SPEAKER 1: Welcome to The Risk Circuit, a WTW podcast delivering the latest insights into risk trends and challenges across the natural resources industry. With perspectives from leading voices across all key natural resources sectors, you can make decisions with confidence and clarity.
MARIE REITER: Hello, and welcome to The Risk Circuit. Thank you so much for tuning in. Today we're going to dive into the topic of the upstream energy insurance market.
I'm your host, Marie Reiter, Head of Global Broking Strategy for Natural Resources here at WTW. And I'm delighted to be joined by three esteemed guests today. Firstly, Richard Burge, Chief Broking Officer for GB Natural Resources and Global Head of Upstream Broking. Richard, good to have you with us.
RICHARD BURGE: Great to be here.
MARIE REITER: And then we also have with us George Richardson, who's a Senior Upstream Broker in our Natural Resources team.
GEORGE RICHARDSON: Great to be here. Thank you.
MARIE REITER: And last but not least, we have Jamie Lee, Managing Director for Upstream Energy North America based out of Houston. Thank you so much for joining us so early in the morning, Jamie.
JAMIE LEE: Good morning, Marie. Thanks so much for having me. Look forward to this discussion.
MARIE REITER: Excellent. And in this podcast, we're really looking to draw out a few key topics and themes covered in our recently published Energy Market Review Update, particularly the current loss trends and the performance of the upstream portfolio, how that interacts with rating movements, and how clients can avoid getting caught out in the emerging broker pricing frenzy.
When looking at the losses recorded in our WTW Energy Loss Database, we can see some deterioration in the 2023 loss record. However, with only a total of circa $590 million of losses recorded for 2024, the current year looks extremely benign, with an absence of both headline losses and attritional losses. So Richard, what impact do you think such a spectacularly profitable year will have on the upstream market conditions?
RICHARD BURGE: Interesting question, Marie. There's no doubt that 2024 will be profitable for many of the markets that we deal with. However, what we have to take into account is that when we look at our Willis Towers Watson loss database, we map losses against calendar year, whilst insurers use GAAP accounting.
GAAP accounting, therefore, means that in 2024, insurers are also having to take into account any deteriorations that they have in back year, especially in our world, construction. So whilst I would agree the losses for '24 look very benign, I still think that there is quite a long way to go.
Historically, we have seen our years go out after the expiry of a calendar year, and I think that there will be some underwriters who will have some quite challenging combined loss ratios for 2024. Having said that, the market conditions are still soft and we still believe that they will continue to be soft in 2025.
We still have overcapacity in the marketplace for the majority of risks that we place. There has been a continued emphasis on mergers and acquisitions in 2024, and we believe that will continue into 2025. So we still have a very competitive market for most risks.
MARIE REITER: So Richard, that's really interesting to hear that. That's still that oversupply of capacity in the London market. But I'm conscious that whilst London market capacity is still abundant, in the US, you appear to be losing some of the capacity. Jamie, could you give us a bit more detail on the US capacity situation and what the impact is that you envisage that having on the rating environment.
JAMIE LEE: Sure, Marie. You're right in that the US market capacity is reducing year over year. 20 years ago, when the unconventional shales were discovered by operators, we had a number of US underwriters that could write risk for operators and service contractors.
And shales brought with them vertical drilling, along with horizontal drilling, and higher costs to drill and complete these wells, which require higher insurable limits. And the US was known less as a quota share market and more of a 100% market. But with these required higher limits, it became more difficult for underwriters to write on 100% basis.
London used to not aggressively approach accounts in the US under, say, $1 million in gross written premium. But with the shale revolution and all the activity coming to light, London began to aggressively court that business. Facilities were set up within London to manage and handle the small to midsize operator business and service contractor business.
And as a result, we've seen much of that capacity move over to London. As Richard had mentioned earlier, there remains plenty of capacity in London and it's over capacity. We see the market continuing to soften in the future, and we see no reason that limits terms and conditions aren't achievable in the London market.
In the United States, we've just lost our last 100% capacity market in Travelers, who has pulled out of the controlled well market. And so for the foreseeable future, we see most of the upstream business moving into the London market and following those trends.
MARIE REITER: So it's really interesting to hear that. Despite the loss of capacity, the US business will now be using the London market. So we'll still be able to benefit from that rate softening we've been speaking about.
And as we look for the year ahead, do we think that the softening will apply equally across the whole upstream book? George, I'd be really interested in your view on this.
GEORGE RICHARDSON: Thanks, Marie. I think it's fair to say that the upstream portfolio is a very broad and varied book in the market. It covers so many different types of risks, from offshore platforms, to subsea constructions, to land rigs, to drilling contractors. And that means that the underwriters, historically, have tried to pick their way through the portfolio to try and make it profitable for them.
