The energy market may be undergoing momentous change but a review of the energy insurance sector by broker Marsh suggests both capacity and rates are largely stable.
In the last two years, the combination of an unprecedented number of natural catastrophes, the dramatic fallout from the Deepwater Horizon blowout, fundamental changes to business practices, the shale gas revolution and advances in technology have led some underwriters to think the industry is at an inflection point.
Yet analysis of 2012 risk transfer activity across various sections of the energy industry in the Marsh Insights: Energy Market Monitor February 2013 report suggests that it has largely been a case of business as usual, albeit with some potential challenges for the future.
The upstream energy business (oil and gas exploration) enjoyed an ‘excellent’ year in 2012 with paucity of losses; however there has not been a reduction in rates. This has been due to the fact that many are running risks from the previous year that have not expired and because underwriters have seen reinsurance costs increase by 10 to 20 percent due to losses in other classes, such as marine.
Many underwriters have responded to this by reducing their reinsurance spend and retaining more risks, which has in turn made them more hesitant to provide cover for energy risks.
However, London-based and native underwriters are likely to come under pressure to reduce rates due to competition from reinsurers in Singapore, Dubai and Houston looking to increase their market share.
Meanwhile the downstream energy market (property, marketing and refineries) is finding it difficult to increase rates because of the substantial capacity available in the market, thereby prolonging the status quo of the last two years—a flat rate on a macro basis with regional variations based on cat exposure and local capacity.
Unsurprisingly, Marsh says that cat exposures are receiving close attention from underwriters and although capacity remains high, the higher treaty reinsurance costs underwriters face have seen them increase premiums by up to 10 percent for significant limits.
Offshore construction risk within the energy sector has remained relatively stable. Though the growing number of mega-projects are presenting ‘interesting challenges’ because they comprise multiple surface structures and therefore raise doubts as to whether the project should or should not be broken down into separate component parts in order to create exposure that falls within market capacity. This doubt is somewhat negated, however, by the fact that most mega-projects are undertaken by the largest oil companies that have their own captives writing in excess of $1bn.