Posted in News on 08 Oct 2018

The short-term outlook in the energy market remains positive, with oil prices stabilising at around $80 for benchmark Brent crude. Some uncertainty over demand is continuing due to the China-US trade dispute, but shortfalls in production from Venezuela and the severe impact of US sanctions on Iran are leading to upwards pressure on oil prices.

The total rig count according to Baker Hughes was 2,289, a 9% increase of 189 over the past 12 months. Refining margins have continued at a high level averaging $15/bbl in the USA and $12.5/bbl in Northwest Europe and indications are that 2018 will be another strong year for refiners.

Overall demand for energy insurance could be viewed as strengthening in the upstream and downstream markets, but there remains an oversupply of capacity which is continuing to hold down rates for all but the largest placements that are stretching the overall limits of market capacity. In addition many large buyers are deploying well-capitalised captive vehicles or alternative capacity such as OIL to manage volatility in short-term pricing.

Lloyd’s of London (Lloyd’s) market update

For 2017, Lloyd’s reported a loss of £2bn (2016: profit £2.1bn) and a combined ratio of 114% (2016: 98%). The deterioration was primarily driven by major 2017 claims activity particularly natural catastrophes in Q3/Q4 combined with challenging market conditions. In fact, major claims in 2017 represented 18.5% of net earned premium, an increase compared to a ten year average of 10%. Only one line of business (Energy) reported an overall profit, although the Accident year result (108%) was significantly improved by a 21% prior year reserve movement.

Global Reinsurance Market Outlook

At the Monte Carlo Reinsurance Rendezvous, buyers were pushing for rate reductions through the January 2019 Treaty renewal season for classes of business performing well. The influx of alternative or third-party reinsurance capital during the ‘great reload’ of 2018 was seen by some as the end of the traditional reinsurance pricing cycle, but others warned that a fully soft market was not a foregone conclusion, as it is still unclear whether another major loss year would trigger future capital flows into the industry.

Energy Loss Update

As we move into Q4 2018, loss activity is generally continuing at a very low level particularly on the upstream side of the business despite the increasing activity levels noted above. The exception would generally be attritional losses on the rig book and underwriters are looking specifically at North American fracking accounts where there have been a series of losses over the past 24 months.

Upstream Energy Capacity, Demand and Outlook

2018 is shaping up to be another benign loss year with no meaningful direct catastrophe impact to date. Traditional Exploration and Production markets remain active whilst more recent market entrants are also pursuing new business.

Underwriters are still rating new business competitively but seeking increases up to 5%-10% on renewal business (but generally accepting less on clean business). Emotionally charged areas for underwriters include transportation heavy risks, environmental issues, earthquakes and unfavourable legal venues such as Louisiana, Texas and the Northeast USA.

For rig accounts flat renewals have been challenging due to losses across the book, but despite this, incumbent markets are containing rises to reflect increasing activity levels. Overall total market capacity remains largely intact at over $7bn but this is largely a theoretical number, and actual working capacity for most placements could be considered to be no more than 50% of this level taking into account regional players and market averse to some coverages. Despite this, the short-term outlook still remains favourable for buyers.

Downstream Energy Capacity, Demand and Outlook

Results from corporate insurers in 2017 were poor compared to previous years, largely attributed to Natural Catastrophe activity and the continuing deterioration of some large individual losses. Markets are more hesitant on Natural Catastrophe exposed accounts with Axis and Qatar Re having withdrawn from the market ($200m combined capacity), but this has been partially off-set by the re-entry of Zurich ($100m).

There has also been a significant reduction in capacity for politically sensitive regions such as Venezuela, Iran, and Libya. This hardening market position has been tempered by new capacity from emerging markets such as China where this can be deployed and through Q3 2018 the market has been relatively flat.

Power Insurance Market

Lloyd’s has placed the PG risk code under review and some carriers and managing agents are at risk of being closed down due to underperformance. Swiss Re, Allianz, Aviva and other European company markets are removing or restricting support for coal fired generators who are unable to demonstrate commitment towards feedstock diversification.

The general Property market, in recent years ever more prominent in broker’s Power Generation schematics, are pulling back from this sector following directive from managing agents to focus on their core business. Accounts with attrition are coming under particular scrutiny, with even apparently profitable high rate on line primary offerings being rejected. Even clean renewals are being disproportionately penalised by the Property market, with the most severe treatment being imposed in developing economies with high Natural Catastrophe exposure.

Despite another challenging year in terms of results for the traditional Power Generation underwriting community, business continues with less of a knee jerk reaction to Lloyds’ recent whip cracking, with clean renewals anywhere between flat and 10% up. Recent sizeable operational losses in both Caribbean will negatively affect profitability for the current underwriting year. There remains significant overall capacity and new options for leadership, despite the London market attempts to hide behind the decision making of certain leaders.

Energy Construction Outlook

The market for energy construction remains flat and soft as London underwriters have resisted broker pressure for further rate reductions on some recent and very large projects. Despite this, competition from regional markets remains strong on smaller projects.

Power Construction

Capacity remains more than adequate for any power construction project other than large nuclear or large hydroelectric enterprise with Natural Catastrophe exposure. There is a significant focus on the continued advancement of gas turbine technology; underwriters may focus on maintaining deductibles and manufacturers warranties on newer, larger units.

OIL Recent Developments

On 30 June 2018, the Total Shareholders’ Equity was $3.9bn with written premiums for 2018 totalling $352m compared to $396m in 2017. Losses in 2017 were $467m resulting in an underwriting loss of $71M, but fortunately this was offset by $679m of investment income. In light of these results OIL declared at the shareholders AGM in March 2018 that a further dividend of $450m would be paid by 30 June 2018.

OIL has introduced a new Renewables sector which will be rated in line with the existing Utilities sector until there is a credible database of losses and exposures.  They have also eliminated Offshore Gulf of Mexico Designated Named Windstorm. Coverage from 1 January 2018 due to a lack of demand for the product. They will continue to provide Windstorm coverage for onshore Gulf of Mexico and all other onshore and offshore areas of the Atlantic Basin and the world.

Finally, overall membership remains unchanged with 54 members.

Our recommendations and considerations

Energy insurance buyers are continuing to trade in a fragile insurance market. The broker’s role in maintaining a strong relationship with key lead underwriters in the commercial market coupled with an understanding of all the alternatives available seems to be fundamental to steering clients through these choppy waters as we approach the final quarter of 2018.