Market update February 2015
Downstream Energy market Capacity and rates In 2014 significant rate reductions were achieved in the downstream energy market, where clean business was generally renewed with double digit percentage reductions. On a like for like renewal with no changes in policy conditions and deductibles UIB consistently achieved these double digit reductions for existing clients. Further to this UIB came up with many innovative solutions when clients insurance needs required amendments in coverage or were limited by budgetary restrictions. The Downstream Energy market capacity is considered to currently be in excess of USD4.6 billion. The capacity in this sector has grown at a consistent rate for the past decade and continues to increase through new capacities entering the market alongside traditional Downstream Energy Reinsurers increasing their capacity. The significantly over-capitalised global reinsurance market and the influx of new and non-traditional capacity providers, has resulted in a notable increase in market competition that is likely to continue in 2015. M&A and consolidations Fitch says that it expects that M&A activity in the European insurance sector is likely to increase, particularly as firms make the transition to the Solvency II regulatory environment at a time when their profitability remains under pressure. AXIS Capital Holdings Ltd. agreed to merge with Partner Re Ltd., combining two Bermuda-based reinsurers with a total market value of almost USD11 billion amid accelerating consolidation in the industry. The new company will be among the world s five largest reinsurers. Starr Underwriting Agents have announced an increased capacity from USD100 million to USD150 million. In April 2014 Endurance entered the energy market with a capacity of USD100 million. The Downstream Energy portfolio will be managed by Alex Murray who joined Endurance from Arch. Major traditional energy reinsurers are looking to utilise a greater share of their working capacities where appropriate 6 USD billions Estimated average rate index (1992=100) 120 5 100 4 80 3 60 2 40 1 20 0 0 1993 1994 1995 1996 1997 1998 1999 Onshore capacities 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Average composite percentage of 1992 rates 2013 2014 (1) Source: Willis Energy Market Review 2014 2 UIBL Market update February 2015
Losses in the Energy industry Top causes of loss: Energy claims ( 1m +) (1) Fire Blow out Machinery breakdown Explosion CBI loss Other Number of claims 10% 14% 6% 8% 18% 45% Fire is the number one cause of energy losses by both number (45%) and value (65%). Fire Blow out Explosion Machinery breakdown Storm Other By values 19% 6%2% 2% 6% 65% Storm damage accounts for just 2% of claims by value. The high sums insured at risk in the Oil and Gas sector are highlighted by the very high average claim values in comparison the other lines of business insured in the international market. Based on the published claims data for the period 2009 to 2013 the average value of a claim in the Energy industry is 20.8m, this is quadruple that of the Aviation industry which provides the second highest average claim at 5.27m and eleven times higher than the average claim across all lines of business (Energy, Aviation, Financial Lines, Property, Engineering, Liability & Marine). 2014 Major Downstream Energy losses (in excess of USD20m Ground-Up) January Fire Saudi Petrochem Plant USD 65,000,000 Mechanical Failure Swedish Refinery USD 51,250,000 February Ice/Snow/Freeze West Virginian Gas Plant USD 20,600,000 Fire & Explosion Russian Petrochem Plant USD 83,000,000 March Fire & Explosion Washington Gas Plant USD 44,400,000 Faulty Work Canadian Chemical Plant USD 94,694,000 Fire & Explosion Swedish Refinery USD 68,905,000 May Faulty Work Spanish Refinery USD 40,500,000 June Fire & Explosion Pennsylvania Refinery USD 28,500,000 Fire & Explosion Dutch Chemical Plant USD 30,000,000 Explosion Canadian Chemical Plant USD 48,000,000 Fire & Explosion Russian Refinery USD 800,000,000 (est) Fire Thailand Refinery USD 160,000,000 July Fire Indian Refinery USD 100,000,000 Fire & Explosion US Petrochemical Plant USD 640,000,000 August Mechanical Failure Canadian Petrochemical Plant USD 110,000,000 Faulty Work Finnish Refinery USD 106,220,680 The total Downstream losses for 2014 are currently estimated to be approaching USD3 billion. (1) Source: Allianz Global Corporate & Specialty. Data based on accident years 2009-2013 (2) Source: Willis Energy Loss Database 3 UIBL Market update February 2015
2015 outlook Excess capital, fierce competition and lack of market discipline may place greater pressure on rates as insurers seek to expand their profiles with their core markets to produce a suitable return on shareholders capital. Higher values combined with increasingly complex and interrelated risks means that the cost of energy claims is increasing. Business interruption and a number of emerging risks will also make for a more challenging future environment. If oil prices were to remain low for a prolonged period, budgets of Oil & Gas companies will shrink and will inevitably affect their allocated spending on Risk Management and Insurance policies i.e. purchasing higher deductible, lower limit or even buying more narrowed covers. Besides that, if the Oil producing countries were to show a contraction in economic activity, then the operating environment could prove challenging for the insurance market as well. Another point that might be affected by low oil prices is the financial ability of Oil & Gas companies to invest in new projects and extensions. Reinsurers remain under pressure to increase their premium income and maintain market share thereby increasing the pressure on ratings and continuing the trend for significant reductions for 2015. World s largest Reinsurance Brokers (2) Rank Brokers 1 Aon Benfield 2 Guy Carpenter & Co. L.L.C. 3 Willis Re 4 JLT Reinsurance Brokers Ltd. 5 Cooper Gay Swett & Crawford Ltd. 6 Miller Insurance Services L.L.P. (3) 7 UIB Holdings (U.K.) Ltd. 8 THB Group Ltd. 9 BMS Group Ltd. 10 Lockton Re 160 140 120 100 80 60 40 20 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 USD per barrel 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Crude oil prices (BRENT) (1) (1) www.eia.gov (2) Ranked by 2013 gross revenue from reinsurance brokerage and related services (includes all reinsurance revenue reported through holding and/or subsidiary companies) - 27th October 2014 for 2013. (3) Willis acquired 85% stake. 4 UIBL Market update February 2015
