Abundant energy sector capacity could see price softening in 2024

Market capacity across the whole energy sector remains abundant, despite the significant loss activity across the sector in the last two to three years, according to WTW. The broker said it believed the energy market is on the cusp of a return to the softening phase of the market cycle in 2024. In its Energy Market Review Update: The price paradox: Decoding energy markets in a dynamic landscape, WTW states: “We view this continued commitment by capital providers and the market as a whole as a sign that they view this increased loss activity as a momentary blip rather than a long-term trend, and that they are willing to continue supporting energy clients in the foreseeable future.” It adds: “Looking forward to 2024, the continued abundant capacity, when combined with the increased risk selection now deployed by insurers, is set to increase competitive pressures on the most desirable business, and we believe that we are on the cusp of a return to the softening phase of the market cycle in 2024.” For global upstream business, WTW says in the update that the market is more selective on construction business than the broker has seen for a long time, and it anticipates that this enhanced risk selection will continue into next year. WTW points to potential capacity increases at 1 January 2024 for several insurers, which will lead to a drive for market share and further soften pricing levels. “Significant additional portfolio losses and increased reinsurance retention levels in 2023 will mean that insurers will carefully evaluate the requirements for a profitable book of upstream business going forward. They may find it nonetheless difficult to achieve the required rate increases. If markets cannot achieve the rate movements needed, they may instead explore more cost-effective ways to write the business. This could see a rise in the use of managing general agents,” says WTW. For the global downstream market, the update says that “all signs are positive for 2023”. It notes an increasing appetite from insurers to offer long-term agreements to their most favoured clients, “a sure sign that insurers believe we are at the top of the market and are looking to lock in current pricing levels”. WTW adds that in a new development for the downstream market, it has seen “some non-cancellable long-term agreements offered to well-engineered blue-chip clients, including with rate reductions in subsequent years in recognition of the likely change in the market cycle. Insurers are seeking to secure their position on preferred business over a longer time horizon and this development could in fact serve to soften the market even further. Overall, all signs are positive for a shift in the market cycle in buyers’ favour as we look forward to 2024.” The update says there are several conflicting factors that will influence international energy market pricing and capacity in 2024, including concerns about social inflation, the deterioration of prior loss reserves, a diminution of facultative reinsurance capacity and a desire by some direct insurers to trim their exposures and line sizes in respect of energy liability business. “In contrast, we anticipate some new capacity in 2024, regional markets are increasingly competitive, and there is a possibility that treaty reinsurance renewal prices may ease,” says WTW. “We expect to see further easing of existing rate increases with average rate increases dropping to low single digit in 2024. Will the nirvana of flat rate or indeed price reductions be reached soon? In some limited cases and territories, it already has, but the smart money is on a forward budget approach of mid single digit for the rest of 2023, easing to low single digit for 2024.” However, the broker adds that this differs by industry sector, with risks that have greater offshore, marine, US or pipeline exposures expected to attract higher increases.

Abundant energy sector capacity could see price softening in 2024

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