MICHAEL BUCKLE: Hello, and welcome to The Risk Circuit. Today, we're talking about downstream energy following our recent energy market update. I'm the host, I'm Michael Buckle. I'm head of Downstream Energy for WTW Global Natural Resources. And I'm delighted today to be joined by a couple of colleagues. We have Austin Sims in the US and we have Charlotte Watts in Singapore. And I'll just thank them both for being here and ask them just to say a little bit about themselves. Austin, do you want to start?
AUSTIN SIMS: Sure. Thanks, Michael. My name is Austin Sims. I'm located in Houston, Texas. I'm a director in our North American Natural Resources Industry Vertical. And I am focusing on midstream and downstream property risk.
CHARLOTTE WATTS: Thanks, Austin. And my name is Charlotte Watts. Thanks so much for having me on the podcast today. I'm based in Singapore and my role is responsible for leading the Energy and Mining team based here in Asia. So that covers the broader Asia geography.
MICHAEL BUCKLE: Great. Thank you very much. So we've issued our Energy Market Review, and we're looking at a situation for our clients where we see softening market conditions ahead of us in 2025. It's been an interesting last couple of years. 2023 we thought was going to be a really good year, and that position seems to have deteriorated.
In 2024, we're currently showing probably the biggest cliff I've ever seen between where claims are today and where premium has been. The question on our mind is, really, what does this mean for insurance buyers? And how do insurance buyers take advantage of these market conditions? What are we really looking for from some of our clients in 2025? And I wonder, maybe, Austin, could you perhaps give us a comment from the North American view?
AUSTIN SIMS: Yeah, absolutely. Just looking at the global landscape, particularly on the pricing front, it seems like the rest of the world was moving a bit more quickly than the US in terms of softening. But as we've gone through the first two halves of 2024, we've seen the US market start to catch up. And they need to do that in order to maintain competition with particularly the London marketplace.
So I would say that at this point, the US market from a rate reduction standpoint has caught up to London. It may not be to where the rest of the world is seeing it, particularly in Charlotte's neck of the woods. But one thing that's been a bit interesting is looking at the way that the market has split itself up into some subsectors.
Not every energy risk is getting the same rate treatment. Depends on what the loss history is. Depends on what the risk itself is and whether or not there is adequate appetite to drive competition for that risk, which is really what's driving some of that rate based on competition.
MICHAEL BUCKLE: Yeah. Yeah, good point. So there's some differential between the different sectors in the downstream world. Charlotte, in terms of Asia, sometimes you're way ahead of the rest of the world in where your markets are going. How does Asia look at the moment?
CHARLOTTE WATTS: Yeah, look, there's no doubt that here in Asia, we can certainly already feel the effects of a softening market, Michael. And our downstream buyers here are already benefiting from that surplus capacity, putting the pressure on pricing on a downward cycle. And that being said, I think as Austin mentions, each risk continues to be viewed on its own merits, meaning those that have the best risk management ethos, strong claims profile, those that are not Nat Cat exposed, because that continues to be an area of concern in our region, are going to get the best results from the softer market cycle.
That being said, when you look at the rate trends in Asia, more specifically on a country basis, it's important to remember that it's a very large and varied region. You've got some countries here that are heavily reliant on international reinsurance support from Singapore and London, Middle East, those being Thailand, Vietnam, Indonesia, Malaysia, meaning those clients are really going to follow more of the global trends but perhaps with maybe a lower starting base.
And you then got other countries in Asia, more like Korea, Japan, India and China, where they've got a lot of their own available domestic capacity. So that also adds another overlaying pressure on the market and the international reinsurance market to be able to commit and compete with the available and abundant capacity available locally. So you might see steeper changes in pricing in those geographies, as there's less capacity to go around.
MICHAEL BUCKLE: Yeah, great. I mean, I'll just comment as well. We haven't really seen a massive pump-up of the available capacity. But we know it's a global marketplace, and we know there is more supply of capacity than there is of risk available out there. So definitely, those supply and demand curves have an impact on price.
You mentioned something else, Charlotte, which was interesting. You mentioned natural catastrophe and the concerns that this wind season didn't quite play out as expected with Helene and Milton hurricanes. In the energy space, particularly, we didn't have assets in the lines of those hurricane tracks, but there still could be an impact. And maybe, Austin, from a US point of view, could you give us your view?
AUSTIN SIMS: Yeah, absolutely. I mean, if you look back to the early part of the year, when the publications that typically put out predictions for what the wind season will bring us were predicting some pretty severe outcomes, high severity and high frequency, and two conditions there to consider, that being the warm water in the Gulf and transition into a La Niña cycle, so people were pretty nervous about what the wind season could bring.
And it didn't help that we had Beryl come through as the earliest cat 5 in modern history. And while it didn't make a huge impact, it was a storm in July that could have sent people down a mental spiral of what the rest of the season could look like. And then it got pretty quiet. And then we had Helene and Milton come through.
