Oil price to hit insurance demand and further pressure rates

Oil prices at the start of this week have halved since June of last year as concerns of oversupply in the US and a weakening global economy have pushed prices down to around $50 per barrel. Price volatility is likely to continue with some analysts predicting that the oil price could fall as low as $10 per barrel, while others believe it will soon climb slowly back to around the $100 mark. Energy companies face considerable uncertainty around the future price of oil, according to Andrew Herring, Managing Director, Middle East and Africa, at Marsh's Energy Practice. Oil prices are already being felt in the energy insurance market, according to Richard Palengat, Class Underwriter at AEGIS London, the Lloyd's arm of Bermuda-based energy mutual Associated Electric & Gas Insurance Services Ltd. "We see it when we talk to insureds and it will not be long before we see it in capital expenditure as well as in insurance renewals," he said.hideBrokers and insurers are already starting to see the effects of the lower price of oil, according to Mr Herring. "Energy companies are now primarily focused on reducing fixed costs, and insurance is seen as such a cost," he said. "Premium volume will go down because oil and gas companies will not need the same business interruption limits, while physical damage values will reflect a lower cost of construction and lower contractor fees," said Mr Herring. As the key renewal period for energy risk-between April and July-approaches, energy companies will be putting insurers under pressure to cut rates further as they seek to reduce the cost of insurance, explained Mr Herring. Following relatively good results in 2014, most energy insurers are in a good position to sustain lower returns, explained Mr Herring. Offshore energy rates have been falling in a very competitive market, explained Mr Herring. "The energy insurance market is very soft, with no sign of it reaching the bottom yet. Reductions at the January renewals were significant and sustained," he said. Offshore construction and contractors risks are most likely to see premium volumes fall and experience even greater competition for a smaller pot of premium, explained Mr Herring. Although competition in other energy lines, including onshore energy and liquefied natural gas (LNG), could increase as offshore underwriters look to make up for lost premium, he said. "The impact in the near term will be an increase in competition for energy business. However, the market still has a long way to go before I can see it changing. But the faster it falls the quicker it will turn," predicted Mr Herring. Lower premium volume could dissuade other insurers from entering the offshore energy insurance market, said Mr Palengat. Falling margins may make some underwriters question their participation in the market, he added. However, he predicts that the market will continue to soften in 2015. "Competition will continue but is now less likely to become more severe." he said. The fall in oil price could see some companies reduce retention levels as their tolerance levels for losses reduces, said Mr Herring. Insurance broker Willis is seeing energy clients want to reduce volatility and buy more limit and broader coverage, according to Joe Seeger, Energy Practice Leader for Willis Canada. "We are in a soft market and prices are falling combined with the values being reported dropping as well, the result is more coverage is available for less premium," he said. The impact of the low oil price is likely to gather pace in 2015, explained Mr Palengat. Oil companies will face the 'double whammy' of falling revenues and potentially lower borrowing as banks make lending decisions based on lower oil prices, he said. Oil companies are already beginning to cut capital expenditure. Last month, Centrica said that it would cut North Sea capital investment by 40%. Anglo Dutch group Shell said in January that it will cut spending by $15bn over three years as it reduces investments in exploration and the development of oil and gas fields. A study released this week by Oil & Gas UK suggested big cuts are just around the corner. It says that investment in the North Sea could fall from £14.8bn in 2014 to between £9.5bn and £11.3bn this year, potentially plunging to just £2.5bn within three years as the current wave of large projects are completed. Some analysts argue that the fall in oil price may only be temporary. As a result, larger oil companies could continue to invest in large infrastructure projects and new exploration, banking on a higher price per barrel in the long term, noted Mr Palengat. He noted that large oil groups are expected to reduce capital expenditure by 10%, compared to 30%-50% for mid-sized firms. Smaller companies could invest just 10% of their current spend, he added. The low oil price could see energy insurance claims fall, reflecting lower business interruption values as well as reduced activity, explained Mr Palengat. The high oil price over recent years has seen a steady rise in the cost of business interruption claims, reflecting higher revenues and profits made by oil and gas companies. Lower business interruption exposures-which can 'turbo charge' physical damage claims-may not be a bad thing, according to Mr Palengat. "Premium volume will drop, but in theory so will claims. However the reduction in claims is unlikely to outweigh the loss of premiums for insurers," he said.

Oil price to hit insurance demand and further pressure rates

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