Two-paced upstream energy market falls in favour of buyers

The upstream energy insurance market “could well be at the beginning of a new market softening spiral” as tier 1 risks see rate reductions and increases fall for other placements, but it is currently a “story of two halves” as the desirability gap between good and bad risks widens, says WTW. In its April Energy Market Review, the broker says that the fundamentals for market softening – an oversupply of capacity, a benign loss record and a resulting desire to grow – are in place in the upstream energy insurance market. Trends in the downstream market are covered in a separate Commercial Risk story. It says these factors may well tip the balance further in favour of buyers but as yet insureds aren’t seeing many outright rate reductions offered by lead insurers. Instead, rate reductions are coming through restructuring placements, applying new discounts, and changes to coverages, limits and deductibles, which are receiving more generous credits than they have in prior years, it continues. The report explains that tier 1 risks are seeing rates flat to down 5% this April. Rates are flat to up 10% for tier 2. But rates are up 15% to 25%, or even worse, for tier 3 and loss-affected business. WTW thinks the best risks should now achieve rate reductions in the year ahead. “Looking forward into 2024, the old adage that a flat market seldom stays flat for long, continues to apply. The expectation for the best Tier 1 business should now be reductions even if markets continue to push for flat renewals, and this is especially the case on accounts where the broker can create competition between different leaders,” it says. “Unfortunately, the same cannot yet be said for the remainder of the upstream portfolio, which is still seeing, albeit more moderate, rate rises, causing a widening of the gulf between the different parts of the portfolio,” it adds. Graham Knight, global head of natural resources at WTW, says the “widening desirability gulf” between the “best and the rest” is “great news” for those clients considered upper tier as competitive pressures for this business will most likely drive softening rate trajectories throughout 2024. “Conversely this is less good news for the smaller, less desirable placements, which could face more of a challenge for optimum capacity,” he adds. WTW says until some of the market discipline unravels and new leaders emerge, there is unlikely to be universal rate reductions on the upstream book of business as most of the portfolio is already well subscribed to by the current leadership candidates. It adds that there have been no new entrants to the upstream market since the turn of this year, but it expects some further capacity to enter during the course of 2024 from both new MGAs and existing carriers that have set up new ESG vehicles. The report goes on to say that ESG considerations are now well understood among energy insurers, and most carriers have adopted a partnership approach to support their clients through the transition in favour of applying exclusion policies. It adds that insurers are keen to support clients with emerging exposures from the adoption of transition technologies, such as carbon capture and storage, and are viewing these new technologies, alongside renewables, as a key component of their future portfolio mix. Knight stresses that risk leaders need to consider the longer-term emerging risks on the horizon. “The energy transition, geopolitical developments and the changing macro-economic environment are converging to create new risk considerations that could have a more severe impact on businesses than was previously anticipated. As the whole energy system undergoes transformation, adaptation and strategic decision making will be crucial,” he says.

Two-paced upstream energy market falls in favour of buyers

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