Despite the dramatic slump in oil and gas prices since 2014 which has led to well-known dislocations in the global market place, energy and power insurance will remain a “growth business” with attractive prospects, said Bahrain-based Trust Re in its white paper “The Changing Global Energy Landscape – Opportunities and Challenges for Energy Underwriters”.
World energy demand is projected to grow by up to another 50% over the next 25 years, driven by non-OECD countries due to a combination of accelerating industrialisation, population growth and the expansion of the middle class.
Overall, by 2040, the energy and power sector will see massive investments of almost US$70 trillion, with a particularly steep growth, not only in investments but also in insurance premiums, expected in the area of renewable power generation.
However, the current collapse in oil prices has led to severe cutbacks in production and exploration as well as squeezed risk management budgets across the global oil and gas industry. In addition, rates continued to slide as a result of an unabated influx of additional capacity.
As in the upstream sector, premium volumes in the downstream segment are eroding rapidly. This is not only a result of abundant capacity but also reflects an increasing reliance on captives. The competitive pressure is currently most acute in upstream markets where the pipeline of new projects has virtually dried up and drilling operations have been scaled back. In the downstream area the contrary is true: The sharply reduced cost of feedstock has boosted refiners’ margins, with business interruption values up accordingly. This offers opportunities in terms of additional premium income for downstream insurers.
From an overall risk management perspective, subsea drilling is a major opportunity for energy insurers. It seems to be clearly superior to traditional drilling and could arguably help mitigate some of the major environmental risks to oil drilling in sensitive areas such as the Arctic Circle.
In order to capture the tremendous potential of the energy industry over the longer horizon, insurers will have to effectively respond to their clients’ rapidly evolving risk management needs, ranging from subsea drilling, an accelerating concentration and accumulation of risks, an increasing vulnerability of supply chains, the potential and threats of digitisation to spiralling liability exposures, said the white paper. For committed energy insurers with a long-term perspective this more complex set of client needs presents a major opportunity of more compellingly differentiating their offerings, deepening and broadening their client relationships.
Energy and power insurance premiums worldwide, including mutual and captive insurance business, amounted to around $23.6 billion in 2014, up from around $21.5 billion in 2010. In 2014, energy insurance premiums stood at around $14.2 billion whereas power insurance premiums came in at approximately $9.4 billion.