New product innovation not keeping up with demand An increasing number of risks which are high on risk managers registers do not have suitable insurance solutions. At the heart of the challenge is the fact that a large proportion of the risks faced by companies today are intangible and often linked to soft assets like brand and reputation. For example, cyber, supply chain and reputational risk. These risks are hard to measure and quantify both in terms of severity and likelihood, which, coupled with the strong regulatory and commercial imperative only to accept risks that can be reliably quantified, creates a conundrum for insurers and their customers. The global insurance industry has recently made efforts to provide products for some of these risks, but the take up has been relatively low. This is partly because customers needs are evolving rapidly, meaning insurers constantly have to play catch up, and partly because in an effort to limit the downside represented by a hard to quantify risk, many policies are too inflexible and have too many exclusions and limits. Cyber risks Energy companies present both a target and an opportunity to cyber-attackers by environmental extremists, terrorists, state-sponsored agents, disgruntled employees and anonymous hackers. The threat of cyber-attack has grown exponentially in the past few decades with high profile breaches featuring on the news. Rigs, FPSOs, onshore refineries and pipelines all rely on Industrial Control Systems (ICS) such as Distributed Control Systems (DCS) and Supervisory Control & Data Acquisition (SCADA) systems. These technologies run on similar software across the industry are particularly vulnerable to malicious cyber breaches. The operational and financial consequences of such actions are potentially catastrophic for an assured. Experience tells us that risk managers are aware of their companies vulnerability but are unsure of how to address it. Until recently the insurance market was unsure as well so most policies now exclude damage arising out of a cyber-event as insurers realised that there were industry wide aggregation issues. However there is now cover available for: Property Damage (PD) Business Interruption (BI) resulting from PD Digital Assets restoration costs BI resulting from damage to Digital Assets (Non-Damage BI) Resulting from a Cyber Attack Coverage comes with services such as penetration testing from Cyber Security partners and loss mitigation advice to minimise the effect of an attack. 5 UIBL Market update February 2015
Supply Chain The increasing cost of BI claims is linked to the complex and sometimes concentrated supply chains in the energy sector. Petrochemicals are used in an increasing number of products and processes, with many sectors and companies relying on their timely delivery, this is a risk that can be picked up by supply chain and customer extensions. We offer all-risk s business interruption cover which is not restricted to property damage or physical damage. The trigger under this policy is simply any reduction in supply (subject to policy conditions) that leads to a loss or output/gross profit. We offer a bespoke policy for all our customers with very few exclusions and coverage that can be tailored to meet requirements and budgets. Supply chain insurance is based around named supplies and suppliers however cover extends through the various levels of supplier tiers and can also include additional costs and expenses, such as increased cost of working, liquidated damages etc. Supplier Site B Site C Customer Reputational Risk Reputation risk is a top strategic business issue: 88 percent of executives are explicitly focusing on reputation risk as a key business challenge. The majority of global companies (76 percent) are confident that their reputations are strong, according to the 2014 Reputation at Risk survey conducted by Forbes Insights on behalf of Deloitte Touche Tohmatsu Limited (DTTL). However that confidence declines when it comes to protecting against and responding to reputation risks. In fact, only 19 percent of companies would award themselves an A grade for their capabilities to manage against such risks. Even Warren Buffett cited it in his Dec. 19, 2014 letter to his top executives to remind them that the top priority trumping everything else, including profits is that all of us continue to zealously guard Berkshire s reputation. American International Group, Inc. (AIG) have designed an innovative insurance solution ReputationGuard. This coverage is designed to protect a company s reputation and brand value through a combination of proactive mitigation and reputation attack response coverage, addressing crisis communication costs incurred through AIG s panel of experienced public relations experts. Coverage begins when a policyholder hires any of those experts. The cost of communications in response to adverse publicity including television, print and online advertising, cost of waging a social media campaign designed to address adverse publicity and costs associated with helping to monitor the brand perception of the company at risk would be covered. 6 UIBL Market update February 2015
Engineering Risk Consultants (ERC) Engineering Risk Consultants (ERC) was founded in 1987 and remains an independent engineering consultancy. ERC provides engineering services to clients across a broad range of industries and areas of expertise. Working closely with the insurance risk placing divisions of UIBL, ERC delivers quality engineering surveys and risk control information utilised by the insurance markets. Our principal service is to provide an independent assessment of the client s risks and provide risk improvement advice to the client. In addition to providing surveys and reports for underwriting purposes, we have the experience and ability to offer a wide range of consultancy services. Our personnel and consultants draw on their backgrounds as professional engineers from a wide range of relevant industries which include Refining, Petrochemicals, Power production, and their considerable experience within the insurance industry. Our expertise covers a diverse range of activities which include safety, design, construction, operations and management. As part of UIB s expansion business plan, we are pleased to announce the acquisition of Eng. Alberto Conesa as a Senior Engineer in ERC. Alberto joined UIBL s ERC Division in September 2014 to work alongside ERC s Head Engineer, Lachlan Munn. He previously held a position as Senior Risk Engineer at Allianz Global Corporate & Specialty AG in Madrid for 9 years where he was tasked with identifying, analysing and evaluating risks and processes for corporate clients in different Line of Businesses in Europe and South America that were integrated into the Underwriting process. Alberto gained extensive experience in all industrial activities. The scope of the audits included analysis and assessment based on NFPA standards, FM, UNE, VDS. He has a Postgraduate Degree in Industrial engineering with