Energy facilities driving less open market premium amid ‘pockets’ of softening: panel

By Rebecca Delaney

July 3 - (The Insurer) - Recent pockets of softening in the energy insurance market have prompted conversations around the changing nature of lead markets and the role of facilities.

Participants on a market panel at the Energy Insurance London conference on Thursday showed a divergence in opinion on the extent to which facilities will play a prominent role in the long-term.

Andrew Herring, CEO, energy and power at Marsh, highlighted that profitability across both underwriting and investments in the past year has driven softening in the market.

“I wouldn't say it's indiscriminate softening everywhere. There are pockets where we see the supply and demand equation slightly differently,” he said.

For example, while there are “quite a few” deep water offshore construction projects coming to market, insurance supply has been limited. On the other hand, increased interest in renewables has driven highly competitive behaviour in the market segment.

Alison Clarke, renewables leader at Aon Global Natural Resources, took a more steadfast stance that an excessive amount of capacity is not beneficial.

“Too much capital, too much of everyone wanting a piece of it, everyone puts their line sizes up, everyone puts their capacity up,” she said.

“Everyone comes to a broker, ‘I had 5% last year, I want 10% this year’. None of that helps. None of us want to be in a softening market cycle, I can assure you.”

Kashe Sambhi, head of upstream energy at Swiss Re, took a less optimistic view of underwriting results in recent years, but agreed that supply and demand dynamics have been skewed.

“Supply and demand plays a big part. I seem to think that with this particular cycle, it's probably one of the worst and most frustrating cycles that I've actually worked in and operated in,” he said.

Sambhi identified recent changes in behaviour across both underwriting and placement that has underpinned price as a key differentiator and driver. However, he added that the focus should remain on scrutinising rate adequacy.

“(Rate) has been strong over the last number of years because we needed to change that, particularly in the downstream world. What disappoints me the most is, over the course of last year and certainly this year, how quickly those deteriorations have occurred,” he said.

“Ideally, I would have liked it over an incremental period, not for it to dip so fast and then go back to soft cycle in a shorter space of time. From my perspective, if I still feel that the rate is adequate, I'll maintain capacity. When it starts dropping below certain levels, I start reducing capacity.”

FACILITISATION

James Boyle, head of energy, London at Liberty Specialty Markets, affirmed that the current point in the market cycle is marked by a reduction in available open market premium, driven by a focus on efficiency in pricing through broker facilities.

“You need to offer lead credentials. Certainly, our market needs strong technical leads, both in pricing and claims experience,” he said.

“I don't think the need for leads will go away, but I worry a little bit about this bifurcation. If facilities take away the 1% to 3% lines in our market, if the market (and when it does) hardens, we could lose diversity of carriers in our market. We need to make sure, as this market does soften, that everyone has their place within it.”

Boyle added that this is a particular consideration for the London market and its reputation as a global (re)insurance hub.

“I think we're beginning to water down what we offer by just saying, have 30% of your placement through a facility, don't talk to the underwriters,” he warned.

“I just worry down the line that we're beginning to just eat into what London's really made of, which is clients coming here and having those relationships that have been built up over many years. I'd argue that building those relationships does transfer to better rates.”

From a broking perspective, Marsh’s Herring offered a more optimistic view on the role of facilities in the energy insurance market.

“It's a very efficient way for us to build capacity behind the lead terms of the programme. It's here to stay, I'm convinced of that. It's not just a soft market feature,” he said.

“Clients like the aspect that it feels innovative for them. And it certainly adds competition to the market. It helps clients get their lead terms home, if you like. I'm sure there's pressure on the underwriters knowing there's that implicit threat that their capacity can be replaceable.”