Energy re/insurance market increasingly overcapitalised, ILS a factor

With rates in the global property/catastrophe (P/C) space remaining under significant pressure insurance-linked securities (ILS) capacity is increasingly interested in specialty markets, such as energy. But with that market already facing a perfect storm of capacity, the pressure is only set to increase.

Recent analysis from brokerage Willis Towers Watson (WTW) highlights an abundance of capital in the energy market as a driver of a “new normal,” and the ongoing softening market cycle.

WTW’s April 2017 Energy Market Review reveals that over the last 12 months’ capacity levels in the sector have either remained flat, or increased for all business lines. Upstream market capacity grew by 2.1% from 2015 to 2016, amounting to $7.72 billion. While international downstream capacity grew 5% to $6.5 billion, and international liabilities grew by 3.1% to $3.3 billion, according to WTW.

As the ILS market has continued to expand and really started to play a meaningful role in the global risk transfer landscape, sponsors and investors alike have increasingly looked to access risk more directly, and participate in re/insurance business outside of the highly competitive and currently, lower profits of the property catastrophe space.

In a bid for greater returns, further diversification and reduced competition ILS, or alternative reinsurance capital players are increasingly looking to specialty lines of business, such as the energy markets, as a place to deploy capacity and to achieve more desirable yields in a challenging global insurance and reinsurance industry.

Furthermore, ILS is increasingly interested in Gulf of Mexico wind coverage, with more and more of this exposure being backed by third-party reinsurance capital than ever before.

“While the rate of capacity increase has slowed, the additional increases are doing little to halt the overall softening dynamics in our markets,” says WTW.

Adding; “While for many years we have feared that softening market dynamics would lead to possible capacity withdrawals, with a few very minor exceptions this simply hasn’t materialized. Furthermore, the number of insurers ready to step up to the plate and lead business has increased significantly in recent years.”

According to WTW the glut of both traditional and alternative reinsurance capital flooding the global re/insurance industry is preventing primary insurers from “generating any kind of market upturn,” and the broker expects the trend to continue throughout 2017.

“We are experiencing a “deceleration” of the overall softening process, with notes of caution being sounded by major (re)insurers that the current situation is “untenable” and that they may begin to “walk away” from some unprofitable business.

“That, of course, is their prerogative. However, such is the abundance of capacity waiting to be utilised in the global marketplace that, for the moment, finding replacement capacity for virtually any specific programme withdrawals has generally not presented much of a challenge. The rate of softening shows signs deceleration, but prices are still heading in only one direction as replacement capacity fills in any gaps left by the more apprehensive insurers,” explains WTW.

So clearly there’s an oversupply of capacity in the energy sector, which, given the persistent and steep rate declines in the property catastrophe space in recent times, might not be too surprising as traditional and alternative players look to pull-away from the less profitable lines and look to redeploy into the potentially more profitable ones, such as energy.

But as this intensifies and the broadening scope of ILS players comes into the mix, the competitive pressures driven by an influx of players and capacity are starting to be more broadly felt in the energy market as well.

Looking forward, WTW says; “As of April 2017 we continue to find ourselves in a softening market, albeit a decelerating one. With no capacity withdrawals, we expect this situation to continue into 2017, although there is the possibility that this deceleration may transition into a broader bottoming out of market conditions should individual portfolio loss records deteriorate further late in the year.”

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