Research

Insurance Marketplace Realities: Energy

2018 Spring Update on Commercial Insurance in North America

April 12, 2018

Price prediction

  Trend Range
Upstream energy: Up +5% to +10%
Downstream energy: Up +5% to +10%

Upstream energy

Key takeaway

Should average loss levels return in 2018, the portfolio could become rapidly unprofitable, leading to instability. Insurers are more comfortable following a benign loss year, but the premium income challenge remains.

Upstream energy has had one of the most benign loss years in recent memory.

  • Reinsurance costs rose on January 1, resulting from the 2017 Atlantic hurricane season. Upstream losses were negligible.
  • Capacity has increased again in 2018 to nearly $8 billion — limiting the chances of a dramatic market turnaround following the catastrophe losses of 2017. Rates, however, are rising some.
  • The January 1 reinsurance renewal season saw no withdrawals apart from PartnerRe, and reinsurance costs increased only slightly.
  • Underwriters are facing less pressure from management to write for premium income and are focusing on quality instead of quantity.
  • The number of program leadership options open to buyers has fallen, allowing for existing leaders to maintain the modest rate upswing that begun on January 1.
  • Prior-year claims may deteriorate, impacting 2017/18 results.
  • Actual price rises will depend on individual risk profiles, loss records and premium income levels, and the status of long-term relationships with leading markets.

Downstream energy

Key takeaway

The underwriting discipline has held for the moment, but how long it can continue to do so without market withdrawals remains an open question.

While the pressure to increase rates is intense, capacity is up again, and there has been only one market withdrawal, creating downward rate pressure that is likely to reduce the increases buyers are seeing.

A challenging year for the downstream market, 2017 proved one of the worst loss years in recent memory.

  • At present, this line of insurance is unprofitable for most insurers.
  • During the January 1 renewals, modest, single-digit rate increases were the norm —despite the prediction by some insurers for a more dramatic market turnaround.
  • We have seen some limitations on the amount of sub-limited cover available for coverages such as contingent business interruption.
  • Brokers are using vertical marketing techniques to secure optimum terms for clients, fusing the different underwriting approaches of major carriers.
  • A wide disparity in regional rating levels continues.
  • We expect prices to rise based on individual risk profiles, loss records and premium income levels, and the status of long-term relationships with leading markets.