As reported in our April Energy Market Review, in 2021 and 2022, we saw major losses in the market, mainly in oil and gas but also in the chemical and midstream space. This ultimately affected both the downstream market and those upstream insurers who write midstream risks. Over the cause of this year, 2022 loss reserves have deteriorated significantly and our database now records in excess of USD 8 billion in losses for 2022. This deterioration is primarily due to the reduced or delayed access to sites for loss adjustors, either due to a knock-on effect of COVID or because local authorities shut down sites immediately following a loss. As a result, loss adjustors cannot access sites to fully quantify losses until after the location is released by local authorities, which is causing meaningful delays in loss quantification and consequently less accuracy in insurer’s initial reserves. This has been a key factor in the increase in reserves, particularly for the North American losses.
But why were losses so much more prevalent in 2021 and 2022? Covid and the resulting low oil price environment have certainly led to fewer fully trained and experienced personnel on site. When this is combined with the excellent refining margins in 2021 and 2022, which have led clients to push out turnarounds and run assets at full capacity, it is clear why a greater incidence of loss events has emerged in these years.
In 2023 some green shoots are appearing. So far there have only been two major losses in the downstream market as well as some smaller attritional losses. The total loss record for 2023 stands at just over USD 1.8 billion so far and we expect reserves for the largest of these losses to reduce, further improving insurers’ position. If loss trends continue to be this benign for the remainder of 2023, we expect a very profitable year for downstream underwriters, which we believe will create a softer pricing environment going forward.
Capacity levels have been generally stable throughout 2023, with some slight increases from less mature carriers who are now more comfortable to deploy slightly larger line sizes. Looking forward to 2024, we already know of some new entrants coming into the market and we expect a number of existing carriers to push for incremental capacity increases during their reinsurance treaty renewals, on the back of strong and profitable underwriting results for 2023. MGAs are also becoming more popular, further helping to increase capacity, and that should create more competition going forward, which is of course good news for buyers.
Regional capacity still plays a key role and in the Middle East in particular, there continues to be plentiful capacity and strong appetite for local business. This local market is buoyant, fuelled by significant levels of construction in both the downstream and upstream sectors.
Elsewhere in the world, we are seeing some local capacity being brought back into London in a move to “deregionalise” and we will continue to monitor whether this recentralising of underwriting authority is a trend that will gather momentum with other (re)insurers across the Downstream Energy market.
The market is still fragmented in their ESG positions, with some of the European carriers taking the strongest stances and we will continue to monitor how insurers’ evolving ESG positions could affect future underwriting capacity.
Business Interruption coverage remains an ongoing focus for markets, especially in view of the significant BI element to losses in 2022 and 2023, particularly in the US.
Carriers are continuing to normalise and scale down volatility factors within Business Interruption volatility clauses to reduce the uncertainty in potential claims amounts. One way for clients to combat this direction is to provide full, up-to-date business interruption worksheets, however we do find many clients continue to be reluctant to do this due to their boardroom directives to risk managers.
Another key area of focus in the 1 January 2024 reinsurance treaty renewals, which we will be keeping a close eye on, will be coverage for Strikes, Riots and Civil Commotion (SRCC) will be impacted. Reinsurers have been impacted by SRCC losses unrelated to natural resources clients. Whilst some treaties already exclude SRCC, we expect reinsurers to further tighten existing SRCC exclusions at 1st January 2024 for carriers who have not yet been impacted on their all risk policies to date. Over the course of 2023, we have increasingly seen direct insurers become more selective on the areas of the world where they are willing to offer SRCC coverage as well as imposing reduced sub-limits where they do offer the cover. If this trend continues, we could envisage SRCC cover following on the path of Political Violence and Terrorism to become a standalone placement in a specialist market.
Carriers are watching closely for how the impact of the current regional instability in the Middle East will affect the market. With large concentrations of downstream assets in the area, any escalation outside of the immediate conflict region, could potentially be very unsettling for the market and affect future market dynamics.
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|Global Downstream update 2023