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Upstream Energy

The Upstream Energy market is a global market. Taking a micro-Asian

perspective on this market would not give us a full understanding of the

current situation.                                              7.5bGlobal

The overall global Upstream premium income pool declined          capacity =
30% from 2014 to 2015. However, the decline in premium            Approximately
income was even more pronounced in some sub-classes
such as Offshore Construction and Operators Extra                 USD
Expense they were particularly impacted by the fall in oil
prices. This is not expected to change until confidence         2 bGlobal
is regained in stability of oil and gas prices. In addition to
low activity, pressure on rates and operating costs, claims       premiums =
have continued to arise. The Willis Energy Loss Database
recorded 16 claims in excess of USD 50 million during             USD
2015, totalling over USD 3.5 billion. Incidents have also
occurred in 2016 including a major platform loss in Asia        The full impact of recent loss deterioration will become
amounting to USD 51 million plus another loss that has not      evident in 2017, potentially prompting a retreat from this class
yet been declared for underwriter confidentiality reasons       of business due to negative underwriting results. Capacity is
that has the potential, when the Business Interruption          expected to increase, so even if losses occur, the worst-case
element of the loss is fully adjusted, to reach a total         scenario would be a flattening out of the softening process.
between USD 750 million and USD 1.5 billion. Should this be     There would have to be several losses with common insurers
the case, when this loss is finally paid by the market, there   for a significant withdrawal of capacity to occur, which would
will be a profound effect on the cash flows the affected        in turn harden the market. If the market stays as it is, a further
insurers and reinsurers.                                        downward pressure on rates can be expected. Buyers are
                                                                in a position to take full advantage of the market’s current
There has been an increase in the number of insurers            predicament and force prices down further, but while making
scaling back their involvement in less attractive               sure to ensure that their risks are placed with insurers who
programmes featuring meagre premium income returns.             are likely to be in play in the event of a fundamental change in
There are a small but growing number of insurers who were       market dynamics.
beginning to distance themselves from some of the worst
excesses of the soft market, preferring instead to wait out
this period until market conditions improved. Now at the end
of 2016, we can report that these insurers have been joined
by others who can see no long-term rationale to continue to
support some of the least attractive programmes.

However, at present this trend has been effectively                                                    WELD Upstream Energy losses 2000-2016 (excess of US$ 1m)  20
cancelled out by the position of many other insurers in                                                             versus estimated Upstream premium income
this market, which is that they are currently way short
of meeting their premium income targets set earlier in          20
the year by their management. As a result, programmes           USS Billion
featuring substantial premium income are still being placed                                                                                                                                                                                                              USS Billion
in the market, even at a significant reduction on last year’s   18 18
rating levels. And while such programmes have been
declined by a large proportion of the incumbent market,         16 16
such is the need for some insurers to increase their
premium income that there have been a steady supply of          14 14
alternative insurers willing to take the place of those who
have withdrawn.                                                 12 12

                                                                10 10

                                                                88

                                                                66

                                                                44

                                                                22

                                                                0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 0
                                                                     Source: Willis Towers Watson/Willis Towers Watson Energy/Loss Data base as of October 6 2016
                                                                                (figures include both insured and uninsured lossess)

                                                                Upstream Losses       Estimated Worldwide
                                                                excess USD 1 million  Upstream Premium

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