Theoretical insurance capacities in both the upstream and downstream oil and gas insurance markets have increased to the highest levels seen this century, according to Willis Group Holdings plc.
Heavily over-capitalized global reinsurance markets combined with a glut of new capacity from non-traditional providers – such as pension funds, hedge funds, and investment banks – have increased competitive pressures in the energy insurance market to unprecedented levels, according to Willis' annual energy market review.
Total theoretical upstream market capacity now stands at $5.7 billion and the equivalent downstream total is now at $4.6 billion, according to the report. Meanwhile, statistics from Lloyd's of London suggest that the overall energy premium pool available to insurers may be reducing for both markets.
Given these conditions, Willis expects it may take more than a run of catastrophic losses to provoke any significant capacity withdrawal from the energy sector.
In 2013, the energy loss record was no worse than average, noted Willis' report. On the upstream side, the Willis energy loss database recorded only a handful of losses in excess of $200 million, while on the downstream side, although there were three serious incidents in Argentina, the U.S., and Canada, the loss record continued to improve.
At the same time, the report noted that the energy industry itself might be sitting on an uninsured cyber-attack time bomb. While insurance cover is readily available for non-catastrophic cyber-attack losses to data and intellectual property, it can be much more challenging to access cover for a truly catastrophic event involving physical loss or damage or business interruption running into billions of dollars, the report observed. Certain markets, however, have emerged recently with the appetite and capacity to provide energy companies with at least a degree of cyber-attack insurance cover, according to Willis.
Commenting on energy insurance market conditions, Alistair Rivers, the global head of natural resources at Willis, said, “With no obvious alternative investment opportunities emerging, and with interest rates around the world still low in relative terms, capital providers are likely to maintain their funds in the reinsurance markets where they are currently deployed – at least for the short term. Energy market capacity is therefore likely to continue to be available, even if the sector falls into unprofitability.”
He continued, “The difficulty with predicting how market conditions will turn out in the next few years is that this is the first time we have seen capital deployed in the insurance markets that is unlikely to be put off by short term underwriting unprofitability. In previous market eras, we have always found that a major catastrophe or series of losses – for example, Piper Alpha, 9/11, and the 2005 Gulf of Mexico hurricanes – has led to a withdrawal of capacity and harder market conditions. But now we think it will take more than a headline-grabbing loss to precipitate a withdrawal. Capital providers would have to find an alternative haven for their money if they are to withdraw from the insurance arena.”
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