Low losses and fresh capacity to drive rates down 20% in energy market: Marsh

In a report published this week on the outlook for the energy insurance market, Marsh noted that the first few months of 2014 have shown 'very strong' risk appetite and 'capacity inflation' in many corners of the energy market. The broker said that new capital streams are, however, changing the dynamics of the market, making it the most volatile it has been for a generation. "Additional capacity created by an influx of capital from private equity and hedge funds could be potentially short-lived if expected returns on investment fail to materialise. Meanwhile, longer-term investments from pension funds could provide greater stability, although we are only just beginning to see this type of capacity impacting the market," said Andrew George, Chairman of Marsh Global Energy.hide"Reduced reinsurance costs, positive results last year (particularly in the upstream arena) and management focus on growth are all pointing to a downward trend in pricing across the key energy classes," continued the broker. Marsh said that after three years of an overall 'stable' marketplace, there is clearly renewed competition, which is good news for energy insurance buyers. "The market is buzzing with talk of 'softening'. Many are now predicting that the softening trend will only accelerate in the months leading up to the key renewal dates of 1 June and 1 July," stated the broker. The report said that there have been a few losses in the upstream market. At year-end, overall capacity had increased to $1bn thus creating approximately $6bn of 'useable' capacity. Marsh noted that there are very few risks that need this level of capacity. A lack of demand puts further downward pressure on pricing. "These two factors are moving the market. If there continue to be few large losses, the situation can only improve for upstream energy insurance buyers," stated Marsh. The downstream energy property insurance market is showing a definite 'accelerated softening' trend as the first quarter draws to a close, said Marsh. "During 2013, the market continued on a stable path for the first three quarters, with a slight upwards trending on a general account basis. However, as we approached year end, it became clear that the market was prepared to offer flat rates and perhaps even slight rate reductions on a global basis," noted the broker. Marsh pointed out that natural catastrophe exposure continues to be closely watched by the market. The low level of natural catastrophe losses to hit the energy market in recent times, particularly the lack of natural catastrophes in the Gulf of Mexico, has resulted in a softening trend for natural catastrophe rates this year, said Marsh. "This softening trend has also been driven by the availability of more competitive treaty reinsurance capacity as a result of large rate reductions on treaties during the major 1 January, 2014 renewal season," added the broker. Programme retentions/deductibles remain stable currently, according to Marsh Energy's analysis. Current 'standard' deductible levels have helped reduce the frequency of losses, adding to the stable and even softening market conditions, said the broker. Any energy firm that attempts to reduce retentions will be penalised heavily by the market, added Marsh. The softening market has persuaded some clients to take higher retentions if they are comfortable with the additional exposure, said the broker. "This is on the basis that significant additional rate reductions can now be leveraged from the market in recognition of higher retentions. The increased retention gives the market a reason to grant an even more aggressive reduction in rates," stated the report. Contingent business interruption exposure continues to be 'reviewed closely' because insurers demand more information than in the past for 'unusually high' limits of liability, stated the broker. Marsh said that 'verticalisation', by which insurance buyers and brokers build a programme with a number of competing insurers that offer their own terms, remains an active part of the market. But the broker said that as market rates ease and many accounts become significantly 'over placed' this practice will diminish as markets realise they will 'lose their order' if they do not follow the lead terms. "Now is the time for clients to seek to consolidate terms behind a single competitive lead. This can result in very attractive overall composite price reductions as the most expensive capacity is leveraged to fall into line," stated Marsh. Overall, Marsh energy believes that, absent of any market changing events, significant rate reductions in the range of 20% will be standard in this market for preferred risks this year.

Low losses and fresh capacity to drive rates down 20% in energy market: Marsh

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