How to be an energy insurance market power player

Despite the high volatility and steep loss ratios borne out by an above-average number of significant man-made and natural catastrophe losses in the past few years, the energy market has remained relatively stable. That stability was due in large part to the continuing availability of capital in the marketplace, insurance industry experts say.

“Energy is very competitive,” said Carmella Capitano, senior vice president, Primary and Excess Energy Casualty, Starr Companies, Inc. “There are a lot of new entrants into the marketplace, a lot of capacity,” she added. “Finally, the industry got ahead of the downturn. Oil prices keep changing, but they are not going down to the lows of two years ago, nor will they get to the peaks of four years ago. That wild ride has stabilized.”

Loss of appetite for risk

“The risk appetite of insurers regarding utilities with California wildfire exposure is limited due to frequent, extremely high losses,” explained Christian Fuhrmann, chief executive, Global Clients/North America 1, Munich Re, based in Munich, Germany. He sees growing demand for reinsurance protection of Combined Cycle Power Plants (CCPP) with the latest eco-friendly technology and solar or wind parks, operational as well as under construction.

Following natural catastrophe events in 2017 and 2018 in the U.S., demand for coverage in CAT-prone areas has been increasing, said Fuhrmann. “In oil and gas reinsurance, rates and terms and conditions started to improve in late 2018 and are expected to further improve in 2019,” he said. “Regarding liability insurance for utilities affected by wildfires in California, not even a sharp increase in premiums could prevent negative results for insurers, resulting in a sharp decline of risk appetite.”

Fuhrmann noted that the insurance industry is seeing an increase in the severity of claims. “The most striking claims on the casualty side are those against utilities after the devastating wildfires in California. Renewable energy is highly affected by natural disasters, including flood,” he explained. “This results in a tendency of higher loss frequency, which is further enhanced by the additional megawatts installed each year.”

In oil and gas reinsurance, Fuhrmann said he expected the trend for improving rates, terms and conditions to continue.

“In casualty, rates are still too low and generally remain flat. Rates for liability insurance for utilities with California wildfire exposure have increased significantly, even though not sufficiently, considering the high likelihood of devastating losses.”

California is not the only state that has had wildfire issues, noted Capitano. “Texas has had events in the last 10 years as well as Florida. There’s a possibility in every state, depending on the conditions of the weather patterns,” she said. “The losses depend on whether it’s a residential area or where the powerlines are and what the wildfire is going to do. If there are miles of vacant land, what is your big exposure?”

Capitano explained that increases will depend on the market. “If there’s pressure to increase the rates, the rates will increase. But the market is very competitive, so most likely rates won’t increase, unless something big happens.”

Capitano said the wildfires are more a property event, not casualty. “They haven’t touched us much. They do impact California, but fortunately we’re not on that risk,” she said. “For utilities, it’s going to make carriers ask for an exclusion for that kind of event. It will be hard to get the tower to cover wildfires.”

Two years ago, when the energy market bottomed out, Starr survived, Capitano noted. “We were able to work with our partners who knew how to do the business. We don’t just raise rates for the short-term. What we want out of this are long-term business partners.”

Uncertainty in renewals

Rene van Winden, senior vice president and national energy property leader, Lockton Companies, noted that late last year there was uncertainty as to what the reinsurance treaties would do.

“Increases on treaty reinsurance will have a direct impact on pricing as carriers will need to pass some of this cost on,” he said. “Looking back at the January renewals, we have seen CAT treaties renewing close to flat due to a continued overcapitalized market.”

He added, “On the facultative side, we see the market increasing rates significantly, which has a knock-on effect on the direct pricing. This could result in a reduced uptake on facultative reinsurance capacity.”

On the onshore energy property book, van Winden expects rate increases from 5% to 10%. Ultimately, this is close to 2017 pricing, he said. He’s seen years of rate reductions, which he expects to remain below what carriers consider to be their technical pricings.

Ron Gleason, global energy industry group leader, Ironshore, a Liberty Mutual Insurance Company, said that the last set of hurricanes didn’t hit the offshore property market. “Harvey came on shore in areas not populated by drilling rigs,” he explained. He’s seen rate movement on the property side, but it wasn’t as extensive or as long-lasting as expected.

In the U.S. renewable market, tornados and hail are issues with a high frequency of large losses, particularly in solar. “In wind, turbine size is contributing to increasing claim activity,” said Eileen Kauffman, global practice leader, Renewable Energy, Travelers.

Then, there’s cyber…

Cyber threats are continually evolving, becoming more complex and sophisticated, insurers say. “The more automated a refinery is, the more susceptible it is,” said Capitano. “Larger energy clients have a greater issue than smaller ones.”

Clients need to take cyber seriously, insurers say. “Cyber is excluded under property policies, however, ensuing damage from a cyber event is coverage that is important to have in place,” said van Winden. He noted that despite significant operational and nat-cat losses in 2018, the market has remained mostly overcapitalized, which drove the marketplace to where it ended last year.

He saw more pressure on rates toward the end of 2018. In energy property carriers pushed for increases, driving up retentions.

“We especially saw it on the service contractor side (servicing around exploration and production), which is a comparatively small pocket within energy. While it’s a relatively limited market, they have seen significant losses over the last few years,” van Winden said.

On the property side of the energy market, van Winden said they saw moderate pressure on rates in 2018, and flat to 5% rate increases on clean accounts. “The market wasn’t strong enough to turn it around due to the amount of capacity that was still available,” he added.

But with the losses that continued to roll in, he now sees that changing for 2019.

