Published on 30 July 2024

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Downstream Energy Market Update H2 2024

Published on 30 July 2024

As we move into the second half of 2024, we are seeing the market starting to soften in terms of rate.

The previous several years have seen a massive influx of premium income into the market, which has had a multiplier impact on premium income due to rising base rates, inflationary pressure on the physical assets of the insured, strong profit margins, and supply chain delays driving greater BI indemnities. Insurers have, during this time, benefited from sizable increases in premium income, which has had a beneficial net effect against any losses.

Of course, the level of softening is as ever dependent on numerous factors, including the usual considerations of premium volume, loss record, risks deemed to be well-engineered, and the amount of critical Natural Catastrophe exposure, i.e., risk location.

One of the key factors behind this momentum shift is that 2023 was a relatively benign loss year for downstream insurers, a return to profitability for most. Last year’s profits, in addition to a positive Reinsurance Treaty Renewal Season, have indeed led to an increase in capacity, both from existing insurers and with the introduction of new markets/MGAs into this class of business. This has led to a scramble for signings and, in some cases, participation in high-profile risks.

Areas that require continued monitoring are ESG, business interruption, valuations, and more recently, wildfires (not necessarily in that order):
 

• ESG: There continues to be no market consensus on this issue. As has been widely reported, some of the major European insurers have tended to be the ones taking the toughest stance, and it remains important to keep a close eye on how their positions could affect future market capacity, particularly in certain sub-sectors of the downstream book.
• Business Interruption: This coverage continues to be under the spotlight across the market, and with the release of the new LMA 5515A Clause (which includes a Partial Loss Adjustment Factor), this is deemed a method for insurers to further reduce the uncertainty of any potential claim amounts. From a client’s perspective, the best way to push back on this is to provide ever more detailed and regularly adjusted breakdowns of their Business Interruption Values.
• Valuations: Insurers continue to expect clients to have undertaken recent revaluation exercises to ensure their asset base is correctly valued in what, post COVID-19, has been a highly inflationary environment across the globe (although this is starting to slow down). Many clients have employed major valuation companies to assist with this exercise, and when this occurs, it is well received by the market. Where no recent valuation exercise has been undertaken and insurers deem there to potentially be underinsurance, the market will look to impose either an average or a rating load to compensate.
• Wildfires: This is becoming more topical in certain areas of the world, with insurers requiring updates on vegetation management and firefighting capabilities.

For the second half of 2024, we are shifting to a market that is in many clients’ favor, but with a lively start to what was already expected to be an above-average windstorm season, all eyes will be on how insurers react if there is a major loss.