Slowing rate increases in energy sector, says Gallagher

The global energy market is seeing varying rate increases depending on loss records for upstream risks and relatively low rate rises for midstream risks, while the end of a hard market cycle for downstream risks may be near, according to Gallagher’s Global Energy Insurance Market Update June 2022. However, there are challenges, such as the impact of inflation, natural catastrophes and nuclear verdicts in the US, but these are somewhat tempered by increased capacity and new entrants to the sector. Upstream Rates in the upstream market have generally remained stable but Gallagher explains that there is a split in the market, with businesses with large-scale assets and good loss records seeing an abundance of excess capacity available and intense competition, while pricing for large national and international oil companies is either flat or experiencing low single-digit rises. However, clients looking to cover smaller-scale assets may face higher minimum premiums, as the market tries to maximise return on capital across the upstream sector, says Gallagher. Mid-market onshore portfolios may see high single-digit to low double-digit increases, the broker adds. “A growing number of underwriters are imposing minimum premium levels on small businesses or introducing artificial rate rises, as capacity is lower for these size of risks,” it says. As for midstream risks, Gallagher says that an increase in year-on-year available capacity means that rate rises for most midstream risks have stayed low since the last quarter of 2021. “Capacity in the upstream market is often proving to be a source of more competitive terms for midstream clients, particularly when coverage is for infield assets, so we have seen some shifting of clients from the downstream to the upstream market. For clients that are growing, the upstream market also offers the advantage of being able to use credits for scale, which tend not to be a feature in the harder downstream market,” the report notes. Downstream Gallagher says the first few months of 2022 suggest that we may be nearing the end of a hard market cycle for downstream risks, with those clients with good loss records that can also show effective management of natural catastrophe exposures benefiting the most. “We appear to have reached a levelling-off phase in rates, where flat to single-digit rises are more the norm, and small reductions are becoming achievable with underwriters . But where insureds still have poor loss records or assets are in locations at a greater risk of natural catastrophes, we are still sometimes seeing meaningful rises in rates,” the report states. The broker says capacity has remained broadly stable during the first quarter of 2022, estimating realistic capacity at about $4bn for international programmes and $2.5bn for North American programmes. “The amount of capacity available is part of the reason lead insurers have not felt the need to impose harsher terms on policies during the past few years. Although pricing conditions are improving for many clients, there is still a trend for tightening of certain terms and conditions,” Gallagher notes. Energy casualty New entrants are boosting competition and increasing capacity in the casualty market. Gallagher says for North American energy casualty, the overall picture is bright for this market but some challenges remain in relation to wildfire risks and some midstream coverage, as well as the effects both of inflation and of ongoing litigation linked to nuclear verdicts. Pricing for these risks is reasonable, says the broker, especially for loss-free business, and there is still ample capacity in this market, including for additional top-up excess layers of coverage which has helped stabilise the market, with rate growth slowing and even some rate reductions. For international energy casualty, capacity appears sufficient at present, says Gallagher, and buyers have an adequate choice of insurers and coverage. Rate increases have been relatively gentle, it says, with renewal discussions typically starting at about 5%, following year-on-year increases during each of the past three years. Power The report says the power sector is seeing more modest increases in rates than in the previous 12 months, despite significant cumulative loss activity during 2021, and new capacity has helped to boost competition. “Power clients who have substantial exposures to natural catastrophe perils have seen only modest increases in rates. While insurers’ appetite and capacity for these risks are both still relatively limited, clients with renewals during the first half of 2022 will have been pleasantly surprised by lower rate increases than those experienced in previous years,” the report states. Finally, the report says 2022 is seeing a more consistent approach to renewals for renewable energy, and new or boosted capacity is supporting competition. It says insurers’ expectations for renewals are generally between flat and 10%, with rate reductions now being achieved in certain circumstances.

Slowing rate increases in energy sector, says Gallagher

Increased capacity and competition but concern over inflation and nat cats

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