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Rates continue to slide in energy market: JLT

Chronic overcapacity and a reduction in underlying activity from customers continued to hamper the energy market in 2016, leading to further rate reductions, according to JLT.

In its latest quarterly energy newsletter, released on 3 January, JLT said the coming year was set to be turbulent for parties on both sides of the insurance transaction.

In the upstream sector premium has maintained its downward trajectory, although capacity remains firm. This has resulted in dramatic price reductions when new leaders have entered the market.

JLT said the "bewildering" entry of two managing general agents, HDI/Thomas Miller and Elseco, indicated the sector remained attractive to new entrants.

The broker commented: "This relentless downward trend suggests that the energy insurance industry will be entering a period of greater austerity, as the cost base will need to adjust to fit the dramatically lower premium levels.

"Our client base has had to adapt, and the impact on our own industry is of course inevitable."

The downstream sector has also experienced capacity growth, with insurers seeking to maximise their business stream and remain relevant to brokers rather than deploy additional capacity across their portfolios.

In addition, fierce competition stemming from regional pressures and depressed earnings at downstream and midstream energy firms has culminated in rate reductions of between 10 percent and 25 percent.

A single bright spot

In terms of market losses, a benign period of activity remained the single bright spot for the market, with the largest downstream loss for 2016 estimated at approximately $500mn.

Total losses in excess of $1mn amounted to around $1.2bn for the downstream market in 2016.

Known losses in excess of $1mn in the upstream market totalled $906mn last year, excluding the estimated $1.2bn-$1.4bn Jubilee oil field loss.

And in the power sector, major losses included a $536mn loss for a Russian coal power plant fire in February, a $58.8mn loss from a flood event at a Texas gas-fired power station in March and a $145mn loss from damage to a Colombian power station in February. Total known losses in excess of $1mn reached $1.32bn.

Looking ahead, JLT said the energy industry's travails and the lack of market-moving losses in 2016 made it difficult to predict the segment's trajectory this year.

"Clearly, continued consolidation and expense reductions are essential from an insurer perspective, but it's looking like many have not got too much more stomach to continue much further down this particular road," it said.

"Even considering impact arguments such as the necessity of capital flight from the insurance sector and the elongation of the market cycle, should we see some of the larger key market insurers blink and withdraw from the class and we have a more normalised level and severity of losses, the market may just turn out to be more fragile than the general perception."

The energy casualty market is similarly grappling with the issue of overcapacity, although most underwriters are continuing to recognise exposure decreases in their pricing, within minimum premium constraints.

Marine hull underwriters are also beholden to the problem of overcapacity as decreases in premium volume persist.

However, JLT said marine underwriters were beginning to resist pressure to grant excessive premium reductions.

With many owners and operators of vessels in the offshore sector suffering as a result of the downturn, the continuing soft insurance market rating environment remains welcome, JLT said.

Some owners, even after adjusting for fleet lay-ups and reduced vessel values, are spending less than half the premium they did just a few years ago.

JLT also noted that for the first time in many renewal seasons, reductions were seen to be the norm across the protection and indemnity market. However, given the significant reserves held by most mutual clubs, it was likely to be some time before this market would begin to hurt, it said.

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