Willis Towers Watson has issued a warning to energy underwriters, suggesting their “bleak outlook” will lead to withdrawals from the market.
An over-supply of capital and falling demand from buyers, caused by cost cutting in the wake of the oil price crash is putting the market under strain, the broker suggested.
For the tenth year in a row capacity has increased in both the upstream and downstream insurance markets, said the broker.
With no meaningful withdrawals during the last 12 months, competitive pressures have intensified to the extent that some insurers may consider whether to continue participating in the market if the available premium income pool depletes further, according to Willis Towers Watson.
The broker thinks it is on the demand side that insurers face the biggest challenge.
“The oil price collapse has forced energy companies to cut costs and self-insure more. At the same time underwriters have had to compete even more fiercely for the reduced pot of premium available,” said Willis Towers Watson.
All of that means that some energy underwriting players are expected to exit, while others are anticipated to at least scale back their presence, the broker thinks.
“Although at face value this is all good news for the beleaguered energy industry, as prices continue to fall we should all remember that the market has provided a stable platform to enable the smooth transfer of risk in a predictable and manageable fashion,” said Neil Smith, Willis Towers Watson’s global product leader for natural resources.
“It goes without saying that any scenario which severely impacts this balance will have negative consequences for all parties involved,” added Smith.
The broker also highlighted potential demand for innovation in energy insurance, citing environmental liabilities, as well as the potential for use of alternative risk transfer as a rival to traditional covers.
“Specialist insurance products can address this threat in part,” said Smith. “But the lessons of both Macondo and the recent mining disaster in Brazil suggest that more advanced risk transfer mechanisms, featuring limits in excess of what is offered by the conventional insurance market, are increasingly needed by the energy industry.”
Cyber liabilities for the energy markets were also flagged by Willis Towers Watson.
“Cyber risk is becoming more and more pervasive and threatens the core operations of energy companies,” said Peter Armstrong, executive director for cyber, writing in the broker’s energy review report.
“Organisations have a fiduciary duty to understand and quantify their exposure and make appropriate provision for it,” noted Armstrong.
“However, most organisations are not including the quantification of their cyber exposure in the overall picture. This means that most organisations have unaddressed exposure on their balance sheets because of cyber vulnerabilities,” he added.