Published on 30 July 2024

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Upstream Energy Market Update H2 2024

Published on 30 July 2024

As we enter the second half of 2024, the upstream insurance market continues to soften, with most subsectors of upstream energy now seeing improving terms on their insurance renewals.

At the beginning of 2024, we predicted we would see the market tipping in the buyer’s favor, and this has proven to be the case. There was a sense as we closed out the 2023 year that we would see a renewed appetite for underwriters looking to increase their market share and deploy capacity in the upstream class, which has also proven to be the case. The theoretical market capacity is now touching USD10 billion, which is at an all-time high, and the amount of true capacity risks is now limited to a handful of buyers. There are pockets of the upstream market that continue to be a challenge; however, most of the well-known and popular risks that have renewed in the first half of 2024 would have experienced improved conditions. Single-digit rate decreases for offshore exposures have become the norm, with examples of significant reductions being made available to those accounts willing to compete for their leadership. The onshore section of the market has held a rating of flat, but as we head into the second half of this year, we also see this softening. The lack of loss activity and continued excess capacity are creating a buyers market for the rest of the year.

Actuarial observations of the upstream loss record and major loss frequency suggest that, in the past ten years, the industry has become safer due to a renewed emphasis on safety and the additional worries that oil and gas companies have about the reputational risk of an incident that would make their operations public. The true cost of a fire on a platform or an oil spill is not about insurance but more about the companies being able to continue to operate or raise finance going forward. The industry has never been more focused on safety and any reputational damage focused on safety and reputation preservation, and this has in turn meant that upstream underwriters continue to try to deploy capacity into the sector, which continues to apply pressure on rating.

ESG continues to be a concern for investors and insurers, but we haven’t seen a withdrawal of capacity as a result. The market has become much better at talking about ESG and the insurer’s role in transition, emerging markets, and technology, among other things. Greenfield exploration will need to have an excellent story on ESG, especially with European insurers, who have a heavier focus on the subject. Unlike their US, Canadian, and Asian counterparts, who place a greater emphasis on energy security and the importance of oil and gas in geopolitics.

Commodity prices have remained stable for the last 18 months, at a price where the market clients are profitable but where capital discipline remains. This is good for insurers as Capex will go to safety; however, we do not see companies rushing to produce through the drill bit, which is a dynamic that can be seen in very high commodity price environments. We are seeing a decrease in the relative cost of risk transfer to insurers’ balance sheets, as inflationary pressure begins to moderate.

Government policies and economic conditions remain unpredictable, but in the current environment, the client base for the upstream market is proceeding with caution but is profitable; this creates an attractive market for insurers as they know that safety capex budgets will be healthy and any capex going back into the drill bit will be well planned and executed. High oil price environments have historically resulted in more loss activity as clients have rushed to bring production online, but what we are seeing now is oil and gas sector leadership commitment to safety and performance, hazard identification, risk management, and reporting occurrences of near misses to prevent future incidents.

Due to all of the aforementioned reasons, the market is still active and steady from the standpoint of the customer and the insurer, but most purchasers are experiencing overcapacity, which presents difficulties for brokers and underwriters. For the remainder of 2024, we believe that will remain the case, barring a significant loss in the upstream sector. As we enter a hurricane season that is predicted to be active in the Gulf of Mexico, it is always challenging to advise clients on what market conditions to expect for the remainder of the year.

However, all insurers have budgets to fill and their fixed costs remain the same, and as rates start to cool and they look to replace missing revenue with a similar number of buyers, it could create a snowball effect in that leaders will have to offer bigger reductions to maintain their position. Well-regarded accounts should expect to see meaningful rate reductions for the remainder of 2024, with all bar a handful of risks seeing available capacity far exceed the limits being purchased.