Capacity shrinks in ‘bleak’ downstream market: Willis

Downstream energy buyers face tightening insurer capacity for the first time since the 2001 Twin Towers attack in New York, according to Willis Towers Watson’s Energy Market Review 2019. Coupled with heavy losses, rate increases are persisting as “the fight to survive for some insurers is now entering a decisive phase”, it adds. Willis says that “almost every” energy programme “will now be subject to some form of rating increase”. The exception is the burgeoning energy insurance market in China. While rate increases in upstream and liability will be mild, downstream and construction increases are pushing through in double digits, explains the broker. Underwriters “are in an unforgiving mood” as they face up to some difficult realities about the future, it adds. “The prospects for this portfolio look bleak unless there is some improvement, in what has been a disastrous couple of years for these insurers,” Willis states. At the same time, it notes that rates in the hardening market are still running 30% lower than 20 years ago. Capacity in downstream business has decreased from $6.8bn to $6.2bn, Willis explains. This contrasts with the upstream market, where capacity has increased from $7.7bn to $8.1bn and sits at a record high. European buyers are finding tighter restrictions on capacity than those with stronger local markets in the Middle East and Asia-Pacific, Willis notes. Following several loss years, downstream energy recorded “another gruelling” year in 2018 and more recently was hit by losses in Darwin, Australia, which Willis says are “causing serious concern in an already reeling construction market”. Willis says losses have yet to be finalised for 2018 but although not as “catastrophic” as 2017, they will still be damaging. Downstream losses totalled $15.65bn between 2015 and 2018, against an estimated premium pool of $8bn, Willis says. It found a “worryingly high percentage” of business interruption losses that accounted for $7.33bn, or about 50%, of the total. “From London to Miami, from New York to Dubai, from Zurich to Singapore, the story has been the same – consistent underwriting losses which have brought downstream portfolios all over the world under increasing scrutiny from regulators and management,” Willis states. In line with findings from Marsh’s recent energy report, upstream business is running in a different direction. Capacity has increased and losses were mild in 2018, dampening any potential for stronger rate increases. Willis says losses for 2018 totalled just over $1bn, compared with $5bn four years ago. But Willis says Q1 2019 has brought a more “challenging” market for buyers and a harder trading environment. Willis says land rig and other onshore losses are a concern for upstream insurers. While the line is reporting underwriting profits, “we don’t believe it would take much to change this, should the current mild loss record deteriorate”, adds the broker. At the same time, record levels of capacity are not necessarily available to all buyers. Willis says well-known and trusted buyers will benefit most from capacity. “Insurers are now under much less pressure to underwrite for premium income and so no longer feel that they have to participate on every programme they are offered; they are therefore deploying their maximum capacity on fewer and fewer occasions,” according to Willis. It says risk managers need to reinvent the way they present their risks across the energy portfolio. “In this challenging market environment, we have to adjust to the way in which energy industry risks are identified, collated and presented to insurers in an era where ‘big data’ is king, and we have to be relentless in our pursuit of fresh ideas that produce valuable new products and services for the energy industry,” commented Graham Knight, head of natural resources GB at Willis Towers Watson.

Capacity shrinks in ‘bleak’ downstream market: Willis

Want to read this article?

Read Next

Action needed to bridge $800bn Asian climate finance gap

Courage and collaboration needed to manage emerging construction sector risks

Dubai floods put $8bn of aircraft at risk, estimates Russell Group

Munich Re ‘more likely’ to exceed 2024 profit target after €2.1bn gain in Q1

Insurance Europe calls for EC to ‘get it right’ on Solvency II

Action needed to bridge $800bn Asian climate finance gap

Courage and collaboration needed to manage emerging construction sector risks

Dubai floods put $8bn of aircraft at risk, estimates Russell Group

Munich Re ‘more likely’ to exceed 2024 profit target after €2.1bn gain in Q1

Insurance Europe calls for EC to ‘get it right’ on Solvency II

Want to read this article?

Read Next

Action needed to bridge $800bn Asian climate finance gap

Courage and collaboration needed to manage emerging construction sector risks

Dubai floods put $8bn of aircraft at risk, estimates Russell Group

Munich Re ‘more likely’ to exceed 2024 profit target after €2.1bn gain in Q1

Insurance Europe calls for EC to ‘get it right’ on Solvency II

Related Articles