Upstream: profitable and competitive, but clouds on the horizon Further to our April 2019 advices we can see a slight increase in Chinese Upstream market capacity, which can be attributed to increasing capital and reinsurance treaty support, which is provided by international markets. In theory, market capacity could be as high as US$500 million but for most programmes this will be reduced in practice. Overall, Chinese Upstream business remains profitable. There have been no significant losses during 2019 and compared with international markets, Chinese insurers are maintaining their competitiveness. The overall underwriting strategy dynamic has not changed, as the Chinese market continues to support Chinese interests in Upstream programs around the world. However, we believe the remainder of 2020 will be very difficult for everyone, including the insured, insurer and broker due to the coronavirus situation and the global economic environment. We have experienced an oil price collapse in 2014 and now it is happening again in early 2020. We hope this will be just a short period of volatility; otherwise we will face the dual challenge of a hardening insurance market together with a depressed oil & gas industry.
Su Ke is Deputy Head of the Energy Department, Willis Towers Watson CRB China.
Downstream: local markets still soft Despite the international Downstream and Construction markets demanding rate increases as capacity reduces, the Chinese local markets are still soft, in general due to competition among non-motor businesses. However, for projects/accounts demanding higher capacity support (e.g. insured value higher than US$ 5 billion), local insurers have started to see their terms either rejected by international reinsurers or on the basis of different in conditions offerings (same price but with higher deductible and reduced limit) since the end of 2019. Whether there will be a turnaround in the Chinese Downstream market remains unknown at this stage.
Eric Wang is Head of Downstream Energy, Willis Towers Watson CRB China.
Retrenchment of authority The role of the Middle Eastern marketplace has experienced a significant metamorphosis during 2019 and the beginning of 2020, which sees a general shift of underwriting authority from the region back to “specialty centres” – which in most cases means the authority moving back to London. The shift of authority will itself be compounded by underwriting results in the sector, which remain less than satisfactory despite recent hardening in rates and is justified by major reinsurers wanting to instil a tighter discipline and consistency of Oil & Gas underwriting regardless of region. The retrenchment of authority “back to centre” raises question marks in the broking community, particularly amongst those with a global footprint, as to how they access this capacity and are faced with broking with regional underwriters with a greater appetite for risks in the Middle East or broking with counterparts in London who may have the ultimate decision making powers related to deployment of capacity and setting of terms.
Disappearing brands In 2019 and at the beginning of 2020, the Dubai International Financial Centre (DIFC) has lost (or announced the loss of) a number of (re)insurance brands, which may be seen as a significant blow to supporters of the regional energy marketplace. These include, but are not limited to: Allianz, Asia Capital Re, Swiss Re Corporate Solutions and Lloyd’s Talbot. Most of these brands still have access points in other trading hubs such as London, but it remains to be seen as to whether underwriters sitting outside the Middle East have the appetite to write risks from that region. Additionally, the region has seen a number of credit rating agency downgrades, which in isolation are not a major cause for concern but are still a significant illustration of the wider region’s reinsurance market’s lack of resilience.
An opportunity for new capacity? The scale of new capacity entering the region has not been sufficient to replace the levels from insurers which have scaled back their operations in recent years. The general trend for the small amount of capacity entering the region is to be focused on Managing General Underwriters (MGAs) that are not limited to Aspire Underwriting and Arma rather than on traditional reinsurers. Many have questioned why there has not been a greater demand for reinsurers to set up operations in the Middle East during 2019 and beyond; this can be justified by the experience of other reinsurers in the region. While there have been successes, particularly where reinsurers have been able to apply international underwriting expertise to regional understanding of the energy industry and risks facing the sector, setting up in the DIFC and wider Middle East region is still seen by many as a hub from which there have been a number of exits in recent years; it is also associated with having a high cost base in terms of real estate and cost of operating a team.
Towing the line Aside from the factors affecting the region specifically, themes relevant to the wider Energy reinsurance market-place are as relevant than ever, not limited to a focus on the importance of risk quality and the provision of detailed underwriting information, demonstrating risk quality as well as reinsurers focusing on a “return to technical rating” rather than a specific percentage increase being applied to renewals.