And I think when we look back a few years, there was more differentiation in terms of what the market wanted to write. But they've done their research. They've looked at the stats and it's very clear over the last few years that there is a certain part of the book that is very profitable. And that is what they call their core book, the tier one accounts. And that tends to be offshore operational business, particularly in certain parts of the world.
And I think what that means is particularly in the quota share market, which it typically upstream is, when a leader, and there are a few leaders who can competitively go after leadership on those tier one accounts, they can really drive the pricing down. And with the massive capacity that there is in our market, a lot of the followers really need to get on board of these tier one core accounts. And the reason that that is the most performing part of the book.
So we see that on that side of the portfolio. But on the other side, whether that's land rig, rigs, or OE-only programs and particularly subsea construction, they are much more challenging to place. With subsea construction, that is just a reaction to numerous losses over the last few years. You'd expect the market's reaction to that to raise prices, to raise retentions.
And we're seeing that. But it's very much on senior management's radar when it comes to the offshore construction, particularly subsea, whether that's pipe lay or cables. And so I think markets are very cautious, particularly in subsea. And when it comes to subsea constructions, the most challenging part of the upstream portfolio, the way that brokers and clients are going about placing them, it tends to be linking them to operational programs, which, as I discussed, is part of the portfolio that markets are really, really competing for.
So I think it's-- I won't steal Richards thunder, but it's very clear that the portfolio is very broad. Different parts of it are performing better than others. And as you'd expect, the market has to adjust to different parts of it and apply the appropriate rating changes from one year to the next.
MARIE REITER: Thanks, George. It's really interesting to hear that subsea construction still continues to be the ailing child of the upstream market. But across the operational exposures, are reductions are still looking fairly consistent, Richard?
RICHARD BURGE: Yes. I think they are, Marie. We've seen, in 2024, reductions gather pace as the year has gone on. There's definitely more competition out there in the market for tier one business. As George has explained, every underwriter wants to write the offshore portfolio, the accounts that have good loss records to balance out their portfolio against certain coverages for offshore contractors. For example, subsea construction.
So yeah, there's increased competition on tier one business. And we see that is going to continue. And also, as brokers, it gives us the flexibility to consistently benchmark leaders by obtaining alternative quotes on our renewals to make sure that we get the best out of the market for our clients.
MARIE REITER: That's good to hear. And looking further afield, do you envisage any particularly challenging areas in the US market, Jamie?
JAMIE LEE: Utilization of the fleets depends on region and also class of business, with some regions being more competitive than others. There are a lot of losses in the US onshore contractor book of business pressure pumping fires. There's an aggregation of a number of pieces of equipment when completing a well. And those values can range from $20 million to $40 million.
In particular, US onshore service contractor market is very difficult. The business itself is tough. Margins can be thin. There's ample competition onshore. There's been a lot of mergers and acquisitions activity as well.
From an underwriting perspective, there are quite a few losses on that book of business. Whether it's losses in transit, moving equipment around, losses due to pressure pumping and completion via frac spreads that catch on fire. There's a lot of aggregation of value and equipment during the fracking and completion process that can lend losses in the range of $20 to $40 million on a frac spread.
And counterpunch is that the US inland marine markets will often write onshore contractor business. They typically won't write drilling rigs, but they'll write the ancillary equipment. And while the London market has had significant adjustments in retentions and rates for the onshore contractor business, we have been successful in placing some of that business in the US with the inland marine markets to create competition and benefit our clients.
MARIE REITER: In our latest market review, we talk about the broker pricing frenzy that we've seen recently, especially on tendered accounts where brokers are trying to win business by outdoing each other and quoting ever larger reductions in their desk tenders. George, what advice can we give clients to ensure that these quoted prices are actually credible and achievable?
GEORGE RICHARDSON: So when a broker is then successful in the tender and they go into the market, their pricing could be so ambitious that it's hard to get a credible leader to lead off at their pricing. And if they do get a leader and they start to place the business, they may find that they can't get support to that pricing.
Even though we talk a lot about there being huge amounts of capacity in the market, if the price if the price is so low and-- and unacceptable to a lot of the underwriters, the broker will come unstuck. And we have seen that.
So that's our big warning to clients, is that brokers will push the pricing, and that could lead to a more distressed placement in the end as the broker is going around replacing markets, replacing incumbents from the previous policy that can no longer-- cannot meet this reduced pricing. And I think as long as clients go into it fully aware of the risk of broker pricing, then hopefully there should be no surprises.
MARIE REITER: And if, as a client, you want to avoid that unexpected surprise, how can you try to go about avoiding that?
