Upstream energy softening exceeds expectations, follow competition intensifies: WTW

By Rebecca Delaney

April 11 - (The Insurer) - Upstream energy clients are increasingly favouring automatic capacity over traditional follow-only markets because of its lack of differentiation between poor-performing construction classes, according to WTW’s George Richardson.

Speaking at the launch of WTW's latest energy review on Wednesday, senior upstream energy broker Richardson highlighted that follow-only markets must now compete with automatic capacity from increasingly sophisticated cross-class broker facilities and algorithmic carriers.

“It's a compelling offering as they do not distinguish between different performing parts of the portfolio, which is different to traditional follow-only markets who try and pick their way through the market to position themselves in the best-performing business,” Richardson said at the event.

In the energy insurance market, construction classes have historically produced poor underwriting results because of high loss activity.

“We see it as a two-speed market, with operating capacity outstripping demand and the intense competition for quality business accelerating the race to the bottom of the pricing pool,” Richardson continued.

“Construction rate is heading in the opposite direction, with contractors and onshore business pitching somewhere in between.”

He added that market premium is estimated at around $2.6 billion, although given the large global exposures, there is concern that this would be insufficient should there be numerous significant claims in one year.

Most markets are competitive for leadership in classes of business that remain “super soft”, which are typically clean, offshore, operational accounts with significant premium spend.

Reductions on these accounts are exceeding expectations, with 5% to 10% rate reductions at the end of 2024 now stretching to between 5% and 12.5%.

“The upstream market is very broad. As a result, within the upstream portfolio, some parts are super soft, and some parts are still very challenging to place. Overall, pricing is being driven down, but not yet in free fall,” Richardson continued.

“The question on all markets’ minds is whether a soft market is sustainable for the long term. This is with the backdrop of not having had a proper hard market for many years.”

There is a general consensus that claims performance from prior years is quickly deteriorating. WTW’s energy loss database currently indicates around $1.5 billion of losses in upstream energy in 2024, although this is expected to further deteriorate owing to worsening loss estimates and deferred construction loss activity.

“2024 looks benign in terms of major losses, but as more and more the premium-generating accounts receive year-on-year compound reductions, underwriters fear for the profitability of the book,” warned Richardson.

“The challenge remains to write enough high-quality income to offset some of the more challenging parts of the book. Those well-established markets with proven results over many years and deeper reserves are likely to be best positioned to write out the reduced profitability.”

Richardson also observed an increase in quoting among non-lead markets to maintain relevance and extend their offering beyond follow capacity.

However, Richardson noted that while more markets are positioning themselves to quote and lead business to increase their share on desirable accounts, “arguably not all are suitable leaders”.

“The suitability of a market to lead is often tied to their ability to provide a variety of services, including claims, leadership, wording expertise, local knowledge and engineering capabilities,” he concluded.

“With so many markets now wanting to quote to improve line size and take over leadership, this puts even more downward pressure on pricing.”