Q3 2021

Insurance Market Update

Oil platform on the ocean. Offshore drilling for gas and petroleum

  1. Upstream energy

Competition and insurance capacity for accounts with premiums in excess of USD10 million remained strong over the last quarter. With aggressive underwriting of the sector in the lead up to January 2022 renewals, rates are likely to be flat for these large accounts. While the vertical towers for some risks are the biggest ever, there are far fewer insureds that spend in excess of USD50 million today than say five years ago. With fewer prized “mega premium” accounts, and the willingness of insurers to continue to deploy high limits, competition for market share is expected to increase. Accounts with premiums below USD10 million and subclasses that insurers continue to find less attractive — such as drilling contractors, onshore exposures in the US, and Gulf of Mexico windstorm policies — are likely to experience small rate increases.

An emerging trend is that traditional upstream markets increasingly seek to diversify into offshore renewable energy technologies, reflecting the heightened focus on energy transition. Some markets are now receiving an estimated 20% of their premium income from offshore wind as they look to balance their portfolio towards cleaner, green assets.

While there have not been significant losses in the sector this year, insurers’ profitability continues to be eroded by a series of smaller losses (below USD200 million). These include a recent fire on an offshore platform in Mexico and losses related to an offshore asset in India, following a cyclone. Losses from a fire last year at a Norwegian LNG plant, are also escalating and impacting upstream energy markets. These incidents have not yet led to any reduction in overall capacity deployed by insurers, and a continued surplus of capacity will put downward pressure on rates.

2. Downstream energy

Although a much smaller number of renewals take place in the third quarter, the deceleration of rate increases continued. Insurers’ risk appetite for downstream risks improved in a relatively benign claims environment as many looked to deploy more capacity to secure market share. This increase in capacity from strong lead markets is removing rating variance within some placements that started to emerge in 2020.

The recent announcement by OIL (the Bermuda-based energy industry mutual) of an increased limit from January 1, 2022, adds further capacity and increases competition among insurers, another positive for clients.

Towards the end of the quarter, Hurricane Ida, quickly followed by Tropical Storm Nicholas, caused concern for the markets. While damage to energy facilities appears minimal, the strength and size of the storms — from a wind and rain perspective — raised concerns about the estimated maximum loss calculations for natural catastrophe (NatCat) losses and, for some insurers, aggregated exposure. This is likely to put pressure on capacity and pricing for US Gulf flood and wind coverage over the next few quarters, particularly following the high level of claims resulting from the Texas freeze in March caused by Storm Uri. Concerns about the potential impacts of climate change and the management of exposures relating to extreme weather events will continue to be key focus areas for downstream energy underwriters.

Although business interruption volatility clauses have become increasingly common, BI values and exposures are likely to get insurers’ attention. This is likely to be particularly true for petrochemical and chemical companies, many of which are reporting strong financial results due to favorable commodity pricing conditions and inflationary pressure in some regions. The easing of pressure on insurance capacity (excluding NatCat) will enable insureds to purchase higher insurance limits to cover increased BI exposures; however, this is likely to result in increased pressure to relax any previously imposed BI volatility clauses.

The next few months will be key in identifying the possible insurance trends for 2022 as insurers look to define new strategies to adapt to a changing pricing environment, while key management and underwriting personnel changes across the insurance community may add to the sector dynamics.

3. Midstream energy

The midstream energy sector covers a broad spectrum of operations from pipelines to storage, through to ports and terminal operations. There is not a distinct midstream insurance sector as such, and policies for midstream companies are written across the upstream, downstream, and marine insurance markets (for ports and terminals). The more benign exposures of pipeline physical damage or gas plants can be written in either the downstream or upstream sectors, but more hazardous risks such as onshore US named windstorm, hydrocarbon blending or processing, or complex contingencies for BI exposures, are pushed towards the downstream market. Premium volumes tend to be lower than the traditional upstream and downstream sectors, leading to more volatile loss ratios. In general, rates have continued to trend upwards (at a decelerating rate) particularly for risks covered in the downstream market, or accounts with loss histories. Flat renewals or reductions are not generally being experienced by this cross-sector class.

