In our 2020 Review, we advised that there was around US$500 million of theoretical Upstream capacity in the Chinese insurance market. We have not seen any significant change in this figure over the past year; however, realistic capacity has slightly decreased, mainly because Chinese underwriters are becoming more rational as they become more experienced. In 2020 we did not see much competition being generated within the market for certain programmes, especially those with unsatisfactory loss records. Meanwhile the Chinese market has still not experienced anything like the hardening dynamic that has affected the London and other international markets.
Indeed, Chinese insurers have continued to maintain a profitable Upstream portfolio as there was no major loss affecting this market during 2020. As a result, rating levels continue to be relatively stable.
Looking forward to 2021, we are not expecting stronger competition or additional capacity to challenge existing markets but would rather hope that talented underwriters emerge to move the Chinese Upstream market forward to a new, healthy and sustainable era.
Su Ke is Deputy Head of the Energy Department,Willis Towers Watson CRB China. Ke.Su@WillisTowersWatson.com
At the beginning of 2021, overall Chinese Downstream capacity was maintained at similar level to 2020 following the renewal of non-marine reinsurance treaties at January 1 2021. Some insurers were hit by the recent loss of an Australian Terminal, and the time element of this loss this has now caused a restriction in underwriting overseas businesses. This has especially been the case for China Continent, which was known as the Chinese market placement leader for such projects, with a 15% line size. Due to additional rounds of motor insurance premium regulation being put in place, most Chinese insurers have been paying significant attention to the development of Non-Motor businesses (including Downstream) but they have also made it clear that the profitability of the combined portfolio (Motor and Non-Motor) needs to be above break-even. Rating levels for operational programmes that put pressure on capacity demand are generally flat, while levels for Construction/Erection programmes which place increased demands on available capacity have slightly increased. Meanwhile, market conditions for other programmes remain soft.
Eric Wang is Head of Downstream Energy, Willis Towers Watson CRB China. Yang.Wang@WillisTowersWatson.com
Following a turbulent 2020 where GCC-based (re)insurers and beyond focussed on correcting premium rating and deductible levels across their portfolio - effectively enacting an industry-wide revision of premium rating - many (re)insurers classed this as a return to technical pricing. As we begin 2021, and as the Energy sector adapts to the economic challenges that the global pandemic has brought, many have also questioned the long-term sustainability of a continued shift in premium rating through 2021.
It is clear that there is a lack of A-rated new capacity entering the GCC (re)insurance market to replace the notable withdrawals (or centralisations) relating to the Energy portfolio in 2019 and 2020; these included (but were not limited to) AIG, Allianz, Swiss Re and AXA XL. While several MGAs have ramped up their efforts in this sector during 2020, this activity has not been sufficient to create tangible alternative risk transfer options for buyers.
Furthermore, while certain local insurers have increased their net and treaty positions on Downstream risks, this has been out of a required inevitability rather than purely from a growing appetite for business, particularly when considering that these retentions are normally on a ground-up, quota-share basis.
With a smaller pool of reputable Energy leading (re)insurers sitting in the region, the additional challenge facing clients is that many (re)insurers have curbed their capacity deployed in the sector during 2020, which has required the inclusion of a larger number of (re)insurers to complete programmes, each deploying smaller levels of capacity per risk.
With the issue of a restricted pool of lead (re)insurers in the sector, all taking a similar stance in terms of premium rating and deductible levels, buyers are understandably interested in how their stance will look in 2021 amongst the major leading markets, traditional follow (re)insurers, MGAs and national insurers. It would appear that the deductible corrections encountered by many clients in 2020 will stand as the required level of risk retention going forwards; whereas (re)insurers were looking for fixed increases in pricing across its portfolio during 2020, this year they seem much more focussed on specific analyses of individual programmes. Arbitrary rate increases in excess of 30% are limited to distressed assets with challenging loss records, whereas the better performing risks are attracting less onerous increases in the region of +10% to +22.5%.