And I think while there's not a lot of oil and gas infrastructure in Florida, there is still some potential impact from storm damage that was done to property infrastructure and to some of the power sector. And this could even show us some impacts from the personal line just because a lot of the reinsurance capital that's involved in commercial risk is also backing some of the personal lines' insurance that we see here in North America.
And so while it's not specifically an energy, particularly a downstream event, it could be a reinsurance event that could slow down some of the exuberance that we may have been feeling as we look ahead to 2025. But while things could have certainly been a lot worse, I don't think it was a total non-event. So I don't think we can look ahead to '25 and say that '24 had no Nat Cat activity because there could be some lingering impact in the reinsurance market that could lead to some restrictions of cover that we may see on risks that have some Nat Cat exposure, particularly in the Gulf.
MICHAEL BUCKLE: Yeah. And, Charlotte, we tend to talk about Nat Cat, and we think of the biggest oil producing nation in the world and the Gulf of Mexico. But we shouldn't forget that natural catastrophe, both typhoon and earthquake, very prevalent in your part of the world?
CHARLOTTE WATTS: Yeah. So look, here in Asia, it's also been very quiet this year. So we've had benign natural catastrophe events. We have seen some earthquakes in Taiwan, which have impacted some downstream assets. The Taiwanese accounts were those that have been treated slightly differently this year, compared to the rest of the countries in my region.
And there's also a number of typhoons hitting the Philippines in the last few months, but they continue to be hitting the Philippines at the moment. So we're monitoring that closely as well because when the market is in a softening cycle, as we all know, with the sharp turn in 2022 after Q1 seemed to be quite quiet and then we had $2-billion losses, things can move the needle.
I also want to bring up at this point that we probably all need to remain vigilant as to what the future of natural catastrophes could be in our region. In our part of the world, we reflected heavily on the fact that some of the largest losses to the natural resources sector, so less downstream, but more on the broader sector, were actually in Dubai when there were floods, which were pretty much unforeseen events. We didn't expect that as an industry, as our clients, but that has caused some significantly costly events for our clients and the insurance industry.
MICHAEL BUCKLE: And I guess it would be wrong to do this podcast without, for a moment, just putting on our underwriters' hat because we were mindful that '23 would be a better year for the market, and I'm sure it was. '24, we feel, looks better at this point in time. But underwriters talk about technical rate adequacy and getting back to where they need to.
That may be something we never quite achieve, but we've certainly moved a long way towards that in the past few years. But prior years have been seriously unprofitable for the energy market. So whilst there is the expectation there and whilst there is the softening there, I think the market faced some particular challenges on how they're going to ride the future wave of '25 and '26 in the downstream industry.
And add to that mergers and acquisitions, which we should probably comment on, too. I wonder if we can just share a few views around rate adequacy and mergers. Austin, anything from your side in the US, particularly on the M&A?
AUSTIN SIMS: Yeah, on the M&A, if you look at some of the major deals that have been announced throughout the year in 2024, we've had three really big ones in the upstream space, Pioneer Resources, Marathon, and Hess all being purchased. And then we've also had some movement in the downstream space in that Citgo is now going to be up for sale, with that sale to be pending.
And Lyondell and Phillips 66 are both shutting down refineries. So not just M&A, but also just change in the future landscape of what the downstream space looks like in North America, and part of that has to do with it becoming more and more challenging to make money in downstream and in other sectors of energy as well in North America. Some of that's regulatory. Some of it's economic.
But it seems like scale is the key to future success in energy in North America. And so we're seeing some of the larger operators continue to gobble up some of the medium and smaller. And we've seen a couple of really big mergers of large companies as well, so it's agnostic to size. But as you see those changes, obviously, that means that premium that was previously in the market is going to continue to decline.
And the severity is still there in what we do. And so as the premium book declines and that severity continues to exist, it could lead to some future profitability issues in the space. So how does the market react to that from a rating and structure standpoint, particularly when you have some of these larger operators are big mutual insurance buyers, so they're in Everen or they're in other industry mutual, some in the power sector being Aegis members? And how does that look for the future in terms of retentions and pure structure?
MICHAEL BUCKLE: So we've all seen the headlines around drill, baby, drill. That seems to have a margin effect on the refineries. You mentioned it earlier in your comments, Austin. I think people seem to be prepared to trade more volume and have a lower margin, but it gets tight. That's going to get tight for rate adequacy in the market. It doesn't necessarily mean we're going to see huge escalations in insured BI values.
And then add to that the ESG agenda and the uncertainty about methane emissions. Can we control the methane emissions at the same time as burn more? How do we feel that will play out?
AUSTIN SIMS: I mean, I would just start by saying that following the election, there's a lot of positivity in the space that's really just driven around a more friendly regulatory environment, a little bit less pressure on ESG, and some of the pretty public initiatives coming out of the Biden administration and administrations before. And so there's just some positivity around some more friendly treatment of the sector.