According to van Winden, the biggest portion of the energy property market is downstream/midstream related. “During 2018 we saw estimated losses of $3 billion to $3.5 billion coming into the onshore energy property market, which is significant in comparison to the estimated $1.75 billion premium pool. If this is happening over a multi-year period, we are in a buyers’ market, which in the long run is hard to sustain,” he said.

“It’s been like that for a number of years, and we haven’t seen significant capacity leave the market. We are now seeing a change in 2019; many carriers are starting to become more conservative in their approach.”

He noted that many losses were operational, not driven by natural catastrophes. “With the majority of the losses coming out of operational issues, there is a strong focus from markets on asset integrity, capital expenditure and risk management in an effort to reduce these losses,” van Winden said.

Moving off the grid

Rick Keegan, senior vice president, Construction, Energy and Marine with Travelers, noted, “We are seeing a shift away from traditional energy sources, with more megawatts moving off the various grid systems and being replaced by combined cycle gas turbines (CCGT) and renewables.” He sees interest increasing in U.S. offshore wind farm development. Battery storage technology is also developing quickly in response to the intermittent nature of renewables.

Keegan explained that CCGT technology, a form of highly efficient energy generation technology that combines a gas-fired turbine with a steam turbine, is being launched by most major original equipment manufacturers. Biomass power (a renewable source of energy that comes from organic material such as plants and animals), is another developing area, he said, with state and federal incentives, mandates and environmental benefits contributing to the interest. “We are also seeing traditional oil and gas companies’ future-proof themselves by diversifying their portfolio and taking on a total energy solution that includes investing in renewables as they continue to gain ground.”

The renewable energy market is growing rapidly with $7.4 trillion expected to be invested through 2040, according to Bloomberg New Energy Finance’s New Energy Outlook. “There’s a lot of competition in the renewable energy market,” said Capitano. “There are usually smaller risks with a lot of players in that area,” she said.

“Turbine sizes are growing from 6 to 8 megawatts today to 15 to 20 megawatts in the coming years, with towers as tall as the Eiffel Tower,” said Eileen Kauffman, global practice leader, Renewable Energy, Travelers. Although larger turbines could provide more energy and potentially reach stronger, steadier winds at higher altitudes, they also come with engineering challenges, new insurance considerations like updated terms and conditions, and additional exposures.

Workers’ comp claims

Insurers are seeing a ramp up in activity in oil and gas with stacked platforms being reactivated and new construction projects coming to market, according to Jim Conroy, global practice leader, Oil and Gas, Travelers. “With this increased activity, companies are finding it challenging to recruit qualified labor to staff operations. This could lead to hiring unqualified workers to fill open positions and an increase in injuries,” he said.

Conroy is seeing increased frequency of severe workers’ compensation claims in oil and gas, which he attributes to several factors. “Creating a safety culture continues to be important as that can help protect employees while they gain valuable on-the-job experience,” he said.

Jessica Dekermanji, senior vice president and chief underwriting officer with Liberty Mutual’s National Insurance Specialty Energy Group, said there are three trends that are impacting rates across all segments: legal concerns, labor shortages and emerging issues like artificial intelligence (AI).“There is going to be a lot of AI coming to oil and gas companies as well as power and utility that can make the workplace safer,” she said.

Dekermanji cited an example of using automated iron roughnecks (a piece of hydraulic machinery that connects and disconnects drill pipe in a modern drilling rig), which previously were put together manually by operators with tongs. Although this isn’t used on all rigs yet, it is something that makes the workforce significantly safer.

Another example is the use of unmanned vehicles or aircraft to inspect pipelines. “Rather than having individuals go out in the middle of nowhere, you can reduce exposure for workers. It can also improve your general liability because if you’re inspecting equipment on a more regular basis, you can identify potential problems,” she said.

Dekermanji noted that labor shortages impact all energy lines. “If you don’t have quality employees, you jeopardize workers’ compensation claims by people not being work ready, you jeopardize inadvertent sudden release of chemicals or other liabilities. In the case of driving, automation decreases the frequency and severity of accidents. This labor shortage is a real critical challenge that the oil industry has been facing, so automation will play a role in letting them become less labor intensive and therefore more selective in the workers they place.”

Companies are seeing challenges in oil and gas as it relates to driving and companies’ auto exposures. “These workers can travel long distances, often at night, to remote locations where they work lengthy, physically demanding shifts,” said Conroy. “Each of these factors can increase the risk of an accident,” he said, adding, “Distracted driving could also come into play. Companies often overlook this exposure, so our challenge is helping the industry understand why it is crucial to address and how to do so.”

There are also escalating jury verdicts trending in auto and liability, according to Dekermanji. “In the more rural areas, insurers are viewed as the bad guys. As a result, insurers are facing huge jury awards,” she said.

According to industry experts, if there’s stability with some rate increase and moderate losses for 2019, then carriers might think that there’s money to be made.

“In this overcapitalized market, if we are able to keep rates at a 5% to 10% increase and we still see losses at the scale we have seen in the past few years, which will result in most markets not being able to produce a return to their investors, then a number of carriers may consider what the long-term outlook will be and whether this is sustainable,” said van Winden. “If there’s no nominal change in rates, and continued losses at the scale that we have seen in the past few years, we could see increased capital fleeing the market. Then, there will be less competition, and we can expect continued and potentially accelerated increase in rate.”

Loretta L. Worters (lorettaworters2932@gmail.com) has nearly 30 years’ experience helping insurers achieve their communications goals.

See also:

• Allianz identifies top global business risks to watch in 2019
• Top 10 financial & professional lines risks in 2019, according to Marsh