4. Traditional power

Rate rises continued to slow to single-digit growth in the third quarter for accounts with straight forward renewals, clean loss records, and no NatCat exposures. A number of large losses in the second quarter, and recent US storms, have not yet interrupted the slowdown of rate increases. However, more accurate loss reserve calculations for the recent storms may provide a better indication of potential impact on rates. 

Insurers’ previous focus on pricing has shifted to the tightening of terms and conditions, and insureds have been willing to accept higher retention levels. Stabilizing of rates was further aided by new capacity from MGAs, and global marketing efforts to reduce the influence of individual insurers. This has led to the return of capacity for more sought after accounts. While London markets dominated the sector over the last 18 months, local markets are looking to regain their market share.

Standalone coal placements continued to see increased retentions and further rate increases, regardless of loss records. The restructuring of programs and utilization of international markets is now commonplace as more insurers withdraw from this class. Road shows, recent engineering reports, and demonstrated commitment to continual risk management improvement are crucial in avoiding tougher market conditions.

5. Renewable energy

There has been a relative stabilizing in deductible levels and policy terms and conditions for renewal business following the significant adjustments markets imposed across their portfolios during 2020. Key exceptions include accounts exiting long-term agreements or those with considerable loss history.

Rates have stabilized to single-digit or low double-digit rises, particularly for operational wind and solar accounts with limited or minimal NatCat exposure. Capacity continues to flow towards the onshore and offshore renewable energy sector, particularly from new entrants seeking to diversify their conventional power or oil and gas portfolio. While historically this has been in support of MGAs, a number of carriers are now entering the space on an open market basis. Established markets also have ambitious growth targets, however, there remains a limited pool of insurers willing to provide lead terms.

Key challenges remain for wind and solar construction risks, particularly those with NatCat exposure, which reflects markets’ poor experience over a number of years. These types of placements continue to experience adjustments to pricing and/or terms and conditions. In onshore wind, exclusions remain for issues with specific contractors that have experienced frequent losses in recent years. In offshore wind, exclusionary language is now standard for potential defects in cabling protection systems worldwide.

Markets continue to be cautious about the pace of technological advances. Some recent high-profile battery energy storage system (BESS) losses have raised insurers’ concerns, and there remains a significant shortfall in capacity compared to other technologies. Markets may adjust their capacity position as they gain a better understanding of these recent incidents and the loss reserves emerge. The situation is similar for advancements in both onshore and offshore wind as manufacturers develop larger turbines. There has been a significant increase in the self-insured retentions sought by insurers for unproven models.  

Early engagement and open sharing of information with the markets remains vital for investors, and allows brokers time to review existing programs and optimization through strategic purchasing and/or policy restructuring. Virtual surveys or market road shows also help differentiate accounts in an incredibly busy sector.

6. Terrorism/political violence

The terrorism/political violence market experienced a further increase in capacity with a few new entrants throughout 2021. In general, rates have been flat, with most renewals being placed at the same rate as last year. However, steep increases remain for insureds with retail exposure or loss history, particularly in Latin America.

While the headline figures for the recent riots and destruction in South Africa are high, it is too early to know the effect this may have on rates for the terrorism/political violence market as a whole. The profitability of these lines of insurance may mean that capacity is unaffected.

7. Energy casualty

The hasty withdrawal in 2020 of approximately USD 200 million in capacity seems to have subsided. Capacity is generally stable and insurers are returning, seeking to take advantage of what they consider to be a favorable trading environment. While markets are still pushing for increased rates, it is at a more controlled pace than previous quarters. Rate rises are now around 10% or below for offshore risks, while insurers are seeking increases of up to 25% for onshore or chemical exposures. However, the Lloyd’s market first half-year results show that casualty is the only class to post a loss, albeit at much lower levels than the same time last year. This may suggest that casualty markets will look to rebalance their financial position. At the time of writing, an oil spill from an offshore platform and pipeline had affected beaches in California. This could result in a substantial loss to the casualty market, and may prompt markets to consider whether further rate rises are required.

