Energy Insurance Market Update Summer 2021

While much of the energy segment shares many of the same prevailing rate movements, capacity and coverage challenges as the broader market, there are some distinctions that need to be highlighted for the sector. The marketplace for U.S. energy risks was already firming prior to COVID-19, but has clearly become more challenging during the pandemic as it has further strained the insurers' underwriting results.

Underwriters are continuing to ask COVID-19 questions pertaining to potential economic impact of the pandemic and specifically whether any deferrals of major maintenance activities occurred as a result. Across all sectors of energy, insurers are insisting on Communicable Disease and Cyber related restrictions and exclusions. Starting the renewal process early and providing detailed, technical and timely responses to underwriter's questions is paramount to a successful renewal.


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Power and Utilities Risk Management

Property Insurance

While Gallagher's internal data and conversations with senior level underwriting executives reflect property rates are increasing an average of approximately 15%, the impact is more significant for energy risks and in particular for downstream energy and power & utility accounts. The historical loss history within these sub-segments of energy has been poor over the last several years. As such, underwriters are seeking 20% to 25% or more increases in rate for accounts not exposed to natural catastrophe risks and without adverse loss experience. For accounts with adverse loss history or those in high hazard natural catastrophe zones, rate increases can be 25%-50% or more.

General Liability and Umbrella/Excess Liability Insurance

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 carriers restricting their capacity and reducing their renewal limits on any given account. As a result, markets are taking advantage of opportunistic pricing as it is taking more insurance carriers and more premium to replace the lost capacity.

Renewable Energy Risk Management

Property Insurance

Specific to renewable energy risks, the market is continuing to impose meaningful increases in rates, especially for assets in high natural catastrophe exposed areas. Rate increases of 20% or more is commonplace in the current market, even for accounts without adverse loss experience. In addition to rate increases, markets are reducing their capacity on individual programs and many insurers are no longer willing to write 100% of a single asset or program. This has an overall impact on pricing volatility within placements. The market is also imposing sublimits and higher deductibles for “non-traditional” natural catastrophe perils, including hail, tornado and convective storms.

General Liability and Umbrella/Excess Liability Insurance

The casualty marketplace for renewable energy risks generally remains quite competitive relative to other lines of coverages throughout the energy sector. Rate increases in the low single digits are achievable for accounts with favorable loss experience. Within the sector, utility scale ground mount solar installations will often achieve more favorable rates as compared to residential rooftop or commercial & industrial rooftop installations.

Upstream and Midstream Energy

According to Reuters, bankruptcies in Q1 2021 by North American E&P companies hit their highest levels since Q1 2016. This was a direct result of companies having difficulty recovering from the 2020 crash in commodity prices. As 2020 closed out, the U.S. Rig count was approximately 320, which was over 59% less than the same time in 2019. As of April 16, 2021 the count has slowly but steadily increased from year end 2020 to 439, representing a less significant drop from the same time a year ago.

The aforementioned news and decrease in sector operations represents a meaningful decrease in ratable exposure. While overall premium spend is impacted by the decrease in ratable exposures, the sector saw a more favorable loss year in 2020 compared to 2019. The natural attrition of exposure coupled with the historical poor performance in the sector is leading to enhanced competition for financially stable companies.

Property Insurance

Property and Oil Lease Property are seeing rate increases that are trending in line with the general insurance market. Risks in locations with Natural Catastrophe exposure are seeing much more significant rate increases. Salt Water Disposal Tank & related facility coverage continues to be a difficult insurance placement. Often these risks are seeing increases in deductibles for the perils of lightning and static discharge in addition to increase in rates.

General Liability and Umbrella/Excess Liability Insurance

In the upstream and midstream sectors General Liability, Control of Well / Operators Extra Expense and Auto rates are experiencing rate increases for those risks with 'poor loss experience.' For the balance of the market that would be viewed to have 'good experience', rates are trending in these lines from 5% on the lower side to 15% on the upper side. While primary casualty is trending in a more positive direction, reduction in available capacity in the excess/umbrella market is having an overall impact of higher rates for the same limit as expiring as it is taking more carriers and capacity to complete programs compared to prior years. The reduction in capacity along with reducing limits combined with significant hardening on these lines of cover are producing rate increases ranging anywhere from 15% to 30% or more.

Looking Ahead for Energy Insurance and Risk Management

While the full magnitude the current pandemic and its economic impact and the subsequent impact on the insurance remain largely unknown, the underlying fundamentals within the environment today and adverse insurance company financial results are likely to continue for some time. The pace of rate increases has started to show some moderation, however, there is nothing that indicates the hard market will change in the foreseeable future.

While the information contained herein is meant to provide macro impacts of the current insurance marketplace for energy related risks, individual account rate changes could vary from the above referenced guidance based upon individual account characteristics, risk profile and loss experience.