Energy Property Market Trends Q1 2021

Upstream Energy

Confidence is returning to the oil and gas industry as the oil price improves significantly from its 2020 lows. The January 2021 edition of this newsletter discussed the concept of a capacity pyramid for upstream sectors. There are now clear signs that insurers are competing for a bigger share of insureds with premiums of around US$10 million at the top of the pyramid. Here, increased capacity, increased competition, and the absence of significant losses in the first quarter, mean price increases by insurers are more difficult to achieve.

Confidence is returning to the oil and gas industry as the oil price improves significantly from its 2020 lows.

Discrepancy between insurers has stabilized and average increases of around 5% were seen over the quarter. However, conditions continue to tighten for smaller business at the bottom of the pyramid. This is due to historical inflation of premiums, poor claims records, and some insurers exiting the market when they are unable to secure minimum premiums in-line with their underwriting requirements.

There is increased interest in offshore construction from following markets, enabling easier completion of programs.

Overall, insurers have absorbed the minimum 10% treaty reinsurance cost increases that they have experienced previously. The insurance procurement outlook for upstream clients definitely looks brighter.

However, it is a different story for United States Gulf of Mexico insureds who buy named windstorm coverage. The market remains tight to hard, with no serious new entrants to challenge the major insurers. Treaty reinsurers have not responded to the excellent results that this class has generated over the years, allowing underwriters to continue to impose extremely high retentions.

The most positive outlook for deepwater assets is likely to be ‘as before’ premium pricing. For fixed shelf platforms, the reasonably priced capacity offered by cargo style underwriters is likely to contract following losses from Hurricane Laura in 2020.

Downstream Energy

Customers experienced improved offerings from the markets during the first quarter. Better loss experience through 2020, coupled with many years of continuous rate increases, and lower than expected reinsurance treaty costs, have seen insurer profit margins significantly improve. Rating levels are close to those of 2012, which some insurers consider a benchmark for sustainable underwriting. However, despite limited new capacity entering the sector, insurers generally, are targeting double digit premium growth in 2021.

The rollout of COVID-19 vaccine programs is beginning to accelerate project work, which will increase opportunity for construction and operational insurers.

The downstream markets have absorbed the impact of COVID-19 with some interesting results. The pandemic has substantially curtailed site surveys, but reaffirmed insurers’ drive to keep rate increases moving. While the feared material losses in the sector have not eventuated, there is continuing focus on the potential effects of pandemics on policy coverages.

Capacity from leading global insurers for downstream property is in the region of US$4.4 billion but with only 50% of that applying to ‘working’ capacity for business interruption and natural catastrophe (NatCat) risks. Business interruption volatility clauses are well established and will be more poignant as customer earnings begin to ramp back up. The rollout of COVID-19 vaccine programs is beginning to accelerate project work, which will increase opportunity for construction and operational insurers. A move back to physical risk engineering surveys (and away from virtual surveys) may be further away as travel is likely to remain restricted throughout the year.

There remains a meaningful difference on expectations between geographical markets but this will likely narrow as the year progresses. The principles of pandemic and cyber resultant damage clauses continue to be hotly discussed. And, we expect to see further scrutiny and evaluation of environmental, social and governance (ESG) issues within the sector.

As we move into the busiest transactional quarter of the year, the markets remain sensitive to both rate movement and loss impact. Substantive or higher frequency of large losses will provide the momentum for upward rate movement, whereas a continuing absence of 2021 loss activity, and increased capacity, will provide a tipping point in the current market cycle.

At the end of the first quarter, rate rises are expected to continue but on a quickly flattening curve.

Power

Traditional Power

Insureds with a clean loss record and no NatCat exposure, continue to experience straight-forward renewals with premium increases around 15-20%. Outside of the US, new insurers are entering the market, which will slow premium increases but may cause over placement and signing down issues on sought after accounts. This is perhaps aided by operators willing to accept higher retention levels, as insurers shift their focus from pricing, towards scrutinizing sub-limits, and tightening terms and conditions.

Virtual risk engineering surveys continue to play a vital role in keeping markets up to date.

Accounts or programs that include coal are still likely to see price increases as the trend for insurers to exit the class is likely to continue. The remaining shallow pool of insurers may use this as an opportunity to increase renewal rates. Therefore, the restructuring of programs and utilization of international markets is likely to become prominent.

The placement process is taking longer due to insurers reducing their capacity, and lead markets delaying the quoting stage to influence price. Road shows, recent engineering reports and a demonstrable commitment to continual risk management, are crucial to prevent tougher market conditions. Virtual risk engineering surveys have been well received by insurers, and in the current circumstances, will continue to play a vital role in keeping markets up to date.

Renewable Energy

During the last quarter, London markets saw an influx of new business, and new capacity, with three new specialist renewable energy insurers starting operations.This is in-line with general industry trends, as energy transition gathers momentum and insurers adapt to the evolving needs of clients.

London markets saw an influx of new business, as the energy transition gathers momentum and insurers adapt to the evolving needs of clients.

Existing renewable energy insurers continue to push for rate increases, to correct poor performance over a number of years. This varies significantly on a project-by-project basis, but even accounts with no losses, and no significant NatCat exposures, are seeing average increases of around 20%.

More positively, it seems that deductibles on renewal accounts have stabilized following corrections by underwriters during renewals in 2020. However, there are exceptions for asset portfolios that have reached the end of their warranty or long-term service agreement period. In these cases, there have been significant uplifts in retention levels as insurers look to limit their exposure.

Early engagement with markets via virtual roadshows and surveys is critical in preparing for renewals or expiry of construction insurances. There has been a significant shift in underwriters’ philosophy and requirements during the construction phase of projects.

Markets continue to tread carefully with respect to unproven or proto technologies and only limited coverage is available until components are tested to prescribed minimum requirements.

As wind turbine sizes increase in both onshore and offshore sectors, deductibles are also increasing to levels similar to the traditional power market. Insurers are taking an increasingly conservative approach towards wind projects following a spate of losses from repeated lightning events, or perceived contractor errors during the construction phase.

Competition in the offshore wind market is improving with the injection of new capacity by traditional oil and gas insurers looking to diversify into this sector. This shift is being driven by the decline in oil and gas production, coupled with increasing focus on ESG requirements.

Overall, the markets continued to focus almost exclusively on wind and solar, and the majority of renewable energy carriers in the London market have discontinued writing hydro, biomass or biofuels, and geothermal assets. Coverage for these asset classes remains available from the power and property markets, but the withdrawal of capacity has led to pricing challenges. Conversely, there is increasing interest in battery energy storage as insurers look to expand their portfolios into new growth industries. As investors and renewable energy developers diversity into the energy storage sector, so too will insurers looking for new revenue streams.

Terrorism

New capacity in the political violence and terrorism market has helped to keep rates stable. The riskier end of the spectrum, which includes pipeline exposure, assets damaged by recent riots and looting, and assets that require the full political violence perils in high aggregate areas, will see higher rate rises. The drone attacks in 2019 on energy and non-energy related assets in Saudi Arabia, are still influencing underwriters in that part of the world.

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