Energy companies cut insurance spend in wake of tumbling oil pricesReprints
Too much capacity and falling buyer demand due to soft oil prices may prompt some energy industry insurers to reduce how much they underwrite or even convince them leave the market.
Low oil prices have forced many buyers to slash their risk management budgets, and many companies now are retaining more risk and self-insuring, said Robin Somerville, an executive director in Willis Towers Watson P.L.C.'s natural resources department in London.
Energy risk capacity is ample, and rates for most types of coverage continue to fall, Mr. Somerville said last week. “There is overcapacity” in many sectors of the energy market, said Mr. Somerville, and rates have continued to fall.
According to Willis Towers Watson's Energy Market Review released last week, the upstream energy insurance market, which covers the exploration and production phase, now has underwriting capacity of more than $7.5 billion, up from $7 billion last year and the 10th consecutive year that capacity has risen.
With new underwriters competing with established insurers for business, rates for upstream coverage are approaching levels not seen since the 1990s, Mr. Somerville said.
At least one traditional leader of upstream energy business has decided to scale back their underwriting, he said of the unnamed insurer.
For global downstream energy business — which covers energy operations after production and up to the point of sale but excludes Gulf of Mexico windstorm risk — theoretical market capacity stands at more than $6 billion, which Willis Towers Watson said is a record, although the maximum realistic program limit remains at about $4.5 billion.
Increased downstream business capacity has generated more competition among underwriters rather than prompting buyers to increase their program limits, according to the report.
Some composite insurers have increased their capacity for a given program to as much as $1 billion, Willis Towers Watson said.
Some leading insurers will consider writing an “all risks” policy form, which fell out of favor after the Sept. 11, 2001, U.S. terror attacks, which would include risks such as terrorism, Mr. Somerville said.
Some insurers are deleting cyber sublimits for downstream energy coverage, he said, effectively replacing coverage that had been excluded.
Rates for onshore construction energy business are likely to fall about 10% this year, and the market remains competitive, the brokerage said.
The international onshore liability market also has record capacity, about $3.1 billion, but larger buyers with a global footprint and complex operations that require “meaningful limits” have a more limited pool of capacity and rate decreases that are more muted than those seen for smaller buyers, according to the report.
For North America, the excess liability market has stable capacity at about $1.2 billion to $1.3 billion, Willis Towers Watson said.