NU Online News Service, April 23, 1:57 p.m. EDT

Summing up the insurance market for upstream and downstream energy risks, a recent Willis report says a “fragile stability” is prevailing where pricing is flat to slightly up. But Willis says factors such as overall market hardening and the ongoing Euro crisis could create a more challenging market for buyers.

For the upstream energy market, which involves exploration and production, Willis says modest rate increases are the norm.

Capacity in the upstream market has increased to a new record level. Overall levels, says Willis, are nearing the $5 billion mark.

“In practical terms, we can now say that for the most attractive business requiring the maximum capacity that the market can offer, program limits of $4 billion for operating business and $3.6 billion for offshore construction business are now achievable—at a realistic price,” says the report.

But buyers may not find as attractive of a market as they would expect given this high capacity. Willis notes, “While overall capacity has continued to increase, it is neither deployed often nor provided from a wider range of leading insurers. As a result, rates continue to creep upwards.”

The report contends that capacity is increasing partly because investors cannot obtain better returns elsewhere given the current global-economic environment.

“As long as insurance remains a safe and reliable haven for capital deployment during these troubled economic times, this anomaly [of increasing capacity accompanied by increasing rates] looks likely to continue for some time,” Willis states. But the report notes that without the capacity, rate increases would likely be steeper than they are.

The types of losses in 2011 and 2012 also play a part in rate increases, Willis says. Many of the losses in 2011 were in the $100 million to $200 million range, meaning that they were absorbed completely or mostly by the upstream market rather than reinsurers.

“Given the recent spate of losses, it is perhaps not surprising that the effect of any increased official capacity has been muted to say the least, and that modest rating increases have therefore been the norm in this market during recent months,” the report states.

For the downstream market, which involves refining, selling and distribution, Willis says rates are effectively flat. More so than the upstream market, Willis says the downstream market feels the impact of recent natural catastrophe and mining losses, “and there can be little doubt that recent events, including the tragic flooding losses inThailand, have had a more significant effect on market conditions.”

However, Willis says the correlation to natural-catastrophe events is “a double-edged sword,” as insurers compete more vigorously in the downstream market “precisely because it offers a more benign loss record than other parts of the overall global-property portfolio.”

Willis wonders in the report if recent natural catastrophes will drive insurers to push for rate increases, or at least flat rates, or if “natural market forces” will reassert themselves, leading to a softer market later this year.

The downstream market was impacted by losses in 2011, Willis says, most notably a Canadian Sands upgrader loss, which produced significant physical damage and business interruption losses. Additionally, the March 11, 2011 Japan earthquake produced three losses over $150 million, notes Willis.

Special Reports /

Willis: Upstream, Downstream Energy Market in State of 'Fragile Stability'

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