Willis Urges Energy Underwriters to Innovate to Survive

April 9, 2015

Willis Group Holdings is urging energy insurers to increase innovation and offer buyers a wider range of new products and services “as underwriters face mounting competitive pressure, record capacity levels and reduced premium income.”

According to the global broker, the combination of the recent collapse in oil prices, record capacity levels, relatively benign loss records and reduced risk management budgets have all contributed to some of the “most competitive energy insurance underwriting conditions for 15 years.”

In its recently published Natural Resources Market Review (previously the Willis Energy Market Review), the firm referenced the “remarkable leap in underwriting capacity,” noting that the largest increases were in the upstream (where capacity increased to $6.9 billion), downstream (to $5.5 billion) and international onshore liability (to $2.4 billion) insurance markets.

The effect of the collapse in oil prices upon exploration and production activity is likely to have a detrimental effect on premium income levels, Willis said.

Faced with these competitive pressures Willis urged insurers to provide wider coverage for clients. “Those insurers that fail to do so could be looking at an uncertain future,” Willis said.

Alistair Rivers, head of Willis’s Natural Resources Industry, said more innovation is needed to attract the interest of buyers. He said the London market “should lead the way.”

“The recent pledge by the UK government to work with the (re)insurance industry to attract insurance-linked securities business into the United Kingdom – a move which we in the London market would all welcome – could help inject some fresh thinking into the market,” he said.

Willis also highlighted a number of areas where underwriters could feasibly offer more flexible coverage or new insurance products, which include the following:
• Repackaging of onshore terrorism cover into property programs. Terrorism is still excluded from most property policies, despite the fact that it used to be included as a matter of course only a few years ago. Risk managers would clearly benefit from having terrorism cover rolled back into property programs.

• Deletion of cyber exclusions. “We still see very little sign of the energy markets being willing to delete the cyber exclusion (CL386) in their policy wordings– despite a gradual softening of reinsurance market resistance to this exposure,” according to the report.

• Increased sub-limits for contingent business interruption (CBI) or supply chain risks. The sub-limits for CBI or supply chain risks are still too low for most risk managers in the natural resource sector. While there have been isolated incidents of higher sub-limits being granted recently, buyers mostly still have to shop around different markets to access the cover they need.

• A seamless product for onshore projects covering handover from construction to operating phases. “Over the years we have seen disputes arise on a number of occasions when loss or damage has occurred at or around the time of the handover of a project, with both construction and operating markets denying liability – much to the consternation of the client. It seems to be logical for carriers to produce a seamless product that might avoid such coverage ambiguities in the future,” the Review noted.

• Increased flexibility of aggregate limits and retentions for natural catastrophe risks. Buyer appetite for natural catastrophe risk transfer products remains as robust as ever (especially for earthquake risks), the report claims. Willis said it is confident that if more capacity is made available in this area, insurers will benefit from a significant increase in revenues.

Source: Willis Group Holdings plc

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