Downstream energy insurance buyers faced ‘bruising’ Q2 rate hikes in two-paced market

Downstream energy buyers have been hit by “bruising” rate increases in the second quarter of this year, but those accessing the upstream market have incurred rises of no more than 2.5%, and in some cases none at all, according to the latest update from Marsh JLT Specialty. Median rate increases of 10% for downstream energy buyers during the first quarter of 2019 were pushed up a further five points during Q2, said the broker. It added that rate rises have further to go and “look likely to accelerate as the year goes on”. A recent fire and explosion at a refinery in Philadelphia is likely to result in a loss of multi-hundreds of millions dollars and strengthen resolve to raise rates further, Marsh JLT warned. It said higher rates in downstream have been led by London, followed by the Middle East, with Asia recording single-digit increases. So far, Marsh JLT said buyers have been “tolerant” of rate rises, which follows falling rates in recent years. However, it said the buyer/insurer relationship is fragile. “Such tolerance is likely to be tested should certain sections of the market act without a modicum of care for established business relationships,” it added. The broker noted that downstream “market stress” this quarter was driven by a lead insurer “drastically cutting large capacity shares throughout [its] renewal book” globally. In addition, Marsh JLT said “late notice” from the insurer sent brokers scrambling to replace capacity. “It is a sanguine lesson for those clients that put any faith in insurer-business partnerships and who now appreciate that when the chips are down such relationships may count for little,” Marsh JLT said. The broker went on to explain that a quiet first six months and record renewals in the upstream energy market have limited rate hikes for buyers. In particular, Marsh JLT said insurers were “generally unable to secure increases” for Gulf of Mexico named-windstorm renewals. However, securing upstream cover has become more uncertain for buyers, continued the broker. It said an uptick in oil industry activity has boosted upstream energy premiums, which had fallen to record low levels. “There is now sufficient income to allow insurers to walk away from business they do not like the terms of, which was a rare occurrence in previous quarters,” Marsh JLT said. During the quarter, the withdrawal of a major buyer in favour of self-insurance upset the finely balanced supply and demand, which Marsh JLT said “led to a signing-down battle on several accounts”. Buyers in the offshore construction market are finding cover more difficult to find, as lead insurers look prepared to lose market share in favour of dealing with losses in the 2017 year of account, said Marsh JLT. Meanwhile, following insurers are turning away cover for long-tail projects. Marsh JLT said it has become “difficult to complete large projects where there is no captive or mutual involvement”. Capacity in the insurance market for conventional power assets has stalled any significant increases in rates, Marsh JLT explained. Lloyd’s named power as one of seven underperforming classes of business as part of its 2018 review, pressuring underwriters to lift rates. So far, buyers have met single-digit increases for non-CAT-exposed assets, with potentially double-digit increases for those with loss history or CAT exposure. “There is a shift in underwriting strategy away from premium growth to risk selection combined with rate increases. As clients look for alternative options to compare with their local offerings, London and other central hub markets are able to offer further options under the current environment,” Marsh JLT said.

Downstream energy insurance buyers faced ‘bruising’ Q2 rate hikes in two-paced market

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