Downstream energy market seeking 20% rate increases: JLT

Downstream energy insurance market customers will find insurers seeking rate increases of up to 20% across their book in 2019, as the sector faces up to a potential “Rubicon” moment this year, according to JLT. The broker also explains that buyers in the upstream market face more favourable conditions at renewal, with increases of about 5% a likely worst case scenario. It is, however, recommending clients take up long-term deals. JLT’s quarterly energy market newsletter adds that following a shakeup in London, worldwide marine hull markets can now be “consistently categorised as hardening”. The broker warns clients that there is a general expectation among downstream energy insurers of rate increases between 10% and 20% across their books in 2019. It notes that there will be a considerable amount of discretion over how these median target increases are achieved. This bad news for buyers is fundamentally a result of downstream losses “trumping capacity”, the broker explains. Underwriting results have taken a turn for the worse in the fourth quarter of 2018, with the market set to absorb about $1.2bn of property damage and business interruption losses in September and October alone. Market estimates place total downstream losses at approximately $3.75bn for the year, which far exceeds the class annual premium pool of approximately $1.75bn. A troublesome 2018 was demonstrably worse for insurers than 2017, which itself saw profound nat cat losses. As a result, management oversight and pressure to turn rates around is “now significantly more acute”, notes JLT. The third quarter of 2018 saw flat rates with some modest uplift, but there was no consistency about how or why such change was occurring, the broker explains. But in the fourth quarter, insurers seem to have “drawn a line in the sand” by not accepting business without rate increases, it adds. The boundaries have been tested and insurers have at last walked away from business even where there have been historical ties and relationships, states JLT. Unless the rating environment improves further there will be withdrawals from the class, it goes on to predict. “For those who have tracked the market through the extended soft cycle, expectations should be for modest rate increases on top of an attractive base environment. For those having taken a more aggressive or opportunist view during the same period and those that have avoided any meaningful repayment of their losses back into the market, it is likely to be somewhat tougher. 2019 could be a Rubicon moment for the downstream market,” the broker adds. JLT says that for the first time in several quarters there is a divergence between energy markets, with the upstream sector still seeing capacity outstrip losses. This has resulted in more favourable conditions for buyers at 1 January renewals, although it seems that even here soft market conditions are a thing of the past. “At 2018 year-end, brokers have continued to reap acceptable renewal terms for clients on the back of excellent upstream loss records and a varied choice of leaders, and more than sufficient capacity options,” says JLT. But it believes the first quarter of this year will see a continuance of 5% or more, as well as rate rise “skirmishes” between buyers and insurers during renewal discussions. “Clients seeking a like-for-like reduction from incumbents are less likely to succeed than in the same period of 2018, but insurers are also sullenly acknowledging their desired 5% rise is probably going to be a best-case outcome on most of the desirable business,” the broker adds. It believes that many modern-day upstream energy insurers have enjoyed profit driven by serendipity rather than a smart business strategy and pricing model. It goes on to warn that regression to a harsher mean will almost certainly happen at some point and therefore it is recommending clients take up long-term deals. Meanwhile, both the upstream energy and marine market are both impacted by actions at Lloyd’s of London. When it comes to upstream energy, Lloyd’s is more fearful and therefore more cautious than in the past. “The recent performance directorate of Lloyd’s has imposed some strict measures to control the performance of the bottom decile of the market. This will have a disciplining impact, encouraging upstream class behaviour to not deteriorate further,” says JLT. The marine sector has seen several Lloyd’s syndicates withdraw from the generally unprofitable class. This has put pressure on rates. JLT says the ripples from London are now starting to be felt overseas, as insurers see an opportunity to put upward pressure on rating. As a result, overall worldwide hull markets could now be consistently categorised as hardening, adds the broker. It notes, however, that different approaches are being applied by different markets. According to JLT, US underwriters are defaulting to type. On underperforming risks, they are simply declining to participate, while still chasing down good performers with competitive premium levels. Far Eastern markets are applying simply generalised rate rises across the board, albeit invariably less than those being applied in London. European markets, and Scandinavia in particular, remain the most consistent, JLT continues. However, their risk appetite remains generally quite narrow, the broker adds.

Downstream energy market seeking 20% rate increases: JLT

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