Differing drivers
Upstream – a competitive market, but watching international developments We are likely to see a modest increase in Upstream capacity levels in 2019, due mainly to increased participations by a handful of Chinese insurers. Some Chinese insurers have improved their Energy reinsurance treaties while others are taking reviewing their Upstream portfolio expansion strategy. The Chinese market now can offer approximately US$450m of capacity available for risks with Chinese interests; otherwise the realistic amount of capacity available is severely reduced. Lloyd’s China also has the ability to increase the overall capacity level. The majority of Chinese Upstream insurers can offer underwriting security at Standard & Poor’s (S&P) or above.
Rating levels offered by the Chinese Upstream market are generally slightly more competitive than international markets. However, they are very keen to follow the hardening trend globally although it is still possible that their portfolio will be profitable for the last fiscal year.
Some insurers may well be feeling the effects of a reduced premium income pool during the course of the Q1 2019 renewal season. However, at the time of writing it would be misleading to suggest that the entire Chinese market will continue to be competitive in terms of rating and price levels; they have one eye firmly on developments in the international market outlined elsewhere in this Review.
Su Ke is Deputy Head of the Energy Department, Willis Towers Watson CRB China.
Downstream – becoming more cautious in light of recent typhoon losses Underwriting capacity in the Chinese Downstream Market remains abundant in 2019, as there was little change in terms and conditions of non-marine reinsurance treaties during the January 1 renewal season. A recent placement of a major complex shows the total working capacity of major insurers has increased – as much as RMB 40 billion (US$5.89 billion) on a Total Sum Insured basis.
General rating levels for Downstream business in China are lower than other countries in Asia. Rating reductions are still possible due to the degree of competition between markets and brokers and the buyer desire to control costs.
Meanwhile the underwriting philosophies of some of the major players have slightly changed to become more cautious following several typhoon losses in 2018, but only for the provinces affected, for example Guangdong. For refining and petrochemical risks, the focus has switched to underwriting profitability rather than pure premium income generation.
For complicated placements, more buyers (including cedants) are now more aware of the need to seek assistance from brokers and consultants.
Eric Wang is Head of Downstream Energy, Willis Towers Watson CRB China.
Refocussed appetites The Middle Eastern reinsurance market for oil and gas business has undergone a process of change throughout 2018 and beginning of 2019, with many reinsurers refocusing their appetite towards risks of this nature as a consequence of poor underwriting results in the sector (regionally). These regional results, compounded by insurers’ wider natural catastrophe experience further afield, has impacted what has been a competitive market place for a number of years.
Tighter underwriting discipline As with other regional marketing hubs, the general shift away from market softening and tighter underwriting discipline has become a dominant factor of the Middle East reinsurance market. However, the Middle East remains a key reinsurance market place, despite some of the trends mentioned herein.
Back to the centre as run-offs increase A number of reinsurance branches across the Dubai International Financial Centre (DIFC) and wider Middle East have refocused their efforts back to centre in terms of underwriting authority following a number of high profile Energy losses in the region and a general change in attitude toward the Property & Casualty and Energy appetite in the region.
Reinsurers and reinsurer branches in run-off in the region include but are not limited to HDI Bahrain branch, Aspen Re DIFC, Partner Re DIFC, Qatar Re DIFC and Lloyd’s Talbot DIFC. However, the region has been bolstered by ratings movements for reinsurers, including Trust Re and ARIG.
Retrenchment of capacity Whilst new capacity has entered the fold including Berkshire Hathaway Specialty Insurance (BHSI) in Dubai, retrenchment of Energy capacity from the region has taken place to a degree with the reinsurers mentioned above participating widely on energy risks in the region. This has led to brokers having to actively replace double digit percentage of incumbent capacity.
Selective underwriting approach Added to the exit of capacity from the region, for the capacity which remains (which still remains a key reinsurance marketing hub) there exists a more selective underwriting approach amongst the reinsurers and in some cases authority for the Energy sector sitting within Head Office rather than branches in the Middle East and further afield. This results in risks being referred from branch underwriters to their respective levels of authority in London, Europe or the US.
Focus on risk quality Risk quality remains a key theme in this marketplace, where increasingly, detailed underwriting information, not limited to up to date risk engineering, and an active risk recommendation strategy focussed towards progression of recommendations amongst clients, have become a pre-requisite for underwriters to view risks from this sector positively.
All of these factors put a greater onus on brokers and clients in terms of the access point for reinsurance capacity, be it regionally through the DIFC and Middle East market or through traditional marketplaces such as London.
Will Peilow is MEA Regional Leader, Downstream Natural Resources GB at Willis Towers Watson.
