A combination of the recent collapse in oil prices, record capacity levels, relatively benign loss records and reduced risk management budgets have all contributed to some of the most competitive energy insurance underwriting conditions for 15 years, according to Willis’s Natural Resources Market Review (previously the Willis Energy Market Review), published today.
With reference to the remarkable leap in underwriting capacity, Willis noted that the largest increases were in the upstream (where capacity increased to US$6.9 billion), downstream (to US$5.5 billion) and international onshore liability (to US$2.4 billion) insurance markets.
Also from an underwriting perspective, the collapse in oil prices and its consequent effect upon exploration and production activity is likely to have a detrimental effect on premium income levels, noted Willis.
Faced with these competitive pressures Willis urged insurers to provide wider coverage for clients. Those insurers that fail to do so could be looking at an uncertain future.
Alistair Rivers, Head of Willis’s Natural Resources Industry, said:
“In this underwriting climate, we believe that the time has come for more innovation, for new products and services to be developed to attract the interest of the buyer. At Willis, we believe that it is the London market, as the traditional innovators of natural resources industry risk transfer products that should lead the way.”
He added: “The recent pledge by the UK government to work with the (re)insurance industry to attract insurance-linked securities business into the United Kingdom - a move which we in the London market would all welcome – could help inject some fresh thinking into the market.”
Willis highlighted a number of areas where underwriters could feasibly offer more flexible coverage or new insurance products, including:
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Repackaging of onshore terrorism cover into property programmes. Terrorism is still excluded from most property policies, despite the fact that it used to be included as a matter of course only a few years ago. Risk Managers would clearly benefit from having terrorism cover rolled back into property programmes.
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Deletion of cyber exclusions. “We still see very little sign of the energy markets being willing to delete the cyber exclusion (CL386) in their policy wordings– despite a gradual softening of reinsurance market resistance to this exposure,” according to the Review.
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Increased sub-limits for contingent business interruption (CBI) or supply chain risks. The sub-limits for CBI or supply chain risks are still too low for most risk managers in the natural resource sector. While there have been isolated incidents of higher sub-limits being granted recently, buyers mostly still have to shop around different markets to access the cover they need.
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A seamless product for onshore projects covering handover from construction to operating phases. “Over the years we have seen disputes arise on a number of occasions when loss or damage has occurred at or around the time of the handover of a project, with both construction and operating markets denying liability – much to the consternation of the client. It seems to be logical for carriers to produce a seamless product that might avoid such coverage ambiguities in the future,” the Review noted.
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Increased flexibility of aggregate limits and retentions for natural catastrophe risks. Buyer appetite for natural catastrophe risk transfer products remains as robust as ever (especially for earthquake risks), the report claims, and “we are confident that if more capacity is made available in this area, insurers will benefit from a significant increase in their revenue streams”.
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