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 Insurers forecast income could dive by 20 percent or more, possibly
forcing some players to quit the energy part of a business that has
attracted new entrants hoping for better returns during the era of
ultra-low interest rates.
While most energy companies renew their policies in the first half
of the year, the effects of the worst oil downturn in decades are
already being felt by insurers and reinsurers, who take on a share
of the risk in return for part of the premium.
Hannover Re's chief executive Ulrich Wallin used some understatement
in describing how the low oil price and resulting cuts in
exploration and production projects have diminished demand for
insurance protection.
"It's a little bit of a crisis," Wallin told a conference last week.
"We will see fierce competition ... on pricing."
Crude prices have tumbled 70 percent over the past 18 months to
around $35 a barrel, leading to five of the world's top oil
companies reporting sharp declines in profits in recent days.
Energy firms have already laid off tens of thousands of workers and
scrapped plans for mega projects that cost billions and take years
to develop, as well as targeting further savings.
Nick Dussuyer, global head of natural resources at Willis Towers
Watson, said some of the broker's major clients had significantly
reduced their insurance program limits, "with a corresponding
dramatic reduction in premium spend".
"If premium income levels continue to deteriorate, and capacity does
not withdraw ... at some stage this portfolio is bound to become
unprofitable," he told Reuters.
"It will be interesting to see at this stage which insurers will
choose to withdraw and which will try and ride out the storm,
anticipating a turning market."
In recent years, high returns in insurance and reinsurance in
comparison with government bond yields have attracted new investors,
ranging from hedge funds and private equity to pension funds and
insurers from newer markets such as China.
This had already driven up competition and put pressure on premiums
in the broader insurance industry, even before oil prices began
diving in mid-2014.
Insurers are also likely to have further exposure to the oil market
via their investments in corporate bonds issued by energy firms,
according to ratings agency Fitch.
INSURANCE EXPOSURE
Investment into energy insurance continued even as oil firms began
delaying or cancelling projects, perhaps in the hope that the market
would bounce back.
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As a result, total capital available for insuring upstream risks -
including around 3,000 offshore platforms around the world and
supply equipment such as drill ships - have risen about 10 percent
over the past year to about $7 billion, an industry source said.
A further $6 billion is estimated to cover downstream projects such
as refineries and processing facilities.
However, the energy firms accept that prices may well stay low for
some time and are scaling down their plans accordingly. Global oil
and gas investments are expected to fall to their lowest in six
years in 2016 to an estimated $522 billion, following a 22 percent
fall to $595 billion in 2015, according to the consultancy Rystad
Energy.
Simon Williams, from the International Union of Marine Insurance
industry association, forecast "a tough time in the next few
months".
Williams, who is also head of marine and energy at insurer Hiscox,
said the lower activity was likely to mean a sharp drop in the
premium base compared with 2015, and estimated it could be as much
as 20 percent.
"With more capacity having entered the energy insurance sector in
recent years, it will be a real test to see how insurers adapt to
this very challenging environment," he said.
William Lynch, head of energy at broker Aon, said a potential 20
percent fall in premiums could prove to be a conservative estimate,
given the drop in projects being carried out and overall lower
rates.
Insurers are already suffering. Beazley said its energy business saw
a 17 percent fall in rates in 2015, the strongest downward rating
pressure of all its segments.
"Our expectation is it's going to continue with further rate
reductions this year," Beazley chief executive Andrew Horton said.
(Additional reporting by Jonathan Gould in Frankfurt and Noor Zainab
Hussain in Bengaluru; editing by David Stamp)
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