The art of the subscription market has become an important feature of the energy market in the Middle East, particularly in the DIFC, with traditional following markets taking a far keener level of interest in the perceived calibre of the chosen lead market as well as the carriers who have agreed to follow these terms.
The second half of 2020 and beginning of 2021 has witnessed a move to ensure that Energy underwriting achieves and remains at technical levels consistent with the wider portfolio of risks held by any one (re)insurer. This has not only affected traditional rating levels but also a drive to ensure that Property Damage and Business Interruption deductible levels are corrected to a sensible level, in line with international standards.
Specifically regarding the Upstream sector, the Dubai/Middle East market has seen a levelling off of rate rises since the 1/1 renewal season, on risks with good claims records. Underwriters are particularly keen to maintain their market share on regional business that they would see as desirable; this has been a factor in keeping rate increases in line with (or slightly below) the London market. While there have been no notable new entrants in the Dubai Upstream marketplace, a small number of existing Downstream carriers are expressing an interest in providing follow capacity on stand-alone Upstream risks. Other than a handful of companies, most of the Dubai/Middle East market prefers to follow quota-share led terms; as a result, on international business the rating environment is very much in line with London’s.
William Peilow is Middle East & Africa (MEA) Regional Leader - Downstream Natural Resources GB at Willis Towers Watson. William.Peilow@WillisTowersWatson.com
As in many other markets and hubs around the world, the Miami and Latin American market was unexpectantly sent to work from home in the middle of March 2020. After a short period of adjustment and the expected ambiguity generated by the global pandemic, the market was ready for remote operation. One thing this market has been doing for some time is to stage negotiations, confirmations and stamp slips in a remote way, so the shock of not having face to face market interactions was not felt as strongly as in hubs such as London. However, the trend of longer negotiation processes that started last year continues, and we expect the timing of turnarounds of quotes and/or confirmations of covers to remain slow during 2021.
In terms of capacity for Downstream Energy risks, although theoretical capacity levels remain unchanged, the actual capacity deployed in practice has reduced. Major players have withdrawn capacity, especially for risks which are perceived to be of below average quality. Underwriters in Latin America have shifted to more bottom-line oriented underwriting and were able to make up the lost top line by the increases obtained across the market.
The main Midstream and Downstream market leaders remain the large (re)insurance groups such as AIG, Chubb, Liberty Specialty Markets, Swiss Re Corporate Solutions and Swiss Re Facultative out of Miami, as well as Munich Re, SCOR and Hannover Re from underwriting desks in the region. All these markets' capacity remains in close sync with their UK and European hubs which co-ordinate capacities, conditions and pricing levels.
Risk appetite for the region remains high for most insurers, with AIG planning on growing their book. A notable exception is Chubb, which is shifting all underwriting decisions for their net retention to London; this applies to the main marquee and large capacity programs.
After a few insurer exits in late 2019, we saw new MGAs entering the market with niche offerings, which quickly occupied the space left by the market withdrawals. Three main MGAs have offered capacity for risks in the Energy sector; Brickell Underwriting Agency (BUA) writing primary layers, Specialty Lines Underwriters (SLU) focused on providing capacity in short excess layers and XS-Latam with a primary layer focus or buffer layers. In 2021, we expect to see consolidation of these new players for different risks in all the region.
Capacity for Offshore or pure OEE coverage remains very limited. Markets such as IRB and Austral offer their capacity and can write outside Brazil, albeit depending on regulatory acceptance.
In line with global trends, 2020 saw a rate increase for Energy and related sector risks, with an important tightening of conditions, especially in Business Interruption, where markets are moving to reduce volatility in unison. Furthermore, last year was a very benign year for insurers in the region, with no major natural catastrophe events and an absence of large man-made losses. This made 2020 a good year overall for the market and loss ratios are likely to close on a very healthy level, based also on the increased premium generated by the market.
Therefore, although the expectation for 2021 is to see further tightening in rates, and clients should expect some level of increases, these are not likely to be as stiff as those imposed during the last 12 months.
