Volatile energy market means insurance pricing to remain firm – WTW

Published on Wed, 03/05/2023 - 12:33

Willis Towers Watson Energy Market Review concludes pricing is likely to remain firm, due to market volatility, developing losses and insurers’ fragile profitability.

Insurance broker WTW has released its annual Energy Market Review, revealing  an insurance segment showing  hard pricing discipline and tightened terms, as insurers seek to stay in profit amid market volatility and a developing claims environment.

The short-term effects of the Ukraine War, now in its second year, have included energy security becoming a priority for European political leaders, while volatility in energy pricing has been seen as fuelling a societal cost- of- living crisis.

“In the short term the world is focusing on energy security, and that shift alone makes the energy industry different, while other factors such as energy sustainability and energy affordability are also going to change it in the long term,” said Paul Sankey, head of downstream energy and power, Convex, in the WTW report.

In the medium to long term, the emerging technologies that are behind energy companies’ transition to renewables represent an area of concern for energy underwriters, highlighted by the WTW study.

Many of the technologies relied upon as foundations for the sector’s transition towards a low carbon economy “are simply not ready”, the report warned.

“The many proposed technologies have not been demonstrated at commercial scale, and a large proportion do not yet resemble industrial technologies at all,” said the WTW Energy Market Review 2023.

“The result is that the job of scaling up and commercialising these technologies is, in many cases, in the hands of ‘first timers’.”

Insurance broker WTW provided the following view of aggregate energy insurance pricing changes.

•    Major exploration and production (E&P) programmes: +5%
•    Offshore contractors: +5% to +7.5%
•    Small to medium E&P programmes: +7.5% to +12.5%
•    Midstream: +15% to +20%
•    Offshore construction (platforms): +15% to +25%
•    Onshore contractors: +20% to +30%
•    Offshore construction  (subsea): +30% to +50%
•    Loss-affected business: “exponential”.

Offshore construction inherently unprofitable

Offshore construction was singled out for continued unprofitability, with loss development likely to continue to far outweigh premium income.

WTW said that it was aware of at least one major offshore construction loss in the Black Sea, which it understood “could be as high as $400m”. This, and two other significant well control incidents in North America, are likely to further hit insurers’ offshore construction underwriting performance.

“Smaller projects will also become increasingly difficult to place due to the lack of premium income,” the report said.

“However, not all Upstream insurers will be affected by this; many of them essentially do not write Offshore Construction and their involvement is often limited to small lines only.”

Upstream polarisation

There is “continuing polarisation” of upstream energy underwriting performance, said WTW. Some big offshore operating programmes are seen as attractive risks and attract much greater interest than many of the smaller onshore drilling and midstream operations.

Despite the price rises already observed, WTW warned that large portions of insurers’ energy portfolios remain unprofitable.

Claims inflation is being driven by rising operating costs linked to inflation, the increased cost of reinsurance for insurers, plus a number of upstream losses, leading insurers to conclude that their profitability .

Reinsurance treaties are trending at 30%-to 50% of upstream insurers’ overall costs, the paper highlighted.

“Readers will appreciate that it would only take a medium sized loss, let alone a major loss along the lines of the Deepwater Horizon, Enchova or Piper Alpha tragedies, to obliterate the entire upstream global premium income pool, so perhaps it is not surprising that this is increasing the market’s apprehension as more losses are reported,” WTW added.

Read the full report here