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ENERGY & POWER NEWSLETTER

Overview of the Insurance Market Q1 2021

Insurance market update for energy and power companies.

04/29/2021 · 2 minute read

State of the Market Overview

Insurance markets, like most commodity markets, are cyclical. The commodity in the insurance market is an insurer’s capacity to underwrite risk, and the limits they place on those risks.

Like all cyclical markets, pricing is driven by supply and demand - supply being insurers’ capacity, and demand being the limits of insurance companies want. Limited capacity leads to higher pricing, and additional capacity forces competition leading to lower pricing. At a certain point in a downward rating environment, insurers cut-back capacity or withdraw, enabling remaining participants to increase prices, which over time attracts new capacity. And the cycle repeats.

Clearly, this is an overly simplistic description of the insurance market cycle which is actually influenced by various complex, external factors, that impact available capacity and drive demand. Capital flowed to insurance markets following the financial crisis of 2007-08, because of record low interest rates and poor investment returns from financial markets. This increase in supply led to a softening of insurance markets across the board. For nearly a decade premium levels (rates) reduced year-on-year, and terms and conditions improved in buyers’ favor.

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April 2021 Energy & Power Newsletter considering the insurance trends over the last quarter.

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While capacity in the insurance markets has remained relatively steady over the last few years, overall loss levels in many sectors have gradually led to capacity withdrawals and the onset of a hardening market. This is characterised by premium increases year-on-year, tightening of terms and conditions, and in some cases, increases in deductibles, in insurers’ favour.

Sectors where overall premium values are not sufficient to cover the actual or prevailing losses, have seen year-on-year double-digit increases to “correct” the insurers’ book. However, despite this hardening market, rate increases in certain sectors, such as downstream property insurance, are decelerating as capacity levels stabilize. New entrants are returning to other sectors where demand is increasing however, at the same time some insureds are exploring alternative risk strategies such as self-insurance or the use of captives and mutuals. Typical of a hardening market, there are more restrictive terms and conditions for certain perils, such as lower sub-limits or absolute exclusions. Cyber exclusions in particular have gained traction with insurers, and unsurprisingly, the pandemic has led to the introduction of communicable disease exclusions on virtually all policies.

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