Will Peilow is MEA Regional Leader, Downstream Natural Resources GB at Willis Towers Watson.
Key capacity providers remain strong as others depart During 2019 the Miami market saw a number of movements in reaction to directives coming from the different headquarters of the capacity providers with operations in the city. By the end of the year some markets closed their operations in Miami; the likes of Brit, Aspen and Argo exited the hub and moved their underwriting back to their headquarters or exited the region from a facultative/wholesale perspective altogether. While this generated some questions regarding the long-term importance of the Miami market, the reality is that key capacity providers remain strong and continue with developing Miami as their regional access point. Downstream Energy insurers are part of that group and we continue to see a full spectrum in terms of appetite. Through MGAs, new capacity has also come to Miami and while their focus remains niche, either in Primary or Construction, we have also seen them develop some appetite for Energy programs.
Insurers under tighter scrutiny Amongst the main downstream players in the Miami market for Latin American risks we saw little movement in 2019. Nonetheless, all are complying with their CUOs’ directives in terms of profitability before premium volume and risk quality before unchecked capacity. Insurers such as CV Starr, Liberty Specialty Markets, Chubb and Swiss Re Corporate Solutions continue to offer the same levels of capacity - just under tighter scrutiny. In addition, underwriters in the region will also write risks in the Downstream sector. Co-ordination between units is also increasing; especially for the large Latin America NOC programs, buyers and their brokers can expect a coordinated approach between their Miami and regional offices, together with London or continental Europe class underwriters.
Latin American loss record bucks the trend While Downstream risks worldwide have seen an uptick in losses, Latin America has showed to be well below the trend and the market has avoided losses coming from the region. Insurers acknowledge the fact that their Latin American portfolios are profitable, and the mix of risk quality, management and sheer luck has proved to be positive. They are also quick to point out that these portfolios balance against global and even Natural Resources aggregates views; as such, the pressure to increase rating levels is there. In general, Latin American programs can expect increases in line with the global trend; however, this can be tempered by differentiating the program by working hard on its presentation and marketing aspects.
Outlook - Latin American market remains significant It is still early days and companies in the Downstream sector need to ride out the current oil market conditions. Opportunities remain attractive, as all National Oil corporations and additional operators of Downstream facilities continue to evolve. Be it via divestments of refining assets, new pipeline operations and terminals or upgrading their operations, the London–Miami dynamic will remain strong. Decision making has been centralized, and the expectation in Miami is that the global market has turned. Be that as it may, Latin America will remain an important growth market.
Mark Kabierschke is Energy Regional Industry Leader, Latin America at Willis Towers Watson.
Renewal rates for the first quarter of 2020 are averaging between 25-40% for loss free accounts with limited nat cat exposure. The extent of the hardening in the US market is such that rates continue to rise as programs are frequently not completed by the expiry date, providing insurers with the extra leverage they are looking for to push rating levels even higher. Meanwhile, reinsurance capacity remains scarce and costly, resulting in incumbent insurance companies voluntarily or involuntarily reducing capacity in turn. As in London, there is very little cohesiveness in the US market; leadership is pretty much non-existent and differential pricing therefore remains the norm. Policy terms such as CBI, Extra Expense and many non-essential sub-limits, Cyber coverage and volatility clauses for Business Interruption are all areas that are subject to negotiation with a determined market. RCV and BI valuation validation is becoming a requirement, while for OIL member “wrap” programs, a “OIL deemed in place” clause is becoming standard in the market. Meanwhile underwriting discipline is becoming extremely rigorous, and underwriters need to have their participation signed off by their Engineering team prior to any actual deployment of capacity. Not only that, but a second and even a third set of eyes and/or senior management approval is becoming increasingly commonplace. As a result, most renewals are going down to the wire, which can cause panic and acceptance of poor and differential terms by apprehensive buyers.
Paul Chirchirillo is Head of Chemicals and Downstream USA at Willis Towers Watson.
