Insurance price increases continue in volatile energy sector

The global energy sector is still facing volatility that is fuelling continued insurance price rises across the sector, according to WTW. However, the broker said insurance price pressures may ease later in 2023. In its Spring 2023 WTW Energy Market Review, WTW said that captives and parametric risk transfer solutions may play an increasing role. Graham Knight, global head of natural resources, WTW, says: “With capacity levels at least matching those of 2022, it seems clear that overall supply remains plentiful. But with more sophisticated risk-management options open to major buyers, the market has to consider the possibility that some of the most sought-after business may be withdrawn in favour of increased captive participations – or even a parametric risk transfer solution – perhaps on a permanent basis.” He adds in the report: “In very general terms, we therefore anticipate a possible easing of these hardening pressures as the year continues, in the absence of major catastrophic losses or other force majeure events.” On the energy liability side, the review notes: “The recent measured expansion in capacity and insurer choice has enabled buyers to build back their overall programme limits to amounts approaching their previous levels. However, many buyers are electing to continue with the significantly increased self-retentions that they were obliged to accept in the recent past, and then selectively top up or infill with new/increased capacity as it becomes available at acceptable pricing levels.” It continues: “As a result, there has been a proliferation of captive activity in the past few years, as buyers were obliged by necessity to self-insure. Many buyers have therefore become more comfortable with including long tail exposures within their captives, which remain a more prominent feature of their liability programme placement strategy.” The review points to challenges facing the energy sector, including the necessity of net-zero transition, dramatic price fluctuations, immature alternative development and adoption strategies, and a fluctuating regulatory backdrop. WTW says the uncertainty resulting from these market disruptions is one factor fuelling continued insurance price increases across the sector. The review covers a range of issues including risk optimisation strategies for a potential recession, with Andy Smyth, who leads the WTW risk and analytics team in London, explaining that insurance managers need to fully understand their key risk drivers, how they may be mitigated, and how different strategies balance cost and the need for protection. It also looks at maximising return on capital through an assessment of insured values, with Justin Paglio, senior director for risk, forensic accounting, and complex claims at WTW, noting that the new inflationary environment has altered the value of assets, and as result, risk managers should re-evaluate them to optimise risk transfer and support a broader exploration of vulnerabilities and resource deployment. Also in the review, Jim Walker, a risk control engineer in WTW’s natural resources business, shows how a lack of competence contributed to many high-profile, historical offshore losses, and explains how a competence management and assurance scheme can reduce risk.

Insurance price increases continue in volatile energy sector

WTW sees captives and parametric solutions playing bigger role

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