‘Savage’ upstream energy conditions threaten capacity exists, warns Marsh JLT Specialty

Marsh JLT Specialty has warned that “savage” conditions facing upstream energy firms are likely to be made worse by insurance capacity withdrawals. In its latest energy report, the broker says the crisis facing upstream energy companies – fuelled by Covid-19 and a collapse the in oil price – is worse than any in living memory. While reduced output could be recognised with lower premiums, the big risk for insurance buyers is underwriters pulling capacity to manage volatility and declining premium levels, it adds. “The savage downturn sweeping through the industry in mid-March 2020 is expected to exceed the trauma of the 1985, 1999 and 2014 oil price crashes. Clients are having to deal with an abundance of issues; any one taken in isolation would be challenging but the combination will result in an existential crisis for some. Coronavirus, Saudi-Russia supply surges, the shock to the world economy, a loss of confidence by Wall Street/the banks/private equity in the oil and gas business model, climate change, renewables and electric cars are providing unprecedented trials for our clients,” Marsh JLT Specialty states. It notes that before the current crisis, capital and coverage in the upstream energy market were at their highest ever levels, with a healthy uptick in capacity at the start of 2020. But with demand expected to slow, capacity will follow suit, it warns. This will also be driven by a spike in attritional upstream energy losses, including $50m from three offshore blowouts in the past nine months and a $100m loss from two onshore shale blowouts in the US, the report says. Upstream energy rates set by line leaders have been up about 2.5% at renewal, Marsh JLT Specialty notes. But with surplus capacity needed on most policies, many markets have competed for preferred signed lines. While the Covid-19 pandemic will affect insurers through insured or investment losses, Marsh JLT Specialty says this should not be taken out on upstream energy buyers, where the current crisis runs much deeper. “Although there is likely to be weakness in insurers’ profitably, it is trumped by extreme circumstances impacting the oil patch. The insurance sector from 2014 to 2019 did not in any way suffer in the same way the oil and gas industry did, and this fortunate position should now be remembered by underwriters as insureds revisit the challenges of 2015-2016,” the broker says. Upstream energy has been an outlier in the energy market. Other sectors, led by downstream energy, have been hit with substantial rate rises. Rates in the downstream energy market on renewal are up 30%, although some risks are running even higher increases, Marsh JLT Specialty says. The broker adds that target rate sustainability from insurers is moving at a faster pace than originally anticipated. Midstream business is afforded a marginally lighter touch, Marsh JLT Specialty says, although is dependent on risk profile. In power lines, rates are running up 20%, with higher rates imposed for more troubled accounts. Downstream energy insurers are tightening up, the report says. They are also taking a keener interest in clients’ asset valuations and earnings volatility, it adds. Insurers are likely to impose business interruption volatility clauses, the report continues. Capacity is an issue in downstream energy. “Capacity continues to leak,” says Marsh JLT Specialty. But it adds that “the market is becoming a real opportunity for capacity that has either not previously participated in this space, or remained shelved for the last number of years, and it is likely that this opportunity will be seized upon in the near term”. And downstream energy losses have been within range, the report says. “Insurers are in a better place at this point of the calendar than they have been for some time,” it explains.

‘Savage’ upstream energy conditions threaten capacity exists, warns Marsh JLT Specialty

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