Introduction

Welcome to this year’s edition of the Willis Towers Watson Energy Market Review. 2017 has been an interesting year for both the energy and the (re)insurance industries, with the good news of the oil price recovery and increased activity in the energy industry being offset by the devastation and personal tragedies brought about by hurricanes Harvey, Irma and Maria.However, as we move further into 2018 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. During the last months of 2017 there were plenty of voices emanating from the global insurance markets suggesting that these terrible storms would lead to a significant turnaround in (re)insurance market conditions. That was certainly the case following such events as 9/11 and hurricanes Katrina, Rita and Ike; however, despite the 2017 storms producing well in excess of US$75 billion of insured losses, the turnaround in market conditions, while indeed bringing the softening process to a halt, has been much more modest in comparison to other market-changing events of the last decade.Furthermore, the direct impact on the energy industry itself has been mercifully limited; although the downstream industry has seen overall losses in excess of USD$1 billion from these storms, this is a much lower figure than for previous events while the direct effect on the upstream industry was, rather astonishingly, virtually negligible.The other reason for the modest impact on the Energy insurance markets, of course, is the ever present glut of (re) insurance capital which, encouragingly for buyers, continues to act as a dampener on efforts by (re)insurers to instigate a return to rating levels where their models indicate that long term profits for these portfolios can be sustained.That’s why we have entitled this edition of the Review as “Between a Rock and a Hard Place?” We have posed this question because we think that insurers in each of our markets now have to navigate a tricky course between:

continuing to invest heavily in these portfolios, knowing that the modest rate rises currently being obtained (which may in any case not last) won’t be enough to sustain long term profits according to their models; and

scaling back to wait for better conditions to materialise, which of course runs the risk of depleted premium income and the threat of overall portfolio unsustainability.

Despite the 2017 storms producing well in excess of US$75 billion of insured losses, the turnaround in market conditions, while indeed bringing the softening process to a halt, has been much more modest in comparison to the events of the last decade.

In brief, here is a summary of the key findings of the Review from an insurance market perspective:

Capacity: once more, capacity has crept up in both the Upstream and Downstream Property markets, to US$7.95 billion for Upstream and US$6.8 billion for Downstream. However, the recent withdrawal of Partner Re from the Upstream portfolio, together with the XL Catlin/Axa merger and AIG’s acquisition of Validus/Talbot, may signal that the trend towards year-on year capacity increases might at last be coming to an end.

Losses: whereas Upstream has had one of the most benign loss years on record in 2017 (under US$1.3 billion according to our database¹), the same can hardly be said for Downstream, which has had its worst loss year for nearly 10 years (over US$5.5 billion).

Rating levels: While the year-on-year broad decrease in rating levels of recent years has finally been brought to an end for most buyers, the overall upswing in rating levels has been limited in both markets, with modest increases being negotiated for the majority of programmes (clearly, this trend can be mitigated depending on individual risk profiles, loss histories, long term relationships and premium income streams).

Profitability: All the indications suggest that the Upstream portfolio has benefitted significantly from the 2017 benign loss record and remains generally pro table – for now. However, it seems clear that the outlook for Downstream insurers is much less promising; although this portfolio must be viewed within the context of the wider Property portfolio, there can be no doubt that very few will have recorded a pro table year in 2017.

Meanwhile, it may well be that the worst is over for the energy industry as its recovers from the oil collapse of 2014-15. We have included an article from the Petroleum Economist’s Selwyn Parker which certainly suggests that more activity can be expected in the years ahead, which may indeed provide the injection of additional premium income that the insurance markets so desperately need.We have also included an interview with Lloyd’s PMD Jon Hancock, in which he reveals his exciting plans for an innovation laboratory to be housed within the Lloyd’s building, as well as articles on the challenges facing investors in the African energy industry, the latest developments in Enterprise Risk Management and offshore safety – a range of subjects which we trust will be of interest to those engaged in both the energy and insurance sectors.Whether it’s in hard copy, pdf or our new “Turtl” format, we hope you will enjoy reading the Review and as ever we would be delighted to receive any feedback or comments that you might that you may have.

Neil Smith is Head of Natural Resources P&C at Willis Towers Watson.

¹ Willis Towers Watson Energy Loss Database as of February 12 2018