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Small upstream rate changes threaten confidence in class: Marsh JLT

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Upstream energy is expected to challenge insurer confidence this year as the class of business continues to attract negligible rate rises compared with other specialty sectors, according to a report from Marsh JLT Specialty.

The broker’s quarterly Energy and Power report said that 2021 will accentuate the contrast between the upstream market and sectors including onshore property, casualty, D&O, hull and cargo.

Marsh JLT said that insurer goodwill towards past profits was expected to be tested, and that pressure on the class was likely to be intensified by environmental, social and governance concerns.

Meanwhile, underwriters are facing higher reinsurance costs, with rates rising around 10% and cyber coverage cut back.

The exposure basis of the sector is also shrinking, with fewer wells and construction projects to insure and constrained rig activity, resulting in less premium flowing into the system.

“It seems inevitable that, at some point, insurers may be forced to respond to the economic transition now occurring in the oil and gas industry,” the report said.

The broker said that insurers were forming a “pyramid of attitude” towards renewals, with businesses paying under $250,000 in premium experiencing market tightening with increased management oversight on quotations.

Mid-sized companies with up to $10mn in premium and no claims will be faced with average rate rises of around 5%, although this increased to between 7.5% and 10% in the fourth quarter.

Insurers are still looking to provide capacity for larger insureds, which have not been subject to the same rating pressure, although reductions are rare.

The most distressed part of the upstream book is the offshore drilling contractor segment, and in North America there are average price rises of 10% as well as increased deductibles and coverage constraints.

Loss activity was “relatively benign” in 2020 and was dominated by three claims. The explosion of the Equinor LNG plant in Norway is expected to result in a sizeable claims, while there was also a $120mn loss of contract claim in Angola from a dropped blowout preventer and a $100mn offshore construction incident in Qatar. 

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