Market softening could move towards further rate cuts for downstream energy buyers
But split market means bad risks still face big rate rises
WTW says there is “light at the end of the tunnel” for downstream energy insurance buyers after a “tumultuous” couple of years, with market softening for the best risks likely to spread further and “meaningful” rate reductions on the cards if 2024 proves to be another good 12 months for carriers.
In its April Energy Market Review titled A story of two halves: Navigating the widening desirability gulf, the broker says it is unlikely that current market discipline will last long as insurers come to terms with a new market reality. But the broker warns that the market is currently split, with less desirable risks still seeing big rate rises.
Downstream energy capacity remains stable, with plenty available for most risks and the best placements “significantly” oversubscribed, the report says.
“If all things come together and a client comes to the market with an international placement featuring good local market or captive participation, excellent engineering, up-to-date valuations, and a clean loss record, it is possible to obtain rate reductions in the current market” says WTW.
“As downstream energy continues to be a highly verticalised market, these reductions would likely be achieved through a combination of market rate reductions and the removal of the most expensive towers from the placement structure,” it adds.
Current Tier 1 international clients, described as well-engineered big premium programmes, are currently achieving rate reductions of between 5% and 10%, with those in North America flat to down 5%, says WTW.
Other “clean” Tier 2 international risks are seeing rates down 2.5% to up 2.5%, with the same North American clients getting flat renewals to up 5%. Less attractive “dirty risks” from an ESG perspective and loss-affected programmes – Tier 3 – are, however, seeing “exponential” rises.
And WTW believes that this initial softening could become even more pronounced next year and beyond.
“If 2024 proves to be another good year, we will likely see markets start competing for share, which could send the downstream market once again into meaningful softening,” it says.
“However, based on current sentiment, we are more likely to see a persistent but steady decline in rates than the freefall of recent years, as underwriters do not want to return to rates falling off the cliff again only to spend several subsequent years working hard to recover to a reasonable base rating level,” the broker adds.
Market discipline is holding for now.
“Despite the market starting to soften once again, market discipline persists, and markets are not yet starting to compete so aggressively that they undercut each other. While 2023 looks to be a profitable year for most and some carriers have ambitious growth targets for 2024, insurers do not yet have carte blanche from senior management to provide significant rate reductions and grow the book at all costs,” says WTW.
It expects “some harmonisation” will return to the market this renewal, with the bulk of buyers obtaining small reductions to small rises through 2024.
“For now, at least, markets will continue to fight for flat renewals, with insurers not wanting to be seen as the ones setting the market on a downward trajectory. However, this market discipline will unlikely last for long and reductions are already going through the books, albeit on a case-by-case basis. While some of the early placements in the spring season will require some complex rearranging of towers to achieve the above reductions, as the year progresses, we expect that markets will come to terms with the new reality of the market,” says the report.
Loss activity remains a key focus for insurers, so accounts that have recent claims will continue to take the brunt of rate increases, adds the broker. But diligent clients who focus on risk quality and accurately assess their asset valuations and business interruption calculations can look forward to a calmer approach to this year’s renewals, it adds.
Companies can make savings by smartly controlling their placement structure and using their own retention appetite rather than relying on pure capacity supply pressure, advises the broker.
And it continues to see a “clear difference” in the downstream market’s competitiveness for business, where local markets can be used compared to placements relying solely on London and European capacity.