GEORGE RICHARDSON: So what we suggest to clients is that there is an extra stage in the tender. So once there is a price that looks to be the most competitive, that the client invites the broker to go into the market and get a credible lead, or a leader to support those terms. And then they can have a conversation with the client about the next stage.
MARIE REITER: Excellent. And I think as a final thought of as we're approaching reinsurance treaty renewals, the markets are obviously keeping a keen eye on US natcat activity, which could always affect the treaty market. Jamie, what do we see in the recent US wind losses? What do they look like? And could this still come in to upset the market softening?
JAMIE LEE: Thanks, Marie. The recent US wind losses have been relatively benign. The last major Gulf of Mexico wind loss for upstream operators was really 2008 in Hurricane Ike.
Prior to Ike, there was a general reset of the coverages, a sublimiting of coverages and increase in retentions after Hurricane Katrina and Rita. Ike hit three years later and there was a drastic additional change in the sublimits and retentions, and specifically the pricing of wind.
But if you've written wind since 2008 as a complement to your operational exposures, as an underwriter, you would have done pretty well. And I believe oftentimes the underwriters see the wind as subsidizing the operational risk and vice versa. So it's the old adage of spreading risk, writing a lot of different covers to achieve profitability.
There have been some late season storms and early season storms recently, but they've generally gone east and west of the oil field infrastructure in the Gulf of Mexico. And so the losses have been small to nonexistent. We feel like the Gulf of Mexico wind premiums have found a general baseline and will remain flat for the foreseeable future, unless we have some significant market events.
MARIE REITER: It's good to know that there's been a limited amount of upstream wind activity that's helped underwriters sustain profitability across that portfolio. But Richard, I'd be really interested in your view on the broader market expectations, looking at the treaty reinsurances due to renew at 1/1 and how the greater treaty market is affected by natcat losses, and what expectations we have from treaty renewals going forward.
RICHARD BURGE: Sure. I'd be happy to take that on and give you an answer, Marie. It's early. I think for those of us that have been in the business for a while, we all realize that treaty reinsurance tends to convert itself right towards the end of December.
But the sounds we're hearing are very much underwriters are expecting flat expectations on their treaties. That's very much from a whole account point of view. So that's across all business lines that they write.
I think that for upstream energy, it's going to be dependent on what the stats are in H2 within markets that we deal with. As you recall, right at the beginning, I mentioned about underwriters GAAP accounting, and how much deterioration there is on the back years into 2024.
I think, then, it's down to how markets buy their treaty reinsurance. Some just buy specifics, just for upstream energy. Some will combine their upstream purchase with their downstream oil and gas refinery treaties.
For those, they're coming off a very good year with benign loss activity in 2024. So they will probably get a better deal this year, compared to the specifics. I think generally, from what we're hearing is that natcat is unlikely to affect treaty renewals.
Having said that, though, we're all fully aware of the recent horrific situation in Valencia, so there's still a lot of natcat happening around the world, non-energy natcat that can definitely have an influence. But I think from what we see at the moment and it's early days, we're kind of expecting the treaty market to be flat, which would tell us that there is possibility. There is a possibility that the markets that we deal with might actually get better terms for their treaties. So we might see some reductions on their treaty costs at 1/1. But it is very early to say.
MARIE REITER: And just to close us off, George, do you have any advice for clients that are renewing at 1/1, knowing that treaty renewals are likely to be pushed out right close to the 1/1 deadline. What can clients renewing at 1/1 do to protect themselves from any last-minute upsets?
GEORGE RICHARDSON: Yeah, absolutely. I think it tends to be the usual things that we suggest. So the first one is an obvious one, which is to start early.
Get the information into your broker as soon as possible so that we have time to go and discuss the renewal terms with the leader. There's often a bit of back and forth. The market gets very busy towards the end of December, so things can slow down. So get in there nice and early.
Market engagement is always a really big topic for our clients, whether that's building relationships with some of the key markets, or trying to really build a compelling story for your company. So whether that's to do with the amazing loss record, or the significant growth that you're about to experience, and just always reminding the underwriter of the risk management that's in place.
And I guess the reason we do that is to make sure that you are seen as a tier one client, core business to these underwriters. Because as we discussed earlier on in the podcast, those are the clients. Those are the parts of the portfolio that are getting the best terms.
And finally, it's important to keep your leader on their toes. So we're in a softening market, particularly for that tier one business. It is important to get alternative quotes where appropriate and make sure that we, as the brokers, are driving competition and making sure that you're getting the best possible price.
MARIE REITER: Thank you so much to all three of you. That was some really insightful answers and I could not thank you enough.
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