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 The downstream insurance market has been softening without break for such a long time – 18 months now – that some senior market figures are convinced we are near the turning point. Add to this the major losses in the first two quarters of 2008 and speculation is rife in the market that rates will start looking up very soon, at least in the specific classes of business that have seen these losses.
A significant proportion of the losses have come from the mining, energy and steel sectors. In a number of cases, the size of loss has been boosted by heavy business interruption and contingent business interruption claims and further blown up by commodity prices.
Feeling the impact
Spread across a wide range of industries and geographical areas, the losses have rattled the insurance and reinsurance markets somewhat. The treaty markets are already starting to dig in their heels and starting to push back.
The blessing in all of these is that insurers are now beginning to have an appreciation for the value of facultative reinsurance – as a means of guarding against the negative impact on their results from a series of shock losses. As treaty prices align quite closely to a cedant’s underwriting results, insurers that experience a series of such losses could see an individualised impact in terms of future treaty costs. Although the overall downstream energy loss pool remains relatively benign, reinsurance costs may well increase as a result of these losses.
This in turn could impact competitive positioning and margins in an already tough market. However, this factor is likely to have a gradual rather than sudden impact as not many insurers need to reinstate their energy treaties at this stage of the year.
Further to this, there are several insurers writing all “energy” business on a broadly defined basis into a single protection/profit center and while some of the 2008 losses cannot really be described as “core” energy/oil and gas losses, many are written under the downstream energy market portfolio. As a result insurers are feeling the impact of both mining and North American plant losses directly into their global energy portfolio.
Counteracting factors
Whilst these losses are considerable it is noteworthy that several key leaders write a strictly oil and gas book of business that does not include mining and other non oil-related industries. Certain major composite markets continue to chase business actively and therefore in general terms pressure on ratings continues downwards.
Capacity also continues to be augmented by local insurance markets, especially in the Asia Pacific region, Middle East and Latin America. These markets are generally less likely to be impacted by the recent losses outlined above.
The coming months…
It cannot be said that the market has turned, and competition for premium income is still intense. However fresh incidents being reported are leading to the re-introduction of market discipline. As in 2005, the ultimate fate of the market may well hang in the balance of the US hurricane season – underwriters may well, once again, be glued to their “Reuters” screens.
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