While there is currently greater competition on excess layers, primary coverage remains challenging, and options for insureds in this area are often limited to captives or self-insurance.

The underwriting process continues to take longer than it did in the past, reinforcing the need for early engagement with markets and greater preparation. Within the insurers’ process, there is a far greater degree of both peer review and actuarial intervention, which is leading to increases in exclusionary/restrictive language, and in some cases the deletion of historical coverages. For example, “occurrence” coverage for onshore risks is being changed to “claims made,” costs in addition is being amended to costs inclusive, free or fixed cost reinstatement provisions are being deleted, aggregate retention caps are being removed, and there are restrictions on definition of injury.

In January 2021, Lloyd’s insurers proposed various cyber exclusions, which were adopted by most markets.  However, some company markets continue to use their own clauses, which is becoming a challenge for coverage continuity. For example, there are inconsistencies in the definition of malicious and non-malicious damage, with variations across geographies particularly for North America or international placements. While brokers have managed to carve out write backs for third-party bodily injury and third-party property damage, some markets are starting to resist this going forward.

Some markets are introducing exclusions for certain chemicals. The latest exclusion is for poly flouro alkyl’s (PFAS). These are often referred to as “forever chemicals” as they do not break down, but accumulate over time. They are used in a variety of industries including firefighting (foam) and in fracking for oil and gas. Where they may not have been applied previously, exclusions are now being imposed for methyl tertiary butyl ether (MTBE), which is an additive that oxygenates gasoline. Gasoline containing MTBE spreads easily underground and estimated costs in the US for removing MTBE from groundwater, aquifers, municipal water supplies, or leaky underground oil tanks range from USD1 billion to USD30 billion.

8. Bermuda casualty

Casualty insurers in Bermuda are still seeking rate increases from 15% to 20%. “Excess” capacity is still available at higher pricing. While there have been several new entrants into the Bermuda market, their approach to energy accounts has been cautious and their presence has not yet resulted in reduced pricing.

9. Marine exposures

The marine market remains stable, with insurers returning to sustained profits following rate rises and minor adjustments to conditions over the last few years. Though rate increases look set to continue, there are signs that hardening of the market is slowing as rates reach sustainable levels. Any significant deterioration in claims could cause this to change.

Over the last 24 months, the global hull market has seen a reduction in capacity, particularly in the Middle East and Asia. Some insurers have limited their underwriters to local fleets rather than international portfolios. While Scandinavian insurers have historically adopted independent pricing, their rate increases have been broadly in line with the global market and they remain commercially flexible for favored accounts with good loss records.

There is a cautious increase in capacity from existing participants, including some in London, mostly limited to profitable sub-sectors. For less profitable, more volatile, or less popular sub-sectors, the market remains challenging, with little sign of change to the hardening trend.

Placements in London markets seem to be increasing as local capacity reduces. So called “verticalization” (or different terms) is still a significant factor in many placements, particularly those with large fleet values or poor loss history. However, most placements are being completed at the lead market pricing without requiring recourse to more expensive options.

10. Onshore construction

 The onshore construction market has remained stable and relatively predictable throughout 2021, with no significant changes to capacity. Moving into the treaty renewal season, rate reductions are unlikely while pressure for significant rate increases has subdued. Trends will become clearer when reinsurers complete their forward assessments, and indications are that the impact of rate consistency and control over extensions and sub-limits is unlikely to result in further increases.

Risk quality is the highest priority for markets, and clients demonstrating continual improvement through timely, quality submissions are more likely to receive favorable outcomes from underwriters.

Deductibles for major projects have remained constant, although significantly higher than three years ago.

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