Downstream energy: Light at the end of the tunnel

The last couple of years have been tumultuous for downstream energy clients, however diligent clients who focus on risk quality and accurately assess their asset valuations and business interruption calculations can look forward to a calmer approach to this year’s renewals. Whilst insurer discipline remains strong, and the market is highly verticalized, we will discuss below how clients can make savings by smartly controlling their placement structure and using their own retention appetite rather than relying on pure capacity supply pressure.

Reinsurance treaty renewals: Nothing to write home about

This year’s reinsurance treaty renewals can be summarily described as organized compared to the chaos of last year, where most markets had to accept both large rate rises and increased retention, and prolonged negotiations ensued. Most treaties were renewed well in advance and direct markets knew their treaty position early in the lead up to 1 January which gave them the certainty to be able to commit promptly to direct placements.

Most insurers saw their treaties renewing at flat rates or small single-digit increases, driving improved loss performance in the downstream energy space.

Despite this, treater reinsurers continue to be affected by multiple non-energy nat cat events which would have been factored into their renewals, especially on whole account reinsurance treaties. As a result, nat cat continues to be a big driver of treaty pricing, and the amount of nat cat limit purchased will directly affect the renewal terms.

Reinsurers did not seek to impose any new terms or coverage restrictions at 1 January.

Capacity is stabilizing

Overall, downstream energy market capacities have remained stable both in theoretical and realistic terms with line size growth from some carriers offsetting a reduction in working capacity being utilized by others.

Midstream and LNG risks attract the most capacity as they are within appetite for most of the market due to the benign nature of these risks and increased competition driven by larger captive involvement.

Overall, this continued stability of capacity is good news for buyers as there is still plenty of capacity for most risks, and we continue to see the best placements being significantly oversubscribed.

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