The Latin American market is experiencing an interesting transition, whereby the global-local combination of large and niche players is key to providing the required capacity. But more importantly, this combination provides both clients and brokers with a cultural and language closeness that aims to enhance Latin American energy companies’ understanding of their risks and exposures.
Sol Batalle is Energy Leader, Latin America, Willis Tower Watson. Sol.Batalle@WillisTowersWatson.com
Mark Kabierschke is Natural Resources Leader, Latin America, Willis Towers Watson. Mark.Kabierschke@WillisTowersWatson.com
The North American Downstream Energy market has been on a recovery path since early 2019. After suffering 5-6 years of declining rates and increased losses, insurance companies have had to return to underwriting discipline and have increased pricing/rates accordingly. There were several companies that decided to “right size” their portfolios and others that simply could not sustain themselves and exited this occupancy. All of this led to a dramatic and sudden change in the market; reduced capacity, increased rates for treaty protection and underwriting discipline has caused one of the hardest markets in decades.
There was widespread inconsistency of terms, pricing and overall market responses. The market change in the past two years has resulted in many clients being forced to assume additional retentions, purchase lower limits, increase captive utilization and seek non-traditional risk transfer solutions.
As of December 2020, we started to hear that insurance companies were experiencing profitable years and loss reserves in the Downstream energy sector were reasonable. Having said that, 2020 was a year where many companies were experiencing substantial reserves due to COVID-19 or increased Incurred But Not Reported (IBNR) claims. The General Property loss experience was also quite poor, which affected some North American insurers because they share reinsurance treaty protections.
Our outlook for 2021 is that the market will be looking be looking at renewals on a “two-tiered” rather than the “broad brush” basis which applied a general rate/premium increase for all renewals which we have seen for the past two years. Using this “two-tiered” approach underwriters will segregate accounts based on certain risk characteristics:
Those risks that grade out “Best in Class” on the above criteria will received lower rate increases.
We therefore anticipate a deceleration of rate increases and less drama and upheaval during each renewal process for the risks in the Upper Tier. This is mostly due to two years of right sizing and wording changes that have been instituted across the board. The most notable of these wording changes are:
In 2020 there were small increases in capacity as new players entered the market and additional capital is being attracted to this vastly improved sector. However, it should be noted that one of the best strategies during this hardening market was to rely on long term partners; these partners responded very well to clients that found a way, despite all the market cycles, to keep relationships strong and continuous.
Insureds must still be diligent and update their engineering reviews. Engineering is critical in this market; underwriters will require positive responses to historical recommendations and improvements. Response to COVID-19 restrictions, maintenance budgets and CAPEX figures will also be scrutinized. Values for Business Interruption as well as Property Damage will be closely reviewed, as years of trending proves to be inaccurate.
Some good advice for 2021 renewals would be:
Paul A. Chirchirillo is Head of Natural Resources Broking, North America, Willis Towers Watson. Paul.Chirchirillo@WillisTowersWatson.com
Oil companies in the Nordic region have been buoyed by the fact that the oil price has recovered well since this time last year, especially considering the effect that COVID-19 restrictions have had on global consumption and the large inventories which had accumulated around the world as a result. A cautious, guarded optimism has therefore once again returned to the sector in this region, with a hope that more favourable and sustained trading conditions will now ensue in the future.
In Norway, 30 companies received offers of ownership interests in a total of 61 production licences on the Norwegian Shelf in the Awards in Predefined Areas (APA) 2020 in January 20211. 40 exploration wells are expected to be drilled in 2021, while oil production is expected to rise from the current 1.7 million barrels per day to more than 2 million barrels per day in 20252.
The introduction of an improved taxation regime with regard to capital expenditure on any projects where Plans for Development and Operation are submitted before the end of 2022, and approved by the authorities by the end of 2023, is focusing minds on pushing through new and some formerly more marginal projects before these dates.