Industry developments in the Nordic region In Norway, medium-sized and small companies remain the most numerous on the shelf, and whilst the number of majors has slowly declined in the past decade, those who remain maintain a healthy share of the total production. Should the oil price return swiftly to the ‘new normal’ levels that we have recently witnessed, the positive uptick in activity should continue. If this is the case, we expect to see more drilling, as Norway looks for new big fields in unexplored areas as well as smaller finds in areas close to existing infrastructure which can be exploited and monetized quickly and profitably. The APA 2019 licensing round resulted in the award of 69 production licenses, with work programme commitments or additional areas. There were many small discoveries in 2019 and there are currently a record number of fields in production. ‘First oil’ from the giant Johan Sverdrup field was delivered ahead of schedule and budget in October 2019 and there were three other developments - Trestakk, Utgard and Oda - which also came on stream. Looking ahead, development plans which were approved in 2019 included Johan Sverdrup Phase 2, Opal sør, Gjøa P1, Solveig, Tor II, Shetland/Lista and Duva. A revised PDO for Balder and Ringhorne was submitted in December 2019. In addition, Vår Energi’s purchase of ExxxonMobil’s assets in Norway has meant a welcome return of premium to the commercial market. In Denmark, after a few years without any exploration wells drilled, there has been a pleasing renewed interested in Danish exploration. Operators, including Wintershall, Hess, Dana Petroleum and Total, are all planning new drilling activities. Meanwhile in August 2019 Noreco became a new partner in Danish Underground Consortium (DUC) having acquired Shell’s oil and gas interests in Denmark. The Tyra field and satellite producing fields were shut-in in September 2019 as the Tyra Future project continued to progress.
Capacity Our estimate of the maximum capacity accessible directly by our Nordic offices for any one risk remains around the US$3.5 billion mark, including locally based Managing General Agents (MGAs) underwriting on behalf of Lloyd’s syndicates. Some of the local MGAs have recently added capacity providers who were not previously represented locally to their agencies in an attempt to offer currently un-utilized capacity to owners of some of the capacity risks on the shelf. Chinese insurers have also expressed an interest in underwriting more business in the region, including to non-Chinese clients to a limited degree. In addition, AIG are to close their energy underwriting capability in Oslo. Currently AIG underwrites Energy out of 26 offices around the globe and this will reduce to 3 being London (HQ), Singapore and Houston. Nicole Guttormsen will leave AIG Norway at the end of April 2020 and Karin Sommer has accepted another position within AIG Norway. All AIG Norway business will be transferred to be underwritten in London at renewal. Losses As recorded elsewhere in this Review, the Upstream market continued to be profitable for insurers in 2019 with very few losses of note recorded. Rating levels Despite the good loss experience and profitability of the sector, leaders are demanding moderate increases of 2.5-7.5% for clean sought-after renewal business, representing a comparatively gentle, yet sustained upswing when compared with the prior year.
Changes in strategy We have witnessed a tightening of scaling provisions in respect of Defence Costs in package liability wordings, otherwise policy conditions are not being amended and coverage is not being withdrawn or restricted. Due to its profitable nature, Upstream underwriters are keen to write as much Upstream insurance business as they can whilst maintaining underwriting discipline on rating. Outlook for 2020 The collapse in the oil price at the time of writing, if sustained for a significant period into 2020, will undoubtedly have a profound effect on investment, OPEX and explorations costs into 2021 and beyond. Access to funds for pure exploration companies and the entry conditions for smaller new entrants onto the shelf could both become more difficult. We see further consolidation as more likely at low oil prices with insurance budgets perhaps coming under pressure as oil companies look for cost savings. Certain traditional oil and gas producers have set themselves decarbonization targets are increasingly looking for opportunities to diversify their income streams by also investing in green and renewables projects. Platforms powered from shore by electricity generated from renewable sources and carbon capture are but two examples of how some of the larger players are seeking carbon neutrality at the current time.
James Locke is an Executive Director at Willis Towers Watson AS, Oslo.
