The upstream market was successful in securing rating increases at a time when capacity was going up from 2008 to 2012, and indications are that there is a rate increase this year, also at a time of increasing capacity, according to an article in "Energy Market Review 2020", published by Willis Towers Watson (WTW).
However, Mr Paul Braddock, head of Upstream, and Mr Richard Burge, head of Upstream Broking, both at WTW London and co-authors of the article, point out the difference between the period 2008-12 and 2020 is: the rating increases that were instigated in 2008 were prompted by the significant losses incurred by the market in the aftermath of hurricane Ike. They were swiftly followed by the Deepwater Horizon loss in 2010 and the Gryphon A loss in the North Sea in 2011. All of these losses provided the perfect excuse for upstream leaders to insist on rating increases.
The writers say that this is by no means the situation in 2020.
“We have already seen that there are no major losses to provide the impetus for more significant rate rises. We have also seen that when a small selection of leaders has tried to enforce more stringent rate rises, they have not received the backing from their fellow leaders, nor the rest of the following market. In short, the relentless rise in capacity levels is capping rate rises to today’s modest amounts. But at the same time, management diktats that apply across the full spectrum are keeping any prospect of rate reductions off the table for the time being – with rare exceptions.”
The question is: in the continued absence of major losses, how long will it be before the need to secure additional premium income from a profitable portfolio such as upstream outweighs these diktats?
The writers point out that the overall premium income pool for this class of business remains at historically low levels – levels that won’t be increased much by today’s modest rises. At some point, to ensure the viability of the portfolio by covering their operating costs, it is likely that some of the smaller insurers will come under enormous pressure to increase their line sizes on the more profitable programmes.
If the only way to do so is to offer more competitive terms, there must surely come a point when senior managers at some insurers accept the trade-off between an increased line size and more competitive terms in their drive for more income – the current standoff can surely not last for ever.
And if the smaller upstream leaders start generating more income and the larger leaders find that their income pool is draining away as a result, that could be the one scenario that might break the current impasse, the writers say.
They added, “Of course, it is instead possible that a succession of large losses will provide the impetus the market requires, and today’s conditions will simply be the launching post for a much harder market. Only time will tell.”