The COVID-19 pandemic resulted in decreased energy production and demand in 2020. According to the U.S. Energy Information Administration (EIA), it will likely take years for the U.S. to return to 2019 levels of consumption. While it’s anticipated that the United States will continue to export more energy than it imports through 2050, recovery will take time and the energy insurance market is feeling the pinch (source 1).
THE INSURANCE MARKETPLACE
2020 saw a reduction of global capacity for energy business as some carriers withdrew from the market entirely and others cut limits. In the 2nd quarter of 2020, most programs saw rating increases of 15%-20%.2 By the 4th quarter, and into early 2021, average premium increases for some international liabilities reached 25%-40%, depending on individual risk profiles and rate adequacy. Those with inadequate prior rates saw premiums skyrocket more than 50%.4 Conditions in almost all energy markets continue to harden with rate increases depending largely on the limits required; however, less dramatic changes are expected in some areas.4 Overall, most markets are evaluating terms and conditions and looking to moderate unusual or peripheral coverages including pandemic, pure financial loss, charterers liability, and cyber.4
Last year, the executive lines, and particularly D&O, were hit hard as carriers reduced capacity, doubled retentions, and raised premiums by 50% or more. Competition evaporated as the market worried about energy companies being financially overextended during a time with depressed commodity pricing and lower demand due to the COVID-19 pandemic. Most carriers were unwilling to add new business to their portfolios in 2020. Now, with carriers in a new budget year and commodity pricing on the rise, underwriters are once again looking to write new energy risks. Underwriters still need to know that insureds can meet their debt obligations, maintain adequate cash flow, and implement an effective survival strategy if another downturn occurs. However, we have seen 2021 renewal programs come in flat or with slight savings due to market competition. While 2021 premiums will be higher than those of 2019, brokers will likely be able to pull up to 20% back out of programs because excess layers are seeing underwriters competing to get on programs, leading to lower excess rates in the 55%-60% range, instead of last year’s 75-80%.
In general, casualty is still playing catchup due to losses sustained over the last 10 years. Some carriers are cutting capacity or pulling out entirely, especially when it comes to offshore risks because fewer are willing to write wet exposures. Close to $500 million 18 months ago, capacity for buyers focused primarily on oil sands has shrunk to around $200 million in London. There are insurers in Bermuda that can help achieve limits, but with tighter terms and higher premiums. In reality, total liability capacity is estimated at $1 billion for most energy business, depending on specific regions and risk profiles.4
While there’s a little more competition out there for upstream business, the market is still hardening from a casualty perspective. Clients won't see the massive rate increases of 2020, but over the next 12-18 months, primary and lead umbrella will still see an increase in rate and more restrictive capacity. When accounts transition off the lead and onto pure excess, there may be more flexibility around price and coverage, creating more competition – especially for higher layers.
In addition, most oil and gas companies maintain large auto fleets, and big auto losses coupled with staggering jury awards are giving rise to larger rate increases for fossil fuel companies.4 Typically, it’s assumed that an auto loss would be absorbed by the primary umbrella, but the losses have been too high; therefore, auto fleets are seeing rate hikes of around 10% on the auto umbrella. Unfortunately, rates can go even higher depending on the size of the fleet. Because primary GL doesn’t include auto, those rates aren’t being hit quite as hard. When it comes to excess, rate increases will depend on the exposures of each account.
Inland marine markets are seeing more competition this year as companies increase production in the oil patch. Rates remain generally flat for profitable risks, with significant increases possible on accounts with poor loss history. The downturn last year saw inland marine markets lose numerous insureds due to consolidation or insolvency; additionally, premiums decreased on many renewals with companies stacking equipment or reducing projected revenue, causing a much lower rating basis compared to prior years. Due to this, carriers can aggressively quote a quality insured, and will drive increased competition for well performing new business accounts. The emphasis from carriers to keep desirable renewals, plus added competition can often lead to decrease rates year-over-year.
The most difficult energy inland marine class to place continues to be saltwater disposal wells, specifically wells with poor loss history, large single pad-site values, and undocumented or non-existent lightning protection. In order to place saltwater disposal well accounts effectively, it is important to provide underwriters extensive information regarding lightning protections, preventative maintenance schedules, and detailed asset lists. Often oil lease property, including saltwater disposal wells, were bundled into the Control of Well coverage, however this year we are seeing London typically unable to provide renewal terms, or are significantly less aggressive in this area.
