While the energy insurance segment shares many of the same prevailing rate movements, capacity and coverage challenges as the broader market, there are distinctions that need to be highlighted for the sector. The insurance marketplace for energy risks was already firming prior to the COVID-19 pandemic, but has clearly become more challenging during the pandemic as it has further strained the insurers’ underwriting results. The recent impact of Hurricane Laura will likely serve to provide further momentum to the already hardening market conditions.
Many underwriters are now asking COVID-19-related questions. While the energy sector was largely deemed essential and did not experience widespread shutdowns due to COVID-19, insurance underwriters have an increasing concern regarding deferral of major maintenance activities and any increase in risk due to such deferrals. In addition, we are finding that insurers are raising a significant number of underwriting questions throughout the placement process. Starting the renewal process early and providing detailed, technical and timely responses to underwriters’ questions is paramount to a successful renewal.
Property rates within the energy insurance sector
While Gallagher’s internal data and conversations with senior-level underwriting executives reflect that property rates are increasing an average of approximately 15%, the impact is more significant for energy risks and, in particular, for downstream energy, power generation and renewable energy risks. The historical loss history within these sub-segments of energy has been poor over the last several years. Accordingly, insurance underwriters are seeking 25%+ increases in rate for accounts not exposed to natural catastrophe risks and with favorable loss experience. For accounts with adverse loss history or those in high-hazard natural catastrophe zones, rate increases can be 30% – 50% or more. For upstream property risks, the market is following the overall general trend of 15% – 20% increases in rates.
Specific to renewable energy risks, the market is imposing meaningful increases in rates of 20% to 30% or more for well-performing accounts. In addition to rate increases, markets are reducing their capacity on individual programs, and imposing sub-limits and higher deductibles for hail, tornado and convective storms.
General liability and umbrella/excess liability within the energy insurance sector
While liability insurance rates are firming within the energy sector, primary general liability rates are increasing at a slower rate than umbrella/excess liability coverage. In many instances, year-over-year rate changes for general liability remain in the mid to upper single digits. In contrast, umbrella/excess liability rates are increasing by 15% – 25% or more. The increase in umbrella/excess rates is driven in part by insurance carriers restricting their capacity and reducing their renewal limits on any given account. As a result, it is taking more insurance carriers and more premium to replace the lost capacity.
Conclusion - The future of the energy insurance industry
While the full magnitude of the current COVID-19 pandemic and its economic impact (and the subsequent impact on the insurance industry) remain largely unknown, the underlying fundamentals within the environment today and adverse insurance company financial results are likely to continue for some time. There is nothing that indicates the hard market momentum will slow in the foreseeable future. If anything, the pace of rate increases has picked up in recent months.
Due to the highly nuanced nature of this market, it is imperative that you are dealing with an insurance broker who specializes in your particular industry and/or line of coverage. Gallagher has a vast network of specialists that understand your industry and business, along with the best solutions in the marketplace for your unique challenges.