At the end of 2020, the Danish government announced an immediate end to new oil and gas exploration in the Danish North Sea as part of a plan to phase out fossil fuel extraction by 2050. The 8th tender licencing round and all future tender licencing rounds have therefore been cancelled, although the agreement made does create security for existing approved activities and opportunities for future mini-rounds and neighbouring block licenses. Denmark has some 55 existing oil and gas platforms, across 20 oil and gas fields, which will continue extracting oil and gas.
Meanwhile the date of start-up of the rebuilt Tyra field has been delayed from 1 July 2022 to 1 June 2023 as a consequence of COVID-19, as a result of local government-imposed restrictions and the closure of several shipyards where the new Tyra facilities are being built.
The Nordic insurance market remains relatively stable. Estimated maximum capacity accessible directly by our Nordic offices for any one risk remains around US$3.5 billion, including local Managing General Agents (MGAs) representing Lloyd’s syndicates and other international insurers who would not otherwise enjoy a local presence.
In terms of losses, the only major incident of note in 2020 was when one of a major LNG plant’s five turbines caught fire in September. Initial estimates put the Physical Damage loss at a modest US$15 million, but the ensuing BI and CBI loss could mean total claims to the insurance market into the low hundreds of millions of dollars.
Certain buyers with exploration operations within a more northerly latitude have expressed concern regarding the commitments made by Lloyd’s in the Lloyds’ ESG Report 2020 concerning Arctic energy exploration activities and are seeking urgent clarification and guidance from Lloyd’s as to what these commitments may mean for them in practical terms.
Despite the profitable loss experience, the lead insurers of Nordic upstream programmes are demanding increases of a minimum of +5% for clean sought-after renewals. However, it is interesting to note that certain Norwegian based lead insurers actually did not maintain the ‘minimum’ rate increase requirements at 1 January 2021 that London leaders were quoting, suggesting an increased underwriting appetite for this market. Meanwhile in a notable underwriting appointment, Radmil Kranda has been appointed the new Head of Energy Underwriting at Gard; he is taking over the role from Gunnar Aasberg, who will continue in a senior role in the Energy department until his retirement.
James Locke is Executive Director at Willis Towers Watson AS, Oslo. James.Locke@WillisTowersWatson.com
As we move further into 2021, we see a slightly shrinking marketplace in Asia, with some insurers closing local offices and shifting them to London. Capacity remains stable with little change, except for a few markets that have downsized or removed capacity altogether, while cutting back on their quoting positions. We have observed that lead authority and requests for quotations are increasingly shifting to London, instead of being directed to Singapore, given that the number of local Upstream players are limited.
Upstream working capacity is reducing, due to markets limiting their line sizes. The number of leaders remains restricted, as we observe a reduced appetite for Offshore Construction. Stand-alone Subsea projects and OEE also continue to be restricted, given that most insurers prefer not to write singleton risks.
The market for Geothermal risks is particularly limited, with capacity further reduced given that available insurers have pulled out or are reducing their line sizes. Currently, there are only 15 markets globally that can write this type of risk, potentially driving higher premiums and deductibles for operators, deploying approximately 50% of capacity (with commercial realistic capacity now standing at US$800 million, although there is theoretically US$1.5 billion available on paper). This suggests that a more conservative approach to limit exposure for each risk is now required.
Overall, insurers are already seeing loss experiences from Offshore Construction, particularly in India and Vietnam. As a result, insurers and reinsurers have reduced their lines to limit their exposure and are increasingly selective about the clients that they onboard, preferring experienced operators or contractors.
We believe that the majority of portfolios remain profitable, although the lack of construction activities as a result of the COVID-19 fallout and low oil prices have affected new business targets for most markets. However, the recent recovery in oil price is attracting operators to start looking into new construction activities to ramp up production, prompting a possible change from the current situation.
We continue to see flat to 5% increase in renewals, but we believe that this may develop into a median of 5% in the future, based on our assessment of the past 20-year cycle, and an estimate of the trends over the last 2 years.
Meanwhile, Offshore Construction Insurance continues to attract rates with a median of 1%, although we have seen some exceptions where the size of the project is moderate, and there is an operational relationship with the operator.
