Wafer thin margins become 'new normal' in energy market

Despite a plethora of challenges including low oil prices, cost control pressures, workforce layoffs, onerous legislation/regulation and the escalating risk of cyber-attacks, margins for energy insurers remain wafer thin, a situation that could become the ‘new normal’ for the market.

That is one of the conclusions of Willis Towers Watson’s latest Energy Market Review for 2017.

It said that despite an encouraging uplift in the energy industry during the last 12 months, the many challenges the industry faces are starting to reflect a “new normal” in the industry.

At the same time, there may also be a “new normal” emerging in the global energy insurance markets, it said, noting that the abundance of re/insurance market capital, the driving dynamic behind market conditions now for nearly a decade, is likely to remain dedicated to the industry – “no matter what individual sector loss records produce”.

And the report noted: “The markets are still softening, albeit at a decelerating pace. This deceleration may transition into a broader bottoming out of market conditions should individual portfolio loss records deteriorate further late in the year.”

The review established that upstream market capacity is up from $7.56 billion to $7.72 billion, International Downstream from $6.19 billion to $6.5 billion and International Liabilities from $3.2 billion to $3.3 billion.

More than $5 billion of upstream energy losses were recorded for 2015, the highest loss total for five years. Meanwhile downstream energy losses for 2016 now stand at $2.58 billion, up significantly from 2015’s total of $1.91 billion.

The report noted that, from a high of £1.06 billion in 2014, in two years Lloyd’s premium income from Energy business has declined to just £700 million in 2016.

It also showed that while individual energy portfolios have generally remained profitable during 2016, should the current loss record deteriorate by only a small degree during 2017 then this might well be sufficient to threaten their viability.

Neil Smith, Willis Towers Watson’s global product leader for natural resources lines, said: “The long term outlook for Energy insurance buyers remains uncertain. History teaches us the market conditions in these lines of business can change rapidly and should this prove to be the case, buyers will need to ensure that they have the right strategy in place to ensure the continued viability of their risk transfer programmes.”

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