Research

Marketplace Realities 2018: Energy

November 6, 2017

Upstream

The one thing

If there are more natural catastrophes later in the year and reinsurance prices rise, then a market turnaround is a real possibility.
  • Recent windstorms have caused apprehension in the market. Current RMS forecasts put insured losses from wind, storm surge and inland flood from Harvey at $25–35 billion. The latest comparable figures for Irma are $25–40 billion, for a potential total of $75 billion. With Maria, the consensus is that the total insured losses will exceed $100 billion. And there is still ample opportunity for further activity this hurricane season.
  • Several major (re)insurers are already purchasing additional “top-up” reinsurance protection.
  • History suggests hurricanes are likely to be seized on as a rationale to increase prices.
  • If reinsurance prices rise in January, then the direct energy insurance markets are likely to have little choice but to pass on these increased costs to their customers.
  • However, offshore energy infrastructure seems to have avoided disaster, with nothing at all to suggest offshore losses on the scale of Hurricanes Katrina and Rita in 2005.
  • Continued over-capacity in the upstream market is enabling buyers with good loss records, risk profiles and spending power to continue to achieve worthwhile premium reductions.
  • Even if reinsurance prices for upstream insurers rise in January, the net effect is likely to be a temporary pause in the softening process rather than a permanent upswing in rate levels.
  • So, there is a very good chance that reinsurance treaty prices will rise, at least in the short term, but as long as capital continues to flood the market, not much is likely to change in the long run.

Downstream

Price prediction

Generally flat conditions as the impact of the catastrophes is clarified, and then a possible resumption of a softening market.
  • Recent windstorms have caused apprehension in the market. Current RMS forecasts put insured losses from wind, storm surge and inland flood from Harvey at $25–35 billion. The latest comparable figures for Irma are $25–40 billion, for a potential total of $75 billion. With Maria, the consensus is that the total insured losses will exceed $100 billion. And there is still ample opportunity for further activity this hurricane season.
  • There has been a significant impact on refinery production.
  • Several major (re)insurers are already purchasing additional “top-up” reinsurance protection.
  • History suggests hurricanes are likely to be seized on as a rationale to increase prices.
  • If reinsurance prices rise in January then the direct energy insurance markets are likely to have little choice but to pass on these increased costs to their customers.
  • Some downstream insurers underwrite energy business as part of a wider general property
    portfolio — a portfolio that is likely to be significantly impacted by both Harvey and Irma.
  • However, the final bill to the energy insurance market may not be severe. Insurance claims will only be recoverable from policies that have been specifically endorsed to cover named windstorm.
  • Many impacted companies are in the energy industry mutual OIL, which will absorb losses that would otherwise have impacted the conventional insurance market.
  • Excess capacity may dampen any momentum toward a sustained upturn.
  • So, there is a very good chance that reinsurance treaty prices will rise, at least in the short term, but as long as capital continues to flood the market, not much is likely to change in the long run.