Buyers of energy insurance will benefit from increased competition and an accelerated softening of energy insurance rates at mid-year renewals, according to Marsh, as the impact of new and alternative sources of reinsurance capital spreads.
According to insurance broking and risk management firm Marsh, the energy sector is set to benefit from the influx of capacity from new sources of capital such as pension funds, private equity firms and hedge funds alongside lower reinsurance costs and the low-level of recent losses.
Marsh says that many insurers are showing an increasingly strong appetite for energy risks and have released additional capacity to put to work in the energy sector in the first quarter of 2014.
Andrew George, Chairman of Marsh’s Global Energy Practice, said; “After three years of overall stability in the energy insurance marketplace, new capital streams are changing its dynamics, making it the most volatile it has been for a generation.”
Alternative reinsurance capital is currently not involved in energy risks in a big way. It is the impact of high-levels of capital in reinsurance, pushing rates down across other sectors and into the primary space through reduced reinsurance costs, added to the low-level of material losses suffered in the sector last year which are really having an effect.
There remains some uncertainty about how long-lasting the effects of alternative reinsurance capital will be on sectors such as energy risks, where only a small amount of the new capital is actively being deployed currently.
George continued; “The additional capacity created by an influx of capital from private equity and hedge funds could be potentially short-lived, if expected returns on investment fail to materialise. Meanwhile, longer-term investments from pension funds could provide greater stability, although this type of capacity is only just starting to have an impact.”
However, energy risks have been proving increasingly attractive to the new sources of capital in the reinsurance space and a number of collateralized or alternative options now exist for securing energy cover, particularly on property risks. As models improve and investor appreciation of the energy insurance space increases we may see more capital gradually slipping into the space.
The current trend is for further softening though, explained George; “Reduced reinsurance costs, good loss ratios particularly in the upstream business, and an intensified focus on growth by key insurers all indicate a downward pricing trend across key energy risks. This downward pressure on rates is likely to accelerate leading up to mid-year renewal dates, which is good news for energy insurance buyers with robust risk portfolios and good claims histories.”
It’s interesting to hear that the capital markets interest in reinsurance as an asset class is cited as one factor in insurance market softening in a sector such as energy risks. If alternative capital is already contributing to insurance market softening, just imagine where rates could head if it started to flow into energy reinsurance in earnest.
The way that alternative capital has pushed traditional reinsurers to reduce rates across broad areas of the market is set to benefit insurance buyers across many lines of business. For reinsurers which have turned to primary business, as they find profit margins less attractive in reinsurance, it may not be too long until some insurance profits are beginning to decline as well.
Marsh expects energy insurance rate reductions in the range of 20% will be standard on a widespread basis for preferred risks, absent any market changing events.