Much like energy resources themselves, the insurance marketplace for energy-sector businesses has abundant capacity. There is, however, upward pressure generally on rates in 2019, and some tightening in excess liability coverages specifically. To obtain the broadest coverage at optimal pricing, retail agents and their insureds should approach the marketplace in a strategic way and explore options for structuring their energy insurance programs.
Current economic conditions are favoring continued growth in nearly all segments of the energy industry. While that’s good news for energy businesses, it also means they must monitor their risk exposures and ensure their insurance programs keep pace.
The U.S. Energy Information Administration (EIA) projects that production of domestic crude oil and natural gas plant liquids, such as butane, ethane and propane, will continue to increase through 2022 and remain at a high level through 2050. Much of this production is expected to come from the lower 48 U.S. states. Two-thirds of U.S. crude production is tight oil, meaning crude oil in shale or sandstone formations. Typically, tight oil is extracted through hydraulic fracturing or “fracking.” Other energy forms have similar growth projections, including:
- Dry natural gas. EIA projects that dry natural gas production will increase consistently between 2018 and 2050, with strong demand from domestic industrial and electric power sectors. A corresponding increase in natural gas exports is forecast to keep demand growing. A new development in this area is the use of dry natural gas to power the manufacturing of liquefied natural gas, considered one of the easiest forms to export.
- Renewables. Future electricity generation will rely increasingly on solar and wind sources, and to a lesser extent, other forms of renewable energy. Overall, renewable energy generation is estimated to reach 1.7 trillion kilowatt- hours by 2050, up 130% from 2018. (source)
The Department of Energy projects that the United States will be a net exporter of petroleum and natural gas between 2020 and 2049. In other words, global demand will keep energy businesses busy for decades. For many of them, that means their liability exposures will grow.
The energy industry is comprised of multiple segments, and insurance is available to respond to property, casualty and cyber risks in each of them, with a wide range of limits. In the excess and surplus (E&S) insurance space, energy lines of business typically comprise general liability, on a primary and excess basis; workers compensation, and automobile liability. Excess liability programs access capacity from three major hubs in the marketplace: Bermuda, London and the United States.
Global energy segments that the insurance industry serve are:
- Upstream. This segment includes exploration and production of crude oil and natural gas, such as drilling, onshore well operation and offshore platforms. Contractors that set up and take down platforms and rigs, and provide other services in the field are important businesses in upstream energy.
- Midstream. This part of the energy sector is responsible for processing, storing and transporting crude oil, natural gas and natural gas plant liquids. Pipeline companies are a major component of the midstream segment.
- Downstream. Processed petroleum and natural gas products flow to consumers through refineries, petrochemical plants, retail outlets and other distributors, which make up the downstream segment.
- Renewables. Renewable energy sources range from biomass — biofuels, wood and solid waste — to hydroelectric, wind and solar power. As of 2017, renewable energy accounted for 11% of U.S. energy consumption, according to the EIA. (source)
- Utilities. These entities supply power and natural gas to residential and commercial customers and may be government-owned, investor-owned or cooperatives, in which the owner members also are consumers.
Liability limits purchased by energy businesses vary by type and size of entity. For example, oil and gas operators and smaller contractors’ typically buy up to $10 million in limits, depending on their contractual obligations, while catastrophe-exposed oil and gas operators onshore and on the Continental Shelf in the Gulf of Mexico usually buy between $50 million to $100 million. Offshore drilling contractors and oil and gas operators in deep water often require excess of $200 million. For large upstream and midstream energy businesses, typical limits range from $200 million to $500 million.
LOSS DRIVERS AND MARKET REACTIONS
Over the past two years, one of the major loss drivers in the energy industry has been automobile-related. Particularly in the midstream and downstream sectors, fleets can be larger than those of specialized transportation companies. Even though the economy is performing well, it can be difficult to find qualified drivers to haul petroleum products.
Because many insurers writing commercial auto liability have seen increases in loss severity, lower excess layers are tightening. Pricing is going up and capacity is contracting somewhat on lead excess, the lead $10 million layer, lead $25 million, $10 million excess of $10 million, and $10 million excess of $25 million.
Other loss drivers include bodily injury and property damage exposures resulting from blowouts at well sites, pipelines ruptures and fires at storage facilities. Pollution events, such as product escaping from pipelines, have become more frequent and typically require monitoring to comply with environmental regulations. Insurers are seeing an uptick in monitoring costs and are keen to close pollution incidents as soon as they can.
The overall energy insurance marketplace is characterized by insurers monitoring their risk aggregation and seeking modest price increases. Capacity is plentiful, but some insurers have pulled back for certain classes of risk, especially in the lower excess casualty layers. This has created an environment where many programs require restructuring. Insurers are generally not requiring increases in self-insured retentions.
Capacity has traditionally been tight for offshore named-windstorm coverage. London wrote about 95% of its 2019 named- windstorm capacity in 2018, and most of the capacity was allocated to accounts renewing between March 1 and June 1.
Two areas where underwriters are proceeding cautiously are:
WHAT AGENTS CAN DO
Retail agents seeking insurance for their energy industry clients can take several steps to obtain the best available coverage. These include:
- Understand the exposures. Agents need to thoroughly understand their clients’ operations and fully convey the risk profile. Strangely, many accounts overlook projects they are planning or have already started, until the subject comes up in renewal discussions.
- Start early on renewals. For energy risks, agents should begin discussing renewal plans with their insureds more than 120 days out. More time makes it easier to find solutions, especially for accounts with challenging loss histories and those needing larger limits. For example, an excess liability tower might need two, three or even more insurers to build $25 million in coverage.
- Work with specialists. Knowledge of the energy marketplace is critical to create effective insurance programs. A specialist wholesale partner with scale in the energy niche can get answers quickly and has strong relationships with the leading insurance markets.
With capacity plentiful for most energy risks, finding adequate coverage is no problem. But insurers are pulling back in certain spots, and pricing generally is trending upward. To obtain the broadest coverage and the best pricing, terms and conditions, it pays to partner with a creative, wholesale specialist to explore options in the energy insurance marketplace.
Contact your CRC Group producer for more information.
- Cindy Brincks is a Vice President in CRC’s Dallas, TX office, specializing in coverage for upstream, midstream and downstream energy businesses.
- Philip Jones is Senior Vice President in CRC’s Atlanta office. He specializes in primary and excess casualty coverage for entities in all segments of the energy industry, including renewable energy and utilities.
- Richard Martin is President of JH Blades & Co., Inc., a CRC Group company based in Houston that specializes in upstream energy, cargo and marine insurance.