Last year was a wild one for the energy sector. There were, of course, COVID-19 related issues. The sector also dealt with continuing pressure on insurer capacity for some energy sectors due to environmental concerns, oil prices taking a wild ride leading to bankruptcies, renewables continuing to gain attention, and power taking the spotlight as Winter Storm Uri brought frigid record low temps and power grid failures to Texas.
This year, while insurance rate increases have somewhat stabilized, energy players are facing a quickly changing market. As wild as 2020 was, this year and the years ahead promise to be just as or even wilder as they work to not only maintain current business practices but also reinvent their organizations to move further toward a lower-carbon, sustainable future.
“The next five years are going to be critical for the industries that supply energy and natural resources to the world’s economies,” wrote Bain & Co. in a recent report, Global Energy and Natural Resources Report 2021: Navigating the Energy Transition.
“Industries in the energy and natural resources sector — oil and gas, utilities, chemicals, mining, and agriculture — face a unique and intense period of change as they navigate through the energy and resource transition,” the Bain report says. “Climate change, shifting consumer preferences, demands for greater accountability, and unprecedented levels of business competition will all require new ways of working, technological breakthroughs, and leadership that can rapidly scale their deployment.”
That means that insurance specialists and their insurance company partners are in for an intense ride over the next few years as well.
The energy insurance market has gone through a transition of its own. Specialists in the sector report that energy premiums rose in nearly all segments of the property/casualty market with property and umbrella lines experiencing double-digit increases for each quarter in 2020.
Today, pricing conditions in almost every arena of energy continue to harden, but at a slower pace than a year ago.
Ricky Bryan, executive vice president, IMA Financial Group Inc., and director of IMA’s energy practice in Houston, says this insurance market is different than past cycles for his energy clients.
“It’s something that we can’t put our finger on and say to clients, ‘This is what happened in 2008. This is what happened in 2001, or 1992, or in the late ’80s energy insurance market.'”
Bryan says like in other lines of property/casualty insurance, the energy market first began to see hardening rates in first party liability coverages. “I think first actually was in energy construction; then operational property followed suit pretty quickly with a lot of big refinery losses, midstream losses,” he said. “Those losses were more fire and explosion, not necessarily catastrophic-driven.”
Then the casualty market hardened, driven most notably by nuclear verdicts and social inflation, he said. More recently, the energy sector is seeing upticks in rates for executive liability and now cyber liability. “Obviously with the Colonial pipeline cyberattack, we’re seeing some big increases there,” he said.
The ransomware attack on Colonial Pipeline in May shut down the largest fuel pipeline network in the United States for several days, crippling fuel delivery to most of the U.S. East Coast. The company paid a $4.4 million ransom to get the pipeline operating again, according to reports.
While rates are continuing to rise, the hardest of the hard market is mostly gone, experts say, and the energy segment is gearing up for growth.
“The message we’re sending to clients now is that we’re in a disciplined market,” Bryan said. “There are markets, in casualty, in property, in midstream, downstream, upstream, you name it, that are poised to write new business,” he said. That’s good news for specialists in the energy sector.
“We’re still seeing [rate] increases but at a much more moderate level than what had happened, say a year or two ago,” said Mike Hogue, managing director of the energy practice at Gallagher and co-author of the report, Global Energy Insurance Market Update published in August. “While things are still going up and not down from a rate standpoint, that trend is much more in moderation.”
Garrett Campbell, a broker at INSURICA based in Oklahoma City, Oklahoma, still sees rate increases across most lines for his energy clients, as well as higher deductibles and reduced limits. The INSURICA Oklahoma energy practice focuses primarily on upstream, midstream, and downstream oil and gas related accounts.
Today’s market is seeing tighter restrictions on coverage forms and more stringent information collection by underwriters, according to Campbell, who focuses mostly on insuring service contractors and other companies supporting oil and gas operators, including pipeline construction and maintenance, consultant services, environmental remediation, crude and refined fuel hauling and others. “Restrictions on coverage, for example, include exclusions such as wildfire,” he added.
