Executive Summary

General
Conditions in almost every arena of the Energy insurance markets continue to harden, albeit not quite to the same extent as 12 months ago:

In particular, those programmes that have already had significant rating increases imposed on them during the first phase of the hardening insurance market are now finding that further rate increases imposed this year are generally more moderate in nature.

As a result, a “two-tier” market dynamic is beginning to evolve, between those programmes that insurers truly value from a risk profile, premium income and long-term relationship perspective, and those which insurers value less unless stronger underwriting measures are put in place.

The COVID-19 pandemic has had a significant impact over the course of the last 12 months, not only on energy industry activity and asset/BI valuations but on the speed of the overall insurance market renewal process.

In the meantime, the recent rise in oil prices may well offset some of the downturn in Energy insurance market premium income levels which, despite the hardening market conditions, have flattened due to reduced Exploration & Production activity and reduced BI values.

Upstream
Positive factors limit the extent of market hardening:

Realistic capacity is now at record levels (US$7 billion), with no sign of withdrawals.

Some insurers now have significant growth targets, fuelling competition.

Reinsurance cost increases at January 1 were more modest than anticipated.

However, negative factors ensure that the overall hardening dynamic remains:

The sector suffered a decline in E&P activity and in BI/loss of production income values during the COVID-19 crisis.

Continued losses in other parts of the property and casualty portfolio weigh on this sector.

Underwriters face continued management pressure to maintain hardening momentum.

Overall, a benign loss record has kept the portfolio in profit:

2020 continued the benign overall loss record of the previous three years.

Premium income was impacted by lack of E&P activity, but we expect total premium will fall only 5% compared to last year.

Lloyds statistics point to overall profitability, although Offshore Property results are much superior to Onshore Property and OEE.

Offshore Construction portfolios continue to deteriorate:

This subsector has seen a significant disparity between premiums and losses for each of the last three years, with losses outpacing premiums.

One major leader has withdrawn from this portfolio entirely.

Others maintain a presence, but the enthusiasm for subsea projects in particular is much diminished.

Rating increase guidelines:

Major E&P programmes: +5%

Small/medium lease operators: +5-7.5%

Offshore contractors: +5-10%

Onshore contractors: +7.5%-12.5%

Midstream: +12.5-20%

Offshore CAR platforms: +20%

Offshore CAR subsea: +50-75%

Loss-affected business: exponential

Downstream
Positive factors restrain the hardening process for the most sought-after business:

A much-improved loss record led to a generally profitable 2020 — and less steep rate increase expectations for 2021.

An increased premium pool, a result of increased rates charged in last 24 months, promotes market interest in the attractive risks.

We have also seen increased capacity, with no major withdrawals this year.

Some buyers are approaching the marketplace with a strategy of retaining more risk.

Negative factors mean the hardening process continues for the rest:

There may be a possible impact of the recent Texas cold weather losses on this class.

Downstream is also affected by the unprofitability of related sectors, including power, mining and renewables

Insurer management is exerting pressure to maintain the hardening momentum.

COVID-19 has impacted BI values:

Oil prices plummeted at the start of the outbreak.

The dramatic reduction in economic activity has led to market suppression for many downstream companies.

The current volatility in oil prices and economic activity is likely to have a profound effect on the volatility of Downstream BI values for the foreseeable future.

The new market clause LMA 5515 factors in maximum percentage of the margin of error between actual and declared values, as well as any premium adjustments — so it is vital for buyers to keep values up to date and accurate if full the quantum of future BI claims are to be paid.

Rating increase guidelines:

Tier One: good clean risks — insurers have received sufficient payback during last two years. Rate increases are less than they have been (+12.5% to +20%).

Tier Two: Programmes still not at the right benchmarked rating are seeing harsher treatment (+25% to +40%).

Liabilities
Social inflation foundations of current hard market conditions still in play:

Statute of Limitation reforms

Growing litigation funding

Higher jury awards

Increased general costs of repair

The result has been continued gloom for buyers:

Capacity above a certain limit is unavailable at any price - a truly hard market

Only $1 billion realistic capacity available, $800 million for refineries/petrochemicals, onshore/offshore follow form capacity just $250 million

New, volatile and openly opportunistic insurers now targeting this market to secure increasingly favourable terms

Losses continue to be reported:

Midstream/pipeline pollution incidents

Gas pipeline explosions

Refinery and chemical plant explosions

Product liability losses

Emergence of two-tiered approach:

The potential top-tier energy programs are recognized by quality of risk, stronger loss and incident records and acceptable operational exposure, especially in the areas of ESG.

A second tier consists of those programs whose assets and operations are considered more difficult to underwrite as compared to the first tier, along with problematic losses.

Rating increase guidelines:

International Liability 25-40% (more for loss-impacted business)

Upstream Liability 10-12.5%

US Excess liabilities 25-50%