The changing risk profile of energy risks should be driving rate increases, but high capacity in the marketplace and surprisingly few losses are keeping prices down, says a report from insurance broker Marsh.
“Are we at the critical point of inflection for the markets? There seems a compelling case for it,” says the report. “Certainly many underwriters hope so; some believe it.”
However, the broker's analysis of the energy-industry sectors “points to business as usual,” which is a disappointment to commercial carriers and “good news for energy-insurance buyers looking for a more stable environment.”
The report, titled, “Marsh Insights: Energy Market Monitor—Point of Inflection?” says the upstream energy business, involving exploration and production, should be experiencing upward rate pressure from the reinsurance side due to disciplined underwriting and losses outside of the energy market—such as Superstorm Sandy and the Costa Concordia—where underwriters purchased whole account protections covering marine and energy risks.
However, competition from markets in Dubai, Singapore and Houston and additional capacity from reinsurance syndicates are holding rates down, the report says.
The sector also experienced an “unprecedented” low number of losses in 2012, adding more downward pressure on rates.
“It is inconceivable that the market will not be giving wholesale reductions by May or perhaps even earlier if the frequency of losses remains at these unprecedentedly low levels,” says the report.
Capacity is also having a stabilizing effect on the downstream energy-property industry, which involves refining, selling and distribution.
While operational losses in 2012 totaled between $2 billion and $2.5 billion for the sector, which “had previously been free [of claims] and seen as 'best in class,'”the losses have not been across the broad market, and attempts to talk up rate increases in early 2013 were not fruitful, says the report.
In light of the Japanese Tsunami and floods in Thailand in 2011, one downstream area getting increased attention from underwriters is contingent business interruption. High limits are available “if needed (for a price), but underwriters are trying to reduce to a minimum the limits for 'unnamed' exposures.”
Overall, for the downstream energy market, Marsh says, “in the absence of a market-changing event we foresee the status quo continuing for the downstream energy-property market in 2013.”
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