Grant Bryant, area senior vice president, energy and environmental at Risk Placement Services (RPS), says the oil and gas sector in particular is seeing a lot more activity from the Permian basin, the largest oil producing basin in the U.S. Bryant added that South Texas and then Oklahoma have recovered as well, and are bringing in new startup opportunities.
“We write a ton of startups, just because that’s not something that an [admitted] carrier is willing to entertain at this time,” according to Bryant. “We’re seeing people get back to work. We’re seeing independent consultants start to get hired.” That’s good for the energy industry and insurance specialists, he said.
Oil & Gas
Energy specialists say that 2020 was a bit of a rollercoaster ride in terms of price and demand for the oil and gas sector. Also, increasing environmental, societal and government (ESG) requirements, the rising cost of debt for the industry, a stagnant acquisitions and divestitures market, and multiple years of faltering commodity prices prior to 2020 have contributed to pressure on the sector.
According to IMA’s Q2 2021 Market Update on Energy, 107 companies (46 exploration and production and 61 oilfield equipment and services companies) filed for Chapter 11 bankruptcy protection in 2020 — the most in a single year since 2016, when 142 companies went bankrupt.
While the sector is in a stronger position this year, profit margins are much tighter, INSURICA’s Campbell said.
“As demand for products has come back a bit, prices for the commodities, such as crude or natural gas, are significantly higher now, compared to where it was in the thick of the pandemic,” said Gallagher’s Hogue. “Pre-pandemic levels of price for crude oil was about $55 a barrel. That bottomed out in January of ’21, at about $47, and then, gradually climbed up to just under $70 now.” That’s at a price level where exploration and production companies can make a profit, he added.
During that same time, insurance companies have “right-sized” pricing. “They’ve collected more premium, and better results are coming out of the insurance community for the energy sector,” Hogue added. “That’s led to a more balanced market in terms of available capacity with sustainable rates. Hogue added that there have been a few new carrier entrants in the energy space as well.
Bryant, agreed. “We’re seeing a lot more capacity come into the market,” he said. But that capacity is limited, he added. “We’re limited as far as the amount that a single carrier is willing to put up for one risk or one exposure. We’re still seeing people capped out at $5 million to $10 million, just to lower their severity or their aggregation for one risk.”
That’s a common trend in the excess liability market, Garrett says. Energy excess/umbrella is generating rate increases from 20% to 50% higher, he added. And as carriers cut back on the capacity limits, brokers have to get a little more creative, he said. “A lot of our service contractors are required to carry a $10 million umbrella, but folks are saying, ‘We’re only willing to offer maybe a lead umbrella at $5 million,’ and so we’ll have to go find another $5 million to meet those contract requirements.”
Bryant says that while carriers are limiting capacity to smaller layers, there are more and more carriers coming into the fold. “That’s helping us build out some of these $25 million to $50 million towers that we need for our larger risks. We have more carriers coming to the table than we had, even since January, so that’s a positive sign.”
According to IMA’s Bryan, while there hasn’t been a “huge wave” of brand new capacity, he has seen a few key energy players expand in certain lines of coverage. “So, we’re seeing some capacity come back as they have adjusted their rates … They feel better about the rate environment out there so they’re opening back up where it makes sense.”
Garrett predicts a better rating environment for the coming renewal cycle, at least in commercial auto and excess liability — anywhere between 10% and 15%. “That is still a significant increase, depending on how large of a fleet; in the general liability, we’re starting to see renewals closer to 0% to 5%.” That outlook might even be better on quality, new business accounts, he added, as carriers are looking to grow.
For example, Garrett says a pipeline contractor that is set to renew in about three weeks, a very good risk, is getting more attention from markets this year. Typically, there might be one or two players aggressively going after this account, with the right terms and conditions, he said.
“This year, we’ve got close to half a dozen folks that are ‘scratching and clawing’ for this deal,” he said.
He suspects that some carriers are trying to catch up and license new business that was lost during last year’s oil and gas downturn.