We have not observed any major restrictions, except for obvious COVID-19 clauses. Moving forward, it is our opinion that the COVID-19 clauses will remain a standard clause.
The recent events in Myanmar have also led to some restrictions on Myanmar-based risks such as Strikes, Riots and Civil Commotions. The situation is uncertain, as it is difficult to assess and gauge future events and implications for operators. During the time when Myanmar was under sanctions, we observed restricted coverages, shortage of capacity and limited supply, which amongst other issues impacted operators with increased premiums and incomplete placements.
Overall, we note no significant changes in the marketplace, except for underwriter movements within the following insurers:
We anticipate the overall market to remain consistent. Insurers are firm about their requirements, translating into inelastic premium levels, costlier coverage/extensions and higher insurance costs. As a result, clients should consider setting aside some buffer in their insurance budgets.
With some recovery in the oil price, we are already seeing an increase in the number of construction projects. There’s a higher number of requests for tenders compared to the previous year, suggesting an increase in new construction projects in 2021. Insurers will understandably be pursuing new business growth, which may drive some relief for premium rates.
Aggregation is fast becoming an issue for risks that are based in Myanmar and Thailand, which might lead to restricting competition on some risks and future construction activities. Clients and E&P operators might need to source for new markets, in anticipation of higher premium prices and retention-levels. Self-insurance might become a necessity and should be factored into consideration by operators.
Capacity for Downstream risks is reducing, as most insurers are not fully utilizing their available capacity on a particular risk, suggesting a more conservative approach towards sector coverage. Realistically available capacity currently stands at circa US$1.5 billion, although theoretically at US$2.5 billion.
Overall, insurers are becoming very selective on renewals, influencing their decisions to deploy lower capacity on more adverse risks, while retaining capacity on risks that they favor. Favorable elements of risk currently include low hazardous natures, no exposure to Natural Catastrophes, and well-maintained plants, to name but a few.
In Asia, we expect a turnaround in terms of profitability, as market hardening remains consistent. While several lead markets are still struggling, there are pockets of positivity given that some reinsurers have started to report an improving combined ratio. There are a few significant Downstream losses in this region, apart from a handful of losses in South Korea.
With regard to rating levels, we are seeing median increases of 25% on clean programs as the norm moving forward. However, small-scale and/or programs with patchy loss records are experiencing increases in excess of 50%. In addition, programs with natural catastrophe exposures may experience higher-than-average rate increases, due in part to the risky nature of their operations.
Insurers were quick to impose COVID-19 restrictions (with inclusion of Communicable Diseases clauses) with the obvious events of 2020. We are also seeing an increasing number of insurers imposing a Business Interruption Volatility Clause in their terms, with a stronger emphasis on the possible fallout from events that could occur to accounts in an increasingly connected world. Some insurers have also opted to impose SRCC exclusions in their terms.
Chubb’s Matthew Bilbey has moved to Chubb London in late 2020, reshuffling Chubb Singapore to oversee only ‘retail business’, comprising small SME-sized businesses insured within a US$10 million limit. On the other hand, QMES is shifting their entire Downstream authority back to London, while Emerald Re has withdrawn from the market.
Going forward, we expect to see a harder, more stringent Downstream market in Asia; despite this, we’ve observed that more tenders are coming in, especially those that are overdue. There is certainly more focus on “Broker Beauty Parade” type tenders, as insurers are keen to avoid capacity waste. Overall, we are also seeing more demand for captive solutions, with many clients working closely with their leaders to assess higher retention levels and moving from Full Limit policies to Loss Limit policies.
George Nassaouati is Head of Natural Resources Asia, Willis Towers Watson. George.Nassaouati@WillisTowersWatson.com
1 https://www.npd.no/en/facts/production-licences/licensing-rounds/apa-2020/ 2 https://www.npd.no/en/facts/news/general-news/2021/the-shelf-2020-high-activity-and-significant-investments/
