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Energy insurance market continues to soften

An international reinsurance consultancy, Willis Energy, predicts there will be a softening of the market in the rest of 2013

Too much capacity chasing an insufficient amount of premium in both the downstream and upstream energy markets will cause a general softening of the energy reinsurance market in the remainder of 2013, according to Willis Energy, an international reinsurance consultancy.

According to Willis Energy's latest Energy Market Review: "With tough premium income targets to meet, pressures on underwriter participation 'signings' have increased, with virtually all the major insurers intent on one objective - to maintain, and if possible enhance, their overall premium income from this class.

"In the absence of further major losses, these pressures will continue to force insurers to compete more vigorously in both markets for preferred business and thus we expect to see a softening of the market in the fourth quarter of 2013."

The report added: "In the absence of another major loss along the same lines as Hurricane Sandy, which effectively acted as a brake on the overall softening process at the beginning of the year, there are excellent opportunities in the months ahead for upstream buyers to leverage their position more favourably with the market."

In the downstream market, Willis Energy said several significant potential losses in 2013 have provided insurers with the rationale to maintain the modest hardening that was becoming evident by mid-April for the majority of the downstream portfolio. However, with available capacity remaining significant, Willis Energy still detects competition for the best business.

Regardless of the losses that are being reported, premium income targets still need to be met and insurers are focusing on preferred programmes in order to do so. Most of these programmes feature a wide spread of risk, a benign loss record and plentiful premium income in areas free of natural catastrophe risk.

Competition for this business has therefore intensified, as insurers look to maintain their market share. Willis Energy says it is finding that significant underwriter signings are not uncommon for these more attractive risks; whereas last year insurers held back from such programmes until the 11th hour in the hope of securing more attractive terms, today the reverse often seems to be the case.

If capacity levels remain buoyant - and to date there are no signs of any withdrawals from the market at the end of 2013 - later in the year, faced with the need to maintain premium income targets, insurers may be forced to compete once again even for the less attractive parts of the portfolio. "It is of course possible that a major series of catastrophic losses might change the situation in the downstream market, but if the last two years are anything to go by a general softening in the fourth quarter is a far more likely scenario," the report added.

As for the upstream market, the general softening is continuing to be tempered by the high capacity requirements for certain types of risk, where demand still exceeds supply. This is predominantly the case in respect of some major North Sea platforms and for the larger construction "all risks" programmes that have recently been introduced to the market.

Willis Energy reports that the market will have to absorb additional capacity in the form of endurance at the beginning of 2014, as well as smaller increases from existing participants, mainly from the smaller Lloyd's syndicates, so the upwards trend in capacity is expected to continue once again next year.

Robin Somerville, director of communications for Willis Energy.

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