Reduced Lloyd’s footprint The composition of the main Downstream markets in Latin America/Miami remain pretty much unchanged. Interest in the value chain all the way up to midstream risks is available, with more appetite for the latter. The Lloyd’s outfits that are represented in the region have either reduced their participation or are no longer writing these risks. Programs will continue to be placed with a mixture of regionally available capacity and the London markets; the mix will depend on complexity, exposure and client preference. Upstream risks will more likely be placed via London, as regional and Houston markets will offer reduced capacity, especially for Offshore risks.
As in other regions, the general trend among leading markets is to push for rate increases, driven mostly by global trends than by the specific results of their regional Downstream portfolio. Programs requiring capacity above US$500 million have experienced increases, even with loss free records. Other terms and conditions have remained unchanged and for now clients are tending to compromise on price rather than looking at alternatives such as modifying their terms and conditions.
AIG reopen Miami energy operation The overall regional underwriting philosophy remains in sync, with global direction set out by different insurers. The major exception is AIG, which has reopened their Miami operation following the acquisition of Talbot; however, its capacity level and market appetite remains to be seen. Meanwhile Axa Corporate Solutions has recently signalled its interest in the Downstream class.
More volatility expected in Downstream As fundamentals in the Latin American Oil & Gas sector remain strong and the industry continues to expand, the insurance market dedicated to these segments is expected to have a dynamic 2019. With clear Upstream opportunities in Brazil, with the next round of Pre-Salt blocks, as well as Argentina with Vaca Muerta, the market can expect increased activity. Colombia and Mexico should continue their modest investment in the Upstream sector. However, in the Mid-/Downstream arena, we should expect some increased volatility in the market.
Mark Kabierschke is Energy Regional Industry Leader, Latin America at Willis Towers Watson.
Supply contraction evident in US market US Energy market capacity is stable, but could be viewed as contracting as markets are reducing their shares and a couple of insurers have withdrawn from the market. Rating increases are at least at single digit level for every programme; accounts with natural catastrophe exposures and/or losses need to be negotiated firmly to obtain reasonable renewals as insurers’ opening prices are starting from a very high level by recent underwriting standards.
There has not been much change in underwriter movements/ or underwriting philosophy; in any event, “line underwriters” are powerless to make decision beyond a certain point. Many final decisions on renewals are being elevated to higher and higher levels within the insurer hierarchy, often ending up with the Global Head.
A more consistent market later in 2019? In terms of the outlook for the remainder of 2019, we believe we may see a more consistent market in second and third quarter of this year. In their enthusiasm for change, some insurers may have “pushed too far” in the early going and have lost a significant proportion of their market share. If this trend continues we may see the rate of market hardening flatten out and a reduced number “edicts” from senior management.
Meanwhile buyers continue to look to analytics and modelling to assist in differentiating their programme in the insurance markets. Relationships still matter, as do face to face meetings.
Paul Chirchirillo is Head of Chemicals and Downstream USA at Willis Towers Watson.
Increase in Upstream capacity accessed through Norway The Upstream market capacity which can be accessed by our Nordic network of offices increased during 2018. Our estimate of the theoretical maximum capacity which is accessible directly by our Nordic offices for any one risk is US$3.5 billion, including locally based Managing General Agents (MGAs) underwriting on behalf of Lloyd’s syndicates.
Gentle hardening evident in Nordic markets – but upswing may be less pronounced Notwithstanding this, the status quo for ‘clean’, like-for-like renewals is flat to +5% rate increases, with +2.5% increases typical at the time of writing for the very large programmes (perhaps a touch more for clients with a more modest premium spend). In general, the Nordic markets offered more modest reductions during the recent prolonged softening market, and our expectations are that on the flip side of the coin, if we are to witness a period of hardening, any rate increases will also be more modest and slower to be introduced when compared to the London market.
Beazley close Oslo office In terms of underwriter movements, after consultation Beazley closed their Oslo office in February this year1. The London underwriting team have assumed responsibility for the underwriting of the Oslo portfolio run off, and Beazley will accordingly not be binding any new business or renewing any business through Beazley Solution Limited Oslo. Other than this development, the market is relatively stable, with little movement to report in terms of personnel.
Energy industry upturn welcomed in Nordic region Looking further ahead into 2019, the energy industry in the Nordic region is looking forward to improving trading conditions later in the year. Buyers are starting to drill more wells and developments which had been previously shelved are now starting to move again. M&A activity is high; we are aware that there is significant Private Equity money looking for suitable opportunities and a number of start-up companies looking for quality assets in which to invest the Private Equity money they are backed by (as outlined in more detail elsewhere in this Review). We therefore expect improved conditions for Upstream insurers in the months and years to come, as activity picks up and some of these new companies who are currently sat on the sidelines enter the market seeking insurance coverage.