Downstream 2019 began with any existing assumptions relating to the changing market conditions becoming rapidly short-lived. The market has now officially turned, and we are seeing evidence of pure rate increases for Asian clients on all classes of business. Indeed, Asia is now well in tune with global market activity, with more consensus between Asian Downstream insurers and their counterparts in London. Whilst theoretical capacities have remained, deployment has been extremely cautious, with dollar deployments decreasing and a more robust referral process being followed prior to capacity being spelt out. The previous gap between Asia and London is therefore bridging quickly, with the latest rate increases ranging from 15% to 25% at the very least if loss free to averaging circa +25% on loss-free programmes and significantly higher for risks where claims have been reported. Energy portfolios remain distressed globally and the scrutiny is now “overall portfolio” basis rather than on the regional basis that we have seen during the last 18 months. Loss loadings have been overwhelming, and programmes which have enjoyed preferential underwriting in the past have been at the receiving end of this process. We are expecting the situation to worsen; we understand there are three major losses in Thailand that we believe may wipe out the premium pool for that region for 2020. Losses continue to roll in and insurers are pressing for rating increases at any opportunity, with no compromises. Buyers seem to be accepting the new status quo, based on what they are hearing from their brokers, insurers and counterparts; accordingly, they are no longer surprised when we inform them that they should expect a minimum 25% increase on their renewal, if not more. Interestingly, we are seeing insurers declining to negotiate any renewal terms on any programme in advance of three months of the renewal date in question. Insurers are holding off to see how the market is moving and are avoiding early commitment on rates, knowing that they are likely to be able to charge more as the overall market continues to harden. Some insurers, such as HDI, are openly restructuring their portfolios and will wait until the last few days before renewal to commit to their participation. This strategy is designed is to enable them to leverage the highest increase possible, by observing how the programme renewal activity is developing. In our view they are being very opportunistic, in line with others who believe that they were abused during the long soft market.
Other major insurers, such as Allianz and AIG, have significantly reduced their capacity on certain programmes, sometimes by as much as 50% of their expiring participation; this is putting a lot of pressure on brokers to complete placements at the quoted terms. Chubb is another insurer that is clearly making the most of the continuing market rate increases; they are quoting a significant number of programmes and are now leading many of those they quote. Their engineers are actively reviewing and assessing risks, which allows them to benchmark them against their technical rating model and thereby support a case to lead and/or write more programmes. Chubb have been dormant for many years in Asia, but are now very active, with all brokers knocking their door for lead terms. Chubb (and to an extent AIG) are sometimes reluctant to quote if they believe that their terms will be second guessed and not fully supported to get the programme home. In addition, AIG are to close their energy underwriting capability in Oslo. Currently AIG underwrites Energy out of 26 offices around the globe and this will reduce to 3 being London (HQ), Singapore and Houston. Nicole Guttormsen will leave AIG Norway at the end of April 2020 and Karin Sommer has accepted another position within AIG Norway. All AIG Norway business will be transferred to be underwritten in London at renewal.
Upstream Upstream working capacity in Singapore has reduced significantly since last year; Swiss Re are cutting back, Markel have stopped writing Offshore Construction risks, Asia Capital Re has gone into run-off and Talbot, following their acquisition by AIG, have pulled out of the Lloyd’s Singapore platform. However, the loss record continues to be benign, with only one loss in excess of US$50 million recorded to our database. Operational programs with clean records are facing increase of about 2.5% to 5%. However, Offshore Construction rates have doubled compared to a year ago and rates on pure subsea projects are now three to four times those quoted this time last year. Meanwhile some insurers are going through consolidation and restructure. The AGCS energy team has been absorbed by their engineering team. MS Amlin now has formed a Natural Resources unit to handle Oil & Gas & Renewables; meanwhile Swiss Re is focusing on their bottom line with an emphasis on technical underwriting. Insurers are shifting attention to renewables to reduce their carbon footprint, and to position underwriters in Asia with the authority to underwrite Renewables business. In short, the outlook for the remainder of 2020 is uncertain; we detect a loss of confidence in the Singapore market as this hub is often no longer seen as the most competitive. Rates are turning and markets are holding firm.
George Nassaouati is Head of Natural Resources Asia, Willis Towers Watson.
