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

Summing up the insurance market for upstream and downstream energy risks, a 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,” the report says.

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

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

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 in Thailand—have had a more significant effect on market conditions.”