According to a report from the global advisory, broking and solutions company, WTW, increased reinsurance costs and higher retention levels have resulted in a renewed hardening of upstream energy re/insurance market conditions.
WTW Energy Market Review 2023 noted the reinsurance market renewal season has impacted the upstream portfolio in three ways: pricing, retention levels, and difference in conditions.
In November 2022, WTW noted that both the energy and the insurance industries have a lot to be apprehensive about heading into the January 1 2023 renewals, as global geopolitical and economic uncertainties continue to intensify.
WTW noted that reinsurance treaty costs are generally between 30-50% of upstream insurers’ overall costs.
“In general terms, January 1 reinsurance treaty prices across all lines of business have increased across the board, by a minimum of 10% for the best regarded business but by considerably more – upwards of 30% – for Nat Cat-exposed business,” WTW explained.
The rise in retention rates has had a greater impact than the price hikes, with some rates reaching twice as high as those in 2022. As a result, small to medium-sized businesses will now be completely covered by most insurers’ retention policies, which will have a significant impact on pricing levels.
Insurers operating upstream have been presented with a clear decision: either substantially increase retention rates or face a significant increase in treaty reinsurance costs. Most have had no choice but to opt for the former option or a combination of both, WTW said.
Upstream insurers have also encountered a final hurdle in the form of more stringent policy clauses mandated by their reinsurers. This has caused some insurers to question whether certain aspects of their direct business written in 2022 are still covered by their reinsurance agreements.
“The impact of these developments on the Upstream market is not difficult to imagine. What has made the situation even more challenging from a broker’s perspective is that it is still very uncertain as to how this is all going to play out in terms of rating rises on direct business.”
The outcome will largely rely on the type of reinsurance that was obtained, as well as how the costs of reinsurance were distributed among the different lines of business within each insurer, which is even more crucial, WTW noted.
