on the energy insurance industry following the OPEC+ meeting in early October where it agreed to a 2 million barrel per day (BPD) oil output cut.

Energy insurance and reinsurance imageRPS notes that the decision was made due to many factors, though one thing that’s clear is that OPEC+ is looking to prop up oil prices around $90 a barrel, and is reluctant to let prices drop further than that, no matter the economic headwinds.

RPS writes, “It’s important to note that we aren’t going to actually see 2 million barrels coming offline; the real number is actually around 890,000 barrels. This difference is because the OPEC+ countries commit to a certain level of output, and since the pandemic, many of the countries haven’t been able to meet their assigned allocation of that output.

“In fact, the group as a whole has been short by almost 3.6 million BPD. Many members of OPEC+ feel the current price of oil isn’t accurately reflecting how tight oil supplies are and this cut was meant to wake the world up to that fact.

“To be fair, OPEC+ isn’t wrong. Looking into 2023, many factors will continue to weigh on prices. Russia is a member of OPEC+, and currently, they are pumping right under 10 million BPD, but there are concerns about them maintaining this output.

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“Many of their shale fields are very complicated and have required expertise from Western companies who are now pulling out of the country due to the conflict with Ukraine. We know shale wells have shorter lives and need to be replaced quickly, so development will be interesting to monitor. It will also be interesting to watch to see what potential actions U.S. and European leaders take.”

As for the impact, RPS states that the energy insurance marketplace is continuing to provide competitive solutions for insureds. It notes that it saw appetite changes from carriers in late 2021 and early 2022, and for the most part the space has adjusted and found some consistency.

The firm also observes that it continues to see carriers leverage lead umbrellas to win deals. It adds that carriers are getting more comfortable with increasing their limits to stay on accounts, with multiple carriers have deployed up to $20 million in limits.

RPS says that this trend indicates that they’ve been able to negotiate and find capacity in the reinsurance space to help support these activities.

Further, the firm suggests it is seeing carriers leverage the Workers’ Compensation line of coverage, as this line of business has been consistently profitable, and carriers are increasingly putting pressure on agents to bundle this line in order to quote the umbrellas.

Meanwhile, RPS notes that underwriters are continuing to diligently underwrite the Auto Liability and Hired and Non-Owned Auto lines of business if they’re sitting excess of a fleet. It adds that it is seeing more requests for Auto Liability supplementals to be completed, in addition to the General Liability supplementals.

RPS concludes, “We’ve continued to monitor insurance companies being pressured to pull out of the oil and gas space. Munich Re announced on October 6 that it will refuse to insure any contract or project exclusively covering the financing, planning, construction or operation of oil and gas fields, midstream infrastructure or oil-fired power plants, beginning in April 2023.

“Munich Re is one of the largest reinsurance companies, so it will be interesting to monitor the effects of this decision as time goes on and to see if other companies will join them.”

As RPS waits to see the full effects of OPEC+’s decision on the U.S. energy industry and in turn, the energy insurance marketplace, it writes it is keeping its eye on finding competitive solutions to help agents and insureds navigate the uncertainty.

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