Energy sector insurers fend off softening, hold market in tenuous balance

Insurance coverage for the energy sector is headed towards at least a tenuous balance after years of hardening, resisting historic trends for greater rate volatility off of market peaks, analysts at global broker  WTW have claimed.

Most energy lines of business returned to profitability in 2021, resulting in an easing of the ongoing hardening market conditions, report authors noted of the step towards market balance.

But insurers have the reason and the position to fend off softening, authors claimed. “Major reductions and market softening may not be achievable.”

Insurance for upstream energy operations is performing a rare balancing act, proving “almost perfectly balanced” just at the moment when an uptick in underwriting results would historically usher in a quick softening of rates.

Capacity remains “abundant” and includes a certain herding into the best-regarded programmes to capture volume, authors claimed. Max capacity for upstream operations hit its fifteenth consecutive annual record at $9.4 billion (excluding Gulf of Mexico windstorm), although gains have been sufficiently modest to suggest no new capacity is stepping in.

In fact, fresh capacity is markedly absent on a market where it proves “challenging to find insurers willing to ‘break ranks’ and offer more competitive terms than those provided by the existing leadership panel,”  WTW authors lamented.

The loss history for upstream covers has been “very benign” and high oil prices is staving off fears of claims for loss of production income. Reinsurance costs have also been lower than anticipated.

Those forces have been offset in part by ESG-driven financing pressure on the energy industry and geopolitical concerns flowing out of eastern Europe.

Rate growth has been choked off entirely for the very best E&P programmes as insurers race in. Elsewhere, the pace of rate gains has slowed from the prior year, down to a 2.5 to 5.0% range for offshore and onshore contractors as well as SME E&P names, or a higher 5 to 7.5% range for midstream and all-risk offshore construction deals. Loss-affected business may still suffer “exponential” rate growth.

The market for downstream coverage has also worked towards greater balance after several years of punishment for buyers as capacity ebbed and poor loss records pushed up rates. Appetite is up notably, although prices have yet to give.

Max capacity for 2022 rose for the second straight year, recouping levels last seen in 2017. Realistic capacity has also increased “as insurers become more confident about actually deploying the stamp capacity already available to them,”  WTW authors claimed.

“Virtually every major insurer has revised their premium income targets [upwards] at approximately the same time,” analysts said of signals picked up on the market, including some hopes to double exposure to most-preferred businesses.

Cat risk, geopolitical risk from eastern Europe and a lack of incoming new capacity have kept that market enthusiasm from the type of “immediate and rapid” softening that the downstream market has typically seen.

Rates are only coming down for best-in-class operations, marked at flat to down 5%. Second tier operations are still suffering rate increases neighbourhood 5 to 10% while loss-affected programmes and North American natural catastrophe risks face 10 to 12.5% hikes, authors claimed.

The 2021 loss record proved relatively “modest”, more so than might have been expected given the Texas freeze and Hurricane Ida.  “If losses were to return to the same level of frequency and severity that the market experienced from 2017-19, it would not be long before a new hardening dynamic emerged.”

Liability covers in the energy sector have also “finally and discernibly turned a corner” following two years of strong double- or even triple-digit rate gains and capacity constraints, with “rate rises moderating and capacity returning."

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