Energy Market Review Update 2022

Welcome to our Energy Market Review Update for the final quarter of 2022. As we look towards the January 1 renewal season, both the energy and the insurance industries have a lot to be apprehensive about, as global geopolitical and economic uncertainties continue to intensify.

Indeed, those of us who are used to the rhythms of the traditional market cycle are having to take a fresh look at the rather peculiar dynamics currently affecting the market. Tradition would have it that a period of significant market hardening is then rapidly followed by an increased appetite for business at the new, higher rates – thereby ushering in the next phase of the market cycle, an equally rapid market softening as market imperatives switch from technical rating adequacy to meeting increased premium income targets.

This time round, instead we are left with the remnants of a hard market – a tapering off of the hardening dynamic but no sign yet of the softening that many by now had anticipated. A number of factors have contributed to this new “apprehensive equilibrium”, not least the Ukraine crisis, global inflation, a renewed focus on ESG and the deterioration of the 2022 loss record, particularly for Midstream and Downstream business.

Perhaps one of the most reported developments of the last few weeks has been the announcement by the Lloyd’s Munich Re Syndicate 457 (MRS) that it is to withdraw from traditional oil & gas business in 2023.

This announcement relates to Upstream Property business and will therefore have a major impact on some sub-sectors of this market. These include major programme “capacity” risks where the Upstream market struggles to meet client demand, Gulf of Mexico Windstorm (where MRS has been a key player for many years), stand-alone OEE “one shot” wells and some construction projects where MRS capacity has also proved to be key in the past. Even if MRS’ capacity as such will not prove to be such a major factor for these latter two sub-classes, at the very least prices for these risks are likely to rise further than they would have done in the absence of the Syndicate’s withdrawal.

However, it is important to note that MRS is primarily exiting from core first party programmes related to Upstream Energy. Munich Re, through various entities, will continue to support Downstream and Midstream Energy, Cyber, Political Risk and certain other lines.

At WTW, we support the energy transition, but recognize the crucial role that oil & gas plays in the global economy and national security. We believe that this announcement underpins the need to utilize a specialist broker who is dedicated to this vital segment of the energy economy. WTW has made significant investments in all market hubs over the past few months to solidify its role as the leading global specialist broker within the energy, power & utilities, mining & metals and chemicals industries.

The other major development affecting the market has been the impact of global inflation levels around the world. Inflation doesn’t only hit the business or its clients; it also has the potential to significantly impact the insurance market. It is for this reason that insurers have been so focussed on ensuring that inflationary provisions are adequately reflected at each renewal. It is difficult to fully assess the impact of higher inflation on claims at this stage, as the higher inflation environment has not been present for a sufficient amount of time to accurately measure this; however, logic suggests that this will inevitably feed through to higher claims costs in the long term. Concern is therefore being felt by many insurers, who are also looking more closely at property declared values. This includes business interruption, the impact of more volatile Energy markets and whether the positive impact of inflation on buyers’ profits is being fully reflected in the values declared to the insurance market.

Today, a simple revaluation using current inflation rates may mask the actual exposure facing insurers; indeed, where brokers have encouraged a more detailed valuation/EML scenario exercise, this has generally been recognised by the market in terms of a more modest rating increase. In contrast, when the old methodology has been applied, a more punitive rating increase has generally resulted.

Our message to the energy industry on this topic is therefore really quite simple: it is vital that a more transparent understanding of how insured values are calculated is communicated from buyer to broker to insurer.

When this is achieved, buyers will see greater price stability, which will in turn reduce the likelihood of large swings experienced between hard and soft market conditions, as we have experienced so often in the past. Furthermore, insurers will increase their confidencelevel on received insured values and the premiums they are requesting. At WTW, we have dedicated Natural Resources engineers located across the globe that can assist buyers in ensuring that the values presented to the insurance market are up to date and accurate.

We hope you enjoy this year’s Update and as ever would much appreciate any feedback or questions you may have.