Further tightening in upstream energy insurance capacity is expected

A further tightening in upstream energy capacity was expected later in 2019 because of constraints placed by Lloyd’s, said broker Lloyd & Partners, part of JLT.

The broker said in a report that the business plan limits placed by Lloyd’s on medium-to-smaller syndicates in respect of the premium income they write would probably result in a tightening later in 2019. These limits would constrain the ability of syndicates to accept new income. Lloyd & Partners recommended that insureds buy longer-term policies where possible, as the market had a fragile look to it.

The broker had reported that upstream clients continued to encounter a benign purchasing environment in the first quarter of 2019. While insurers had been chasing 5% rate rises, these were “often amicably bargained down to plus 2.5%”.

A few “as befores” were achieved but this was usually due to extenuating circumstances.

The broker said that many clients, recognizing the underlying fragility in the market, strategically elected to accept a slight upward inflation rate trajectory. Capacity was said to be plentiful but, it was becoming more cautious.

Attrition had picked up in the book after a very good loss experience for the 2018 year of account. However, Lloyd & Partners said that luck “played no small part in the good profitability seen in the last two years”.

The first significant new loss estimate to the commercial market in the past two years has been reported offshore Canada in the amount of around $100m.

North American onshore oilfield equipment, which had suffered very poor claims records, saw a spike in prices. “Offshore construction definitely has seen a sea change as insurers’ appetite to chase down rates has evaporated”.

The broker said that there continued to be a number of high-profile out-of-work underwriters seeking posts, as consolidation continued.

“Furthermore, the exit of Standard Club and now Skuld from Lloyd’s shows the creeping effect of the Lloyd’s Performance Board strictures”, the broker said.

It also noted that the primary reinsurance capacity underpinning some insurers underwriting was diminishing and becoming much more limited in choice.

There continued to be a healthy desire to buy North Sea business interruption which the broker said “paradoxically has the potential to cause a market changing price environment due to huge limits at risk.” We very much continue to recommend insureds buy longer term period policies.