I mean, you look at some of the DOJ decisions and all the mergers that we've got going on. And so hopefully, with the Trump administration, there will be some friendly treatment from the DOJ as well toward M&A activity. And just thinking about margins, obviously, there's a sweet spot where downstream producers would like to see the price as it goes lower and lower. That's actually detrimental to the margins that they're able to make on their products, and so that could impact some of their production decisions.
So there's certainly a sweet spot. They don't want to be pumped full of cheap oil, but obviously, we want to see it at a price where everybody all the way from the wellhead to the pump can make a good margin on their business just to keep the sector healthy.
MICHAEL BUCKLE: And, Charlotte, maybe I can just come to you on that comment. We were talking a little bit earlier around decisions in the US seem to have global influences, certainly in Europe on energy imports and LNG. That's playing out in Asia, too, right?
CHARLOTTE WATTS: Yeah. Look, I mean, prior to the recent administration change in the US, we'd seen quite a number of European and American oil and gas majors actually reducing their footprint across the upstream and downstream sector in Asia, selling their shares, actually, to more Asian-domiciled oil and gas companies who are looking to further build up their portfolios.
Some of this had probably been driven by the fact that these oil and gas majors had been looking to diversify their portfolios with the challenge of ESG being so strong. So I guess I'm interested to see now whether that trend will continue or whether the investment that we have from the oil and gas majors may remain in Asia, given that they are reasonably profitable at the moment.
And I guess what does that mean for the insurance sector? Some of this is quite exciting when oil and gas majors sell to smaller companies because it actually introduces new premium to the sector that has perhaps previously been held in an oil and gas major's insured retention or captive. So some of this is adding premium to the market, but what the future will look like is still unsure.
I guess a lot of our clients are waiting with quite anticipation for what happened in the election results. And some are cautiously optimistic that it could increase sales and options for themselves, so new customers and maybe new suppliers as well.
MICHAEL BUCKLE: Thank you very much. So I think maybe to wrap up what we've been talking about here, what do clients really need to do to manage through this market cycle? And just to share my comments, I think there's a couple of things.
Having a seriously good engineering program is going to be important to be able to explain to the markets their process safety controls and their risk improvements, how they manage their CapEx, how they manage their ESG performance, how they manage running their business facing lower oil prices and building those relationships. I think they are really key.
I think you really just can't sit with an expectation that the market is going to help you. You can do a lot to help yourself and your messaging and your connection to your risk transfer partners. That's my take. Charlotte, what's your take?
CHARLOTTE WATTS: Yeah, similar to you, Michael. I think how clients can continue to differentiate themselves in a softening market cycle remains important because insurers frequently tell me, and they tell clients, that it's not a portfolio approach. This softening market cycle is done on a case by case. So being able to justify why your risk needs to be viewed as better than the average position is always going to be the most important.
Getting in front of your risk carriers and actually presenting and hearing them hearing your risk ethos and actually understanding more about what you're planning to do in the next 12 months and your strategic decisions so that the insurers feel like they're on a journey with you as well remains really, really important. We've hosted a number of these in the last two weeks in Singapore, and we're already seeing the benefits to our clients.
And I think just a further point, which is slightly different, but I think the importance of reviewing your business interruption values remains extremely important for our clients to make sure that they're both correctly insured with the volatility that we may see, given the changes in the oil and gas sector. So that remains very, very important as you're going into renewal, but also if you're looking at a 12-month, 24-month policy period, making sure that you are regularly adjusting that as and when is needed.
AUSTIN SIMS: I would just add to that, Charlotte, thinking about the data side, I wholeheartedly agree with you on the business interruption side. And now that we're coming into a cycle in the market where we are coming off of some pretty severe infrastructure issues, issues with supply chain, coming out of COVID and some of the inflation that we've seen, I think now's a really good time for people to look back at their property damage values as well to make sure that we've kept up with inflation but that we haven't actually overinflated values.
I think there will be some scenarios with time where we see people have continued to trend values and that maybe we're in a position where we're over-reporting. And obviously, that has a significant impact on a couple of things. One is premium, just thinking about rate times value but also looking at the limits that you buy. So working with us to ensure that PD and BI buy values are both in a good spot.
And then from there, looking at your estimated maximum loss calculations and ensuring that you're buying the program that works for you and not just one that's designed based purely off of legacy purchasing habits and thinking about the science behind the way we set limits and retentions.
MICHAEL BUCKLE: That's fantastic. I think that's really good commentary. That's really good advice. Thank you both for making time to join this podcast. I hope some of the comments people have heard strike a note and are interesting. And there's obviously more, you can read about this in our Energy Market Review. Thank you very much indeed for joining us.
AUSTIN SIMS: Thank you, Michael.
CHARLOTTE WATTS: Thanks so much.
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