Climate change risk will have transformative effect on Energy sector

SINGAPORE, 16 April 2020 – Climate change and Environmental Social Governance (ESG) will transform the energy industry risk landscape, according to Willis Towers Watson (NASDAQ: WLTW), a leading global advisory, broking, and solutions company, at the launch of its annual Energy Market Review. Additionally, the recent oil price war and the reduction in demand for hydrocarbons as a result of the current Covid-19 pandemic will also have a significant impact on future energy industry risk management strategies.

Environmental Social Governance (ESG) forms the key theme of the report, highlighting that the transition to a low carbon economy requires a fundamental reappraisal of energy company climate risk; the Review shows that achieving a satisfactory ESG rating will be critical in enabling energy companies to attract and maintain the support of key stakeholders in the future.

Other key highlights of the report from an insurance market perspective were:

• Capacity: once again the Upstream market has bucked the general market trend, as theoretical amounts are now at another record level, US$8.73 billion, from US$8.10 billion in 2019. The reverse is true, however, for Downstream, where capacity has declined for the second successive year, down to US$5.978 billion from last year’s US$6.428 billion.


• Losses: the extraordinary run of benign loss years in Upstream continues, with only three losses in excess of US$100 million during 2019. The Downstream also show a significant number of losses over US$100 million, with one major loss significantly above US$1 billion.


• Rating levels: rating increases are still very modest (2.5-5% on average) compared to Downstream, which features increases well in excess of 20% for virtually every type of programme, and significantly more for refinery and petrochemical business.


• Profitability: The Upstream market remains profitable in overall terms; however, premium income levels are still low by historical standards, and certain sub-sectors of the Upstream market such as Offshore Construction, have been hit by attritional losses. For Downstream and Liability insurers, their portfolios remain firmly in the red and the long road back to profitability is uncertain.

George Nassaouati, Head of Natural Resources in Asia at Willis Towers Watson, said: “In these unprecedented and uncertain times, there is no denying that the last 12 months have been challenging ones for the energy industry. However, it is the issue of climate risk and wider ESG factors that will have a significant impact on the future shape of the industry. In short, today’s energy businesses must commit to incorporating ESG standards and climate change into their risk mitigation strategies in order to ensure a sustainable future.”

In Asia, the Downstream insurance market continues to harden, with losses in countries, including Thailand and Korea. The gap in pricing between Asian and London-based markets is reducing significantly, especially with a majority of the Asian markets making headquarter referrals before underwriting a risk. There are also elements of domestic hardening in countries like Korea, Taiwan and the Philippines amongst others. At the same time, the Downstream market in China remains competitive for domestic risk following the Covid-19 lockdown and pandemic situation, which has affected supply and demand in the oil & gas industry.

On the other hand, the Asian Upstream insurance market remains stable in respect of rate increases for operational business. However, there are significant increases in Upstream construction rates. The Asian Upstream construction market remains more competitive than their London counterparts for smaller projects with an estimated contract value of up to USD 500 million. This hardening in Upstream construction may be short-lived in Asia as volatile oil prices are causing project cancellation and delays. Such occurrences will put pressure on the markets regardless of their new business targets with less expenditure available. It will also create competition amongst the insurance markets to underwrite whichever projects that proceed.

“We cannot underestimate the immediate challenge faced in the loss of demand as a result of Covid-19 and the impact of the recent oil price war, notwithstanding the agreement now reached by OPEC+ to cut production by 10% of global supply. While it is still too early to forecast exactly how these twin factors will play out in the months ahead, the potential effects on the energy industry are obvious; reduced capital expenditure, a reduction of exploration and production activities, lower refining margins and lower Business Interruption valuations. It will also have a knock-on effect on premium income levels for an insurance market that remains unprofitable for most lines of business.”

“That being said, there is no doubt the world will eventually recover from COVID-19 and the energy industry will recover from the oil price war. But there is one issue that is here to stay on a permanent basis and that is climate change, and the transformed risk landscape that now confronts the energy industry. Willis Towers Watson is a global leader when it comes to helping companies address growing regulatory, investor, consumer, employee and operating pressures related to climate change through combining the analytics, advice and transactional expertise from across the company,” added George.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.