Global energy sector rate increases plateauing, says Gallagher report

Rate increases in the global energy sector are beginning to plateau, according to a Global Energy Insurance Market Update from Gallagher. However, some energy sectors are seeing continuing capacity withdrawal on environmental concerns as a result of pressure on insurers from environmental, social and governance (ESG) lobbyists. Such sectors include oil sands, coal-fired power generation and some offshore drilling activity, notably in the Arctic region. The upstream market has seen on average single-digit rises in the range of 2.5%-10% at the half-year mark, while the midstream market remains in its hardening phase with rate rises, although the market stance is softening. While new underwriters have entered the upstream sector for 2021, overall capacity is more or less flat, perhaps marginally down. Rate increases are dependent on loss record and profile, according to the report. “It is often more complicated than a blanket rate rise across an account; rather sections such as LOPI and control of well are being peeled back and scrutinised, and will be the reason for overall policy rises… there still seems to be excess capacity for many upstream accounts, especially for business that is larger in scale and with attractive loss records. Whilst rate momentum has continued into Q2 2021, we are seeing this in slow to low single-digit rate increases. Where market competition can be established and placements are able to be remarketed, we are seeing the first examples of reductions,” it states. However, rates have increased on construction business by about 10%-15% along with deductibles, and large projects continue to be challenging, with limited appetite to offer subsea elements, says Gallagher. It notes that the ESG movement within Lloyd’s is growing and poses a potential problem for underwriters, as this could isolate risk appetite. Last year the downstream market made a profit for the first time in a number of years, and the rate rises seen during the past 18-24 months are beginning to plateau, states the report, with those insureds with good risk engineering and a good loss record now looking at 10%-15% rate rises, compared to the 20%-30% seen in early 2021. “We believe we may be close to reaching the crest of the hard market cycle,” says Gallagher. On the capacity side, Gallagher says it has not seen a large influx of new capacity, and there has not been a marked change in the supply versus demand balance. It estimates capacity will remain fairly constant at approximately $4bn. “Insureds with a policy limit beyond $1.5bn are faced with a challenge to complete a placement at a cost which is not considered to be too prohibitive. For risks in cat-exposed areas, the access to competitively priced capacity is even more challenging,” the report states. Gallagher says that while 2020 was a challenging year in the energy casualty sector, with key capacity withdrawing altogether or significantly reducing appetite, there is some positive news for 2021, as rates are beginning to stabilise. The same is true in the renewable energy market, with rate increases at the start of 2021 typically in the range of 10%-25%. Covid-19 continues to present challenges, particularly for risks where onsite engineering is required, says the report, but insurers and insureds are adapting well to the use of remote technology, although it is far from ideal. Rates in the power market are still rising, albeit perhaps a little slower than at the start of the year, and the market is also showing a slightly greater appetite for clean/good-quality business, states the report. “There is still a high level of underwriting discipline, but hopefully we are getting to a point where there may be the possibility of introducing some competitive tension between markets. This may be further encouraged by the recent emergence of pockets of new capacity and increased growth targets in certain areas. We are still encouraging our clients to have an early engagement with underwriters and provide as much comprehensive/updated risk information as possible,” says Gallagher.

Global energy sector rate increases plateauing, says Gallagher report

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