Published on 30 July 2024

Share:

Midstream Energy Market Update H2 2024

Published on 30 July 2024

In 2023, Midstream (re)insurers faced challenging market conditions due to some significant and isolated incidents in the USA and Middle East, as well as some severe wildfires in Alberta, Canada.

Regarding the wildfires, while few oil and gas companies experienced any actual physical damage, the (re)insurance market suffered a high number of business interruption (BI) claims. As such, we have seen a tightening of policy terms and conditions, namely around additional coverage such as interruptions from denial of access and civil and military authorities. Determining the final quantum of these wildfire claims took some time due to the involvement of forensic accountants and the additional work required by loss adjustors given the fact that they were financial losses rather than physical damage (PD). As a result, we continued to see consistent rate increases from the back end of 2023 into the first quarter of 2024. During the second quarter of 2024, however, the total claim amounts for these wildfires became much clearer, and reinsurers observed steady decreases in their overall net reserves, which contributed to a moderating of rate increases.

Other key factors having a positive impact on the Midstream market:

1. The improved outlook for the global economy, namely the tailing off of inflation (in sharply rising inflation environments, (re)insurers become very concerned about valuations given the increased likelihood of claims costing considerably more than originally anticipated), and largely restored supply chains.
2. The stabilization in commodity prices has meant that the spikes in BI values witnessed in 2022 and 2023 have subsequently retreated and allowed for more balanced PD and BI programs.
3. An uptick in available London capacity. Expanding on point three, we have seen a softening rate environment in the offshore space coincide with the noted increase in available capacity and have even seen some more traditional upstream (re)insurers decide to branch into the midstream space, primarily to increase their GWP’s in line with their stringent 2024 income targets.

For the Midstream sector, halfway through 2024, this means continued downward pressure on the rating environment, which has already moved average program rate increases into the early single-digit region. Even considering this positive pressure, (re)insurers continue to witness total annual claims outweighing the global premium pool, and therefore, the midstream sector remains harder than the traditional Upstream market.