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Insider in Full: Downstream market ‘past tipping point’ but underwriters resist large rate decreases

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Topics: Claims & Losses Offshore Energy Onshore Energy Rates

The downstream energy market has reached a pricing peak following a dramatic period of rate rises since 2018, but underwriters are currently holding firm against any significant reductions in pricing, Insurance Insider understands.

There was a rapid decline in rate rises in the latter half of 2021, with double-digit acceleration still standard at mid-year, but rates became close to flat by the end of the fourth quarter.

Coming into 2022, underwriters are now looking to increase market share to capitalise on improvements in pricing, and while there is common resolve not to let prices slide, brokers expressed optimism that market forces are beginning to drive down rates.

“I think we are past the tipping point now,” one broker commented.

Insurer growth plans are common across the market, and a number of major players have increased their line sizes, upping competition to secure business.

This dynamic is being reflected in a host of specialty classes across the industry – including D&O, cargo and property D&F – as the insurance cycle reaches a point where carriers are looking to write more business in favourable conditions, with competition from new sources of capacity.

Brokers said the increase in capacity meant deals were beginning to be oversubscribed, leaving underwriters with the choice of either being signed down or altering their pricing or coverage strategy to secure business.

“Everyone else is looking over their shoulder,” one source said. “If someone increases their line by, say, $50mn then that could be the share of one or two smaller markets just gone.”

Underwriters across the market acknowledged a cooling in rating conditions, but cautioned that profitable underwriting years in 2020, and likely profits for some in 2021 depending on major loss exposure, did not necessarily indicate that sustainable levels of rating adequacy had been achieved.

Carriers noted that a benign loss environment – especially in 2020 – had contributed to the results, and large exposures and potential volatility meant it was questionable whether rating adequacy had been achieved.

Last year there were notable losses linked to the Texas Big Freeze, most notably the $600mn+ Dow Chemicals claim.

Queried on rating adequacy, one senior underwriting executive said: “To answer that question you have got to have a normalised year of losses.”

Another underwriter added: “The reality is that a lot of people will not have made money last year. If 2021 was the peak of the hard market, then I would want to be making more money.”

Marsh commented in its latest energy market report: “It appears that rates reached their upper limit in the fourth quarter and are now set to decline. However, there are complexities within this dynamic.

“The insurer perspective is that rates are still shy of technical adequacy levels and there is little headroom to accommodate the anticipated one-in-five-year exceptional impact of natural catastrophe losses.”

The outlook on how the situation would develop in 2022 was divided, with some underwriters optimistic that pricing discipline would be maintained, but some brokers bullish about the savings they could achieve for their clients.

Major writers of downstream business in London include AIG, Scor, Liberty Specialty Markets, Axa XL, QBE, Zurich, Chubb and AGCS.

The insurance cycle kicks in

Downstream is just one of a host of markets to have reached a point of transition away from hardening, as insurers look to pursue growth targets in underwriting conditions which have been transformed since the soft market of 2017.

Some of the largest carriers in the market have increased their capacity, which can end up forcing smaller follow markets off business unless they are prepared to cut their prices.

Sources pointed out that deals were reaching a “crunch point” when it transpired they were oversubscribed, and follow carriers had to produce more competitive terms or risk being signed down.

Brokers said they were more likely to support strategic partnerships with major lead markets, meaning followers were under extra pressure to attract business.

In part, this has led to the verticalisation that had developed during the hard market to have almost disappeared, as followers can no longer extract a premium to lead pricing to fill out struggling placements.

There are also signs of new capacity set to enter the class, with Inigo due to launch in onshore energy later this year under the leadership of Liberty Specialty Markets’ Paul Talbot, and one other large carrier said to be eyeing the class.

It was pointed out that downstream is an attractive line of business to target for underwriting organisations looking to boost their group-wide premium income, owing to the size of the global premium pot, which is estimated at $3bn-$3.5bn.

“The premiums are big in downstream, so this is an attractive area if people want to write for premium,” one source observed.

But underwriters were adamant that the number-one priority was bottom-line profitability, and the gains made in pricing in the last three years could not afford to be reversed.

An uncertain energy landscape

These dynamics in the insurance market are playing out in a period of huge global uncertainty about energy supply and demand.

Oil prices have fluctuated wildly in recent years, crashing to lows of below $40 per barrel in the teeth of the pandemic, before rebounding to over $105 last week following Russia’s invasion of Ukraine.

Sources said the uncertainty around Russian supplies was likely to boost activity in other areas of the globe, where upstream exploration and production, and associated downstream refining, was in many cases put on ice during the pandemic, when oil prices had crashed.

The situation is being watched closely because a resurgence of refining activity is commonly believed to be a significant risk.

Some refining plants were mothballed during the pandemic, and sources noted that any maintenance defects, and resulting losses, were only likely to emerge as the plants were brought back into operation.

In addition, there is the ongoing pressure of the ESG agenda, with the possibility that global uncertainty around fossil fuel supplies may lead to an accelerated shift towards renewables.

Energy insurers are commonly diversifying their operations and upping investments in renewables, but the loss history in the growing class of business is chequered.

 

Insurance Insider delivers global wholesale, specialty, and (re)insurance intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider.

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