Willis: Downstream Energy Market Gripped by 'Atmosphere of Pessimism'

An “atmosphere of pessimism” has taken hold of the “downstream” energy-insurance market after two poor underwriting years, and while capacity has not been impacted yet, one or two exits by leading insurers could trigger a wider withdrawal, a new report says.

In its recent “Energy Market Review” Willis says the downstream energy market — which involves refining, selling and distribution — endured losses from Superstorm Sandy in 2012 after a loss-filled 2011 that included 10 major losses over $100 million.

Willis says some insurers may now be on the cusp of withdrawing from the market. “Until the onset of [Superstorm] Sandy in December, it looked as if 2012 would prove to be a benign year for downstream–related natural-catastrophe losses,” the brokers says. “However, this tragic event, in conjunction with historically low rating levels, has helped to prompt a mild hardening of conditions in the market, where an atmosphere of pessimism seems to now hold sway following two poor underwriting years  in succession.”

Willis says the energy industry is also impacted by the wider problem of supply-chain-risk exposure. The broker reports, “As supply chain exposure is so complex, risk managers and insurers alike are finding that not enough information with regard to key suppliers is being made available. This not only prevents effective risk management strategies from being developed, but also results in the coverage offered by both the downstream and stand-alone supply-chain-interruption markets being somewhat limited.”

And for the energy industry, supply-chain issues extend beyond just securing contingent business interruption coverage. Willis notes that energy companies are trying to reduce costs by adopting global sourcing strategies, subjecting their supply chains to significant natural-catastrophe and geo-political risks.

“Furthermore,” Willis explains, “in attempting to streamline their production processes, many in the energy industry are operating “just in time” procurement strategies to keep inventory costs low and maintain stocks at minimal levels; this means that all too often they are increasingly relying on their more critical suppliers to stay operational if they are to keep their own business running.” 

Consequently, Willis says any loss of production from a critical supplier is more likely to have more financial impact in 2013 than it would have had even 10 years ago.

Insurers' fortunes have been better in the upstream energy-insurance market — which involves  exploration and production — according to Willis. 

The broker maintains a “very positive” outlook for this segment, stating, “The market experienced an excellent 2012 in terms of premium income and loss record – indeed this is a market that has proved to be consistently profitable in recent years.”