As an example, Norway is looking forward to ‘first-oil’ at the giant Johan Sverdrup field currently scheduled for November 20192. At plateau production this field will likely be producing 25% of Norway’s entire daily production output with an expected production rate of 660,000 barrels of oil per day3. Johan Sverdrup is one of the five largest fields ever discovered on the Norwegian continental shelf. The recent placement of operational insurance coverage into the commercial market for the Johan Sverdrup assets was very significant; what is noteworthy is that this was one of the largest placement in terms of limit and total capacity requirement ever attempted in the Upstream market. It involved truly eye-watering numbers, with the majority of the Joint Venture (JV) now insured in the commercial market.
Changes to JV ownership in Denmark In Denmark there have been significant changes to the JV ownership of the DUC assets, with Total becoming operator in 2018 having acquired Maersk Oil4, subsequently also buying Chevron Denmark. Noreco, via its wholly owned subsidiary Altinex, announced it is to acquire Shell Denmark’s upstream assets5. The hugely significant Tyra Gas Field Redevelopment project is underway with shut-in of production at Tyra anticipated in November 20196.
James Locke is an Executive Director at Willis Towers Watson AS, Oslo.
1 https://www.postonline.co.uk/lloydslondon/3887136/beazley-to-close-oslo-branch-next-year 2 https://www.offshore-technology.com/projects/johan-sverdrup-export-pipeline-north-sea/ 3 https://www.offshore-technology.com/projects/johan-sverdrup-export-pipeline-north-sea/ 4 https://www.businesswire.com/news/home/20180308005528/en/Total-Completes-Acquisition-Maersk-Oil-Issues-97522593 5 https://www.noreco.com/news/2018/q4/extended-notice-noreco-acquires-shells-danish-upstream-assets 6 https://www.offshoreenergytoday.com/denmark-approves-3-36b-tyra-field-redevelopment/
Downstream market capacity impacted by recent loss record We can safely assume the working capacity for any single downstream risk in the Asia Energy markets is short of US$2 bn. Given the large losses for the last two consecutive years, we doubt if anything close has been deployed just out of Asia in 2018. Most of the active Lloyd’s syndicates have either stopped writing Downstream business completely or are simply deploying watching lines on renewal business.
Downstream BI covers particularly hit Most credible lead markets are looking and pushing for rate increases even on loss free accounts. Some are getting flat renewals only as a part of a larger portfolio or as a part of a larger relationship network. BI covers have been worst hit as typical Asian waiting periods/rates on large risks have been woefully inadequate compared to other parts of the world. There are no reductions available, and loss making risks have seen close to 50% rise in BI rates. Where possible and based on Chinese interest, Chinese markets can be competitive; hence they are offering improved pricing on a blended basis.
Meanwhile Munich Re CIP has recently closed their Singapore office and will now be underwriting Asian risks out of their Munich office. There is a reduced appetite by insurers such as AIG to lead business as we understand that they are looking to restructure their portfolio.
Full-blown Downstream hardening uncertain at this stage Looking further ahead into 2019, we feel it is a little early to definitely comment at this stage. The market is still in the grip of the largely negative figures in terms of underwriting profits for 2018, with Combined Ratios very close to the late 90s. Most treaties have gone for flat renewals, or with marginal discounts made on very profitable portfolios. The first quarter performance might well be the key indicator as to whether this “cusp” will translate into an actual hardening market for the rest of 2019. Most buyers that are tendering in 2019 are looking at renewals on a flat basis.
Upstream capacity reaches US$1 billion The working Upstream capacity in Asia is circa US$1 billion, dominated by company markets and a selected number of Lloyd’s syndicates. Zurich, Allianz and Swiss Re remain the most competitive and credible insurers in setting terms for any Upstream business in the region, including Australia. Canopius and Markel at Lloyd’s are driving the Lloyd’s Singapore platform in leading or supporting Upstream business competitively.
Gentle hardening process in Upstream mirrors London dynamic We are generally seeing rises between 5% to 10% on most Upstream renewals, although a flat renewal is available for programmes that renewed having been on a long term deal of say 2 to 3 years. We are experiencing an increase in the number of Offshore Construction projects coming to market but we also expect significant rate increases to get these projects 100% placed.
A nervous Upstream outlook for 2019 In our opinion, both buyers and insurers are nervous with the ongoing market developments, as buyers are generally finding the reasons behind the recent hard stance taken by the market difficult to digest. Insurers are worried about losing market share but are maintaining discipline for now. We are expecting a number of Offshore Construction tenders that have been secured by brokers at the beginning 2019 to struggle to achieve 100% placement, thereby driving competitively quoted prices much higher.
George Nassaouati is Head of Natural Resources Asia, Willis Towers Watson.