Introduction

Welcome to our Energy Market Review for 2020 – and to a world that has seemingly been turned upside down. As I write, the full impact of COVID-19 is now being felt across the entire globe and all our thoughts are with our readers and their families as we collectively come to terms with the full magnitude of what is upon us.

As societies adapt their ways of life to cope with this virus, I’m sure you will understand that it is a little premature at this stage to comment on the long-term effects of COVID-19 for either the insurance and energy industries. However, I can advise that Willis Towers Watson has a special page on our website devoted to COVID-19¹ and I would advise any of our readers to visit the site to find out all you need to know about our company’s position as the weeks and months progress.

To cap it all, the energy industry is already reeling from an oil price war which we very much hope will be short term in nature. The effects of this price war on the energy industry are obvious; reduced capital expenditure, a reduction of exploration and production activities, lower refining margins, lower BI valuations. And, of course, this will have a knock-on effect on premium income levels for an insurance market that remains unprofitable for most lines of business other than Upstream, where even in this market premium income levels remain well below historic norms.

This being said, there is no doubt the world will eventually recover from COVID-19 and the energy industry will recover from the oil price war. But there is one issue that is here to stay on a permanent basis and that is climate change, and the transformed risk landscape that now confronts the energy industry. It’s our theme for this year, because regardless of individual views on the subject of climate change, the risks to your organisation that it brings could not be more significant, both now and in the future.

We have therefore dedicated the first part of the Review to the issue of Environmental Social Governance (ESG) and the risk management implications for the energy industry. In my view, ESG is rapidly becoming the single most important business driver of the decade, not just for the energy industry but for business and commerce in general. Margaret-Ann Splawn, who is a climate policy finance and investment consultant, sets the scene with a detailed analysis of how ESG is transforming the energy industry risk landscape; our experts from the Willis Research Network then show how energy risk managers have a vital strategic role to play in quantifying climate change risk, as well as improving their company’s ESG footprint. Finally in this section we include an outstanding article written by Michele Waters of Cenovus who sets out how her company is responding to its own ESG challenges.From an energy insurance market perspective, there is no denying that the last 12 months have been challenging ones for the energy industry and their brokers. The underlying market dynamics which have led to today’s hardening market conditions and which were outlined in some detail in last year’s Review – a general centralisation of underwriting authority, a determination by senior insurer management to generate change, significant loss levels – have simply accentuated during the last 12 months.

However, it continues to be a tale of two markets. To sum up:

Capacity: once again the Upstream market has bucked the general market trend, as theoretical amounts are now at another record level, US$8.730 billion, from US$8.100 billion in 2019. The reverse is true, however, for Downstream, where capacity has declined for the second successive year, down to US$5.978 billion from last year’s US$6.428 billion. Moreover, these theoretical figures tell only half the story; insurers are increasingly being forced to adhere to maximum percentage line sizes to satisfy their reinsurance treaty requirements.

Losses: the extraordinary run of benign loss years in Upstream continues, with only three losses in excess of US$100 million during 2019. Again, the Downstream market figures could hardly be more contrary; once again a significant number of losses over US$100 million were recorded by our database for 2019, with one major loss significantly above US$1 billion.

Rating levels: If it was not for the almost universal insistence by insurer management that no reductions can be countenanced by their underwriters, it is our view that the Upstream market would already be re-softening. As it is, rating increases are still very modest (2.5-5% on average) compared to Downstream, with increases well in excess of 20% for virtually every type of programme, and significantly more for refinery and petrochemical business. The Liability portfolios, both North America and International, have been similarly impacted.

Profitability: The Upstream market remains profitable in overall terms, but we do have a couple of caveats: premium income levels are still low by historical standards, and certain sub-sectors of the Upstream market such as Offshore Construction, have been hit by attritional losses. For Downstream and Liability insurers, their portfolios remain firmly in the red and the long road back to profitability looks rocky indeed.

Finally, we are delighted that Convex’s Paul Brand and Zurich’s Ben Kinder have agreed to talk to us about the challenges they both face in their respective senior underwriting roles and hope that their interviews in this edition of the Review provide an opportunity for our readers to gain a deeper insight into underwriters’ minds at this challenging time in the market cycle.

We hope you enjoy reading the Review, and as ever would welcome any feedback that you may have.

Graham Knight is Head of Global Natural Resources, Willis Towers Watson.

¹https://www.willistowerswatson.com/en-GB/Insights/trending-topics/willis-towers-watson-response-to-covid-19