Recently, upstream property, including control-of-well, has seen a loss ratio of around 130%. These losses were exacerbated by the pandemic because many companies stopped drilling when oil prices plummeted, which resulted in a reduced premium for 2020 and a lack of coverage for 2019 losses. All of these factors exaggerated the state of the control-of-well market. Clean accounts are seeing rate increases of 5%-10%. Physical damage, the biggest exposure for upstream accounts, will find that it’s difficult to cover saltwater disposal sites unless lightning is excluded. Unsurprisingly, most areas are also seeing communicable disease/coronavirus exclusions and it is typically not possible to buy back any of that coverage. On the other hand, underwriting generally feels that wind coverage for offshore facilities is satisfactorily rated because Gulf storm seasons have been relatively benign over the last 5 years, and large rate increases shouldn’t be an issue.
Real property in the energy space is typically seeing increases of 15%-20%, similar to the rest of the general property marketplace. For layered programs, excess market appetite and capacity are reduced, while attachment points and minimum premiums are increasing. Building valuation is an area of emphasis for carriers, as material costs continue to rise and underwriters penalizing risks they perceive as having insufficient insurance to value (ITV). Larger Engineered Risk accounts currently placed with admitted markets are seeing smaller increases, however, if the incumbent market does not provide renewal, and the account must be moved into the E&S marketplace, rates can typically increase 2-4 fold. Unprotected manufacturing will continue to be a difficult class, as well as, any account with significant loss history. As the bulk of U.S. energy production is in Texas, Oklahoma, and Louisiana, most property placements should expect to experience increases in wind and hail deductibles, as well as lower flood sublimits. General property business with a good balance of risk and premium income will see more moderate rate increases.4
FACTORS IMPACTING THE ENERGY MARKET
Along with post-pandemic recovery, the global energy system is grappling with big issues impacting the marketplace, including climate change, fossil fuel losses, and the growing popularity of Environmental, Social, and Governance (ESG) strategies.
CLIMATE CHANGE-DRIVEN ENERGY TRANSITION
The impacts of climate change and a subsequent movement toward alternative energy sources are continuing to transform the energy risk landscape, making it the primary issue facing the energy industry. According to the EIA, renewable electric generating technologies are expected to account for almost 60% of the capacity additions from 2020 to 2050. Natural gas will remain relatively flat at about 36%, and both coal and nuclear shares are expected to drop by about 50%.1 As the global energy system lays the foundation for moving away from fossil fuels, questions remain. Renewable energy is currently a very small portion of the energy sector, generating $250 - $500 million in annual premium. It would need to grow significantly to provide a client base large enough to replace the fossil fuel sector’s premium revenue. Insurers currently remain cautious around renewables because while green energy does tend to be safer and have fewer losses than fossil fuel extraction and transport, there isn’t enough of a loss history available to instill solid market confidence.3
SUBSTANTIAL FOSSIL FUEL LOSSES
With an eye on the energy industry’s evolution, at the end of 2020, Lloyd’s of London announced its intention to stop insuring some types of fossil fuel companies by 2030. The decision, spurred by issues related to climate change, substantial fossil fuel energy losses, and the anticipated impact of energy transition on the business, is likely to trigger similar future actions by other markets. For insurers, pivoting away from some fossil fuel classes makes sense based solely on the loss history. A review of 30 years’ worth of onshore and offshore losses of at least $100 million each revealed that insurers took approximately $60 billion in losses from fossil fuel companies as compared to only $30 million from other companies.3
ESG MOVEMENT INFLUENCE
As the ESG movement continues to gain momentum in the insurance industry, energy insurance buyers – especially in oil and gas – can also expect increased scrutiny of their ESG policies and procedures.4 Over the last 2 years, data suggests that pressure from investors has spurred a clear increase in ESG discussion with clients. It’s also impacting the coverage that insurers and reinsurers are willing to offer.4 Energy businesses that carefully consider how they will transition to ensure a sustainable future, and develop robust, actionable plans to move toward those goals will find themselves in better alignment with market interests.5
HOW AGENTS CAN HELP
Paint a Clear Risk Management Picture. When it comes to executive lines, agents should be marketing accounts to obtain better terms, conditions, and pricing due to increased competition. Submissions should demonstrate that the insured’s cash flow is going to cover any debt obligations over the next 18 months. Underwriters need to see the previous years’ YE financials including a balance sheet, income statement, and cash flow statement (if audited, all notes to the financials) as well as the current year’s most recent interim financials. Without this full disclosure of information, insureds are unlikely get the markets’ interest.
For those marketing property, casualty, or inland marine business, communicating firm targets will be important when setting price expectations with carriers. Schedules that include saltwater disposal wells or oil lease property must communicate solid risk management plans including proper bonding/grounding, and regular maintenance intervals, as well as documentation regarding the kind of tanks deployed. As new ventures come back into the space, underwriting will also want to review client lists and employee resumes to ensure that adequate expertise and experience are in play. Agents should also elaborate on risk management plans around equipment maintenance, especially if the equipment hasn’t been used recently. Because revenue has been down, many companies might be cutting costs and not being as diligent with maintenance; however, proactive maintenance of unstacked equipment is vital to avoiding a claim. Agents that can confirm equipment is in great shape will benefit with underwriting. If an account has had a significant inland marine or property loss, insureds will also need to clearly explain the loss and how it has been mitigated.
Start Early & Proactively Communicate Anticipated Changes. Auto continues to be a primary pain point, and agents should prepare clients in advance to help avoid sticker shock. In this market, agents must help clients explain what they’re doing to ensure auto safety, provide driver training, and guarantee appropriate vehicle maintenance to highlight how the insured would be a profitable risk.
For executive lines, aim to begin the renewal process 90 days in advance of the renewal date with a scheduled underwriting meeting at the 45-day mark. Getting submissions early is important because most underwriters do not have substantial field authority post-pandemic and it can take longer to obtain approval. Inland marine markets can turn quotes around much more quickly, but for property business, agents should start the renewal process 60-90 days out, and get it to the broker as soon as possible so that modeling can begin. For upstream property and casualty, submitting 30 days before renewal is adequate as long as the application is complete. Quotes can often be turned around in 24 hours if the account is clean. Midstream and downstream pre-renewal phone calls should take place 3-6 months prior to renewal with the goal of having submissions to market between 90 and 120 days out.
Partner with the Right Specialists. The energy business is a special niche and it’s important to get submissions to underwriters who specialize in the sector to achieve the best results. Programs should be structured using a longer-term strategy around coverage and price, and CRC Group is home to energy specialists with decades of experience and a network of underwriting relationships that ensure clients benefit from the best possible price and coverage.
With capacity cuts and price increases characterizing most of the energy market, agents should expect to experience some hard market issues. Making every dollar count in a tough market means working with high-quality partners. CRC Group’s specialists have the expertise and industry relationships you need to explore available options and obtain the best possible coverage and price.
Contact your CRC Group producer to learn more about how we can help you navigate the modern energy marketplace.
- Richard Martin is the President of JH Blades a CRC Group company based in Houston that specializes in upstream energy, cargo, and marine insurance.
- Lori Wheeler is an Inside Broker with CRC Group’s Dallas, Texas office where she is a member of the ExecPro team specializing in executive lines including D&O, EPL, FL, and other liability coverages.
- Mark Sangenito is a Property and Inland Marine Broker with CRC’s Dallas, Texas office and is an active member of the Property Practice.
- Philp Jones is a Senior Vice President with CRC’s Atlanta, Georgia office where he specializes in primary and excess casualty coverage for entities in all segments of the energy industry, including renewable energy and utilities.
ABOUT JH BLADES
JH Blades prides itself on having the very best insurance products for the upstream energy sector and the industry's best energy underwriters and brokers. For over 60 years as a market leader, they have consistently partnered with top- rated insurance companies and kept the team intact through the energy market's up and down cycles. As a team, their unique company culture emphasizes the free flow of information and expertise to clients' benefit. JH Blades will always ensure that clients get the best coverage for the highly specialized risk they need to cover.