Energy Market Review 2022

Welcome to WTW’s Energy Market Review for 2022. As if COVID-19 and its devastating effects over the last two years was not enough, we now find ourselves living in the most turbulent geopolitical era that any of us can remember. We can only think of those directly affected by developments in eastern Europe and can only hope that by the time this Review is published, a resolution of the current crisis will be a more realistic prospect that at the time of writing in late March 2022.

The effect on the energy industry has, of course, already been profound. We have not seen oil prices as high as these for over a decade; indeed, with western governments continuing to show a determination to shun Russian oil and gas, it seems clear that they are here to stay for the foreseeable future.

In previous times, higher oil prices were generally good news for the industry. And for insurers, they usually meant increased premium flows from greater rig utilisations, refinery margins and exploration & production activity, together with new construction projects. But following COP-26, the industry must now come to terms with the consequences of the energy transition – a transition that may actually be accelerated by the recent events in eastern Europe, as governments step up their efforts to find alternative sources of energy to oil and gas. It’s a transition that means that any future expansion of the oil and gas industry, even if in response to this new geopolitical era, may well be a relatively short-term and limited one.

In our first face to face event that we have hosted in two years, which was our European Energy Conference here in the UK at Pennyhill Park, Surrey, we discussed these issues with a variety of eminent speakers, both from the energy industry itself and from our Climate Resilience Hub at WTW. The key message that emerged from the series of presentations and panel discussions that were held was this: the energy transition will wait for no one; every risk manager involved in the industry will need to address the uncertainties arising out of both the new geopolitical landscape and the mounting momentum towards achieving Net Zero emissions targets.

We have entitled this Review “Facing up to Uncertainty” because we think that this is the most challenging and uncertain risk landscape to confront the energy industry since the beginning of the century. In Part One of the Review we include articles on risk modelling (with particular reference to physical and transition risk), managing geopolitical risks and the potential exposures for directors and investors. We also include a view from the US as to how the energy transition may eventually play out across the globe.

1. In Part One of the Review we include articles on risk modelling (with particular reference to physical and transition risk), managing geopolitical risks and the potential exposures for directors and investors. We also include a view from the US as to how the energy transition may eventually play out across the globe.
2. In Part Two we include edited transcripts of two interviews that we conducted recently with some senior Energy underwriters. There is no doubt that as a whole the market is still in the pioneering stage in terms of developing a common, consistent and workable stance on the issue of assessing buyers’ ESG credentials when offering to provide cover. However, the production of the new Energy Transition Questionnaire by the London Joint Rig Committee does at least represent a starting point in developing a common approach to insurers’ assessment of their clients ESG profiles, while SCOR’s David Cosserat offers an interesting perspective on how insurers will develop their ESG focus over time. We also take a look at the issues raised by increased asset valuations as a result of recent commodity price rises and how they may affect claims payments in the future.
3. In Part Three we focus, as always, on the Energy insurance markets themselves. Until events in eastern Europe overtook us all, the story was (and to a large extent still is) of a gentle easing of the previous hard market conditions; indeed, in some lines of business we have finally seen actual rating reductions for the most sought after business.