Upstream sees benign year in 2018

Although the downstream energy sector in 2017 suffered its worst loss record for nearly 10 years, upstream energy has had one of the most benign loss years on record in 2017 (under $1.3bn), according to Willis Towers Watson in its just published Energy Market Review for 2018.

WTW said that all areas of the energy insurance market remained relatively stable, largely due to continuing availability of capital in the marketplace.

Capacity once again crept up in the Upstream Property markets, to a theoretical single programme maximum of $7.95bn.

The upstream portfolio appeared to have benefitted significantly from the 2017 benign loss record and remained generally profitable.

WTW noted that conditions in the Upstream market had been uncomfortable for insurers for several years. In previous editions of its review WTW had explained how the Upstream premium income pool had been whittled away over time due to a combination of a number of factors, including excess capacity, lower oil prices and increased captive retentions.

Upstream losses from hurricanes Harvey, Irma and Maria were negligible, the broker/consultancy said. Following the 2017 Gulf of Mexico hurricane season, WTW said that it was widely assumed (but not by all) that increased reinsurance costs resulting from record windstorm losses would lead to a definite Upstream market turnaround. “However, not only were there virtually no direct Upstream losses from hurricanes Harvey, Irma and Maria, but there were also no severe increases in reinsurance market rating levels, except for Whole Account programmes featuring significant Hull exposure”, said WTW.

The broker said that underwriters had been under significant pressure from their own management to raise rates across the board, not least because the overall portfolios had taken a big hit from the 2017 hurricanes. “As a result, the softening process has been brought to a halt and a modest upswing in rating levels has become the norm”, said WTW.

While 2017 saw a significant flattening in the rate of increase of overall upstream capacity, WTW said that, if anything, the rate of capacity increase in 2018 seemed to have increased slightly. This was largely (but not entirely) due to two new start-ups beginning in 2018 whom WTW said it understood were intending to enter the Upstream market for the first time in many years, as well as there being no withdrawals other than Partner Re.

WTW’s research showed that there was almost $8bn of ”theoretical” (i.e. what insurers state is their maximum) capacity – “yet another record level at a time when premium income streams continue to decline”.

In terms of what might be realistically achievable in the market (rather than relying on insurers’ stated theoretical maximums) WTW considered that the same figure that it used last year, $6.5bn, remained the most that any buyer could realistically hope to purchase for a single programme. “It should be pointed out that such a limit would be expensive to purchase (as it would require the participation of most of the market to achieve it) relative to more modest programme limits”, the broker noted.

WTW’s capacity figures confirmed that once more there had been no signs of any withdrawals during 2017. Insurance remained a safe haven for capital in a low interest rate economic environment, and on a macro level any lost Insurance Linked Security capital as a result of the 2017 Gulf of Mexico windstorms was easily replenished. The Upstream sector remained one which contained an unusually large number of programmes featuring attractive levels of premium income – even in the current soft phase of the underwriting cycle, said WTW. The (for upstream) benign 2017 was a case of bullets being dodged.

In terms of catastrophic losses, only two such were recorded by the WTW Database to date in 2017, while in contrast there were 10 such losses in 2015 and four (including a very large BI loss offshore Africa) in 2016.

Neil Smith, Head of Natural Resources P&C at Willis Towers Watson, said that “looking back at the terrible hurricane season in 2017, we can now say with some confidence that the apprehension felt by many energy insurance buyers in the immediate aftermath of these hurricanes has to a large extent been unfounded. Despite the 2017 storms producing well in excess of $75bn of insured losses, the turnaround in market conditions has been much more modest in comparison to other major events of the last decade.”

Smith said that “we recognize that insurers now have to consider whether to continue to invest heavily in these portfolios or to scale back to wait for better conditions to materialise. Both options carry risks, which suggest that the outlook for the energy insurance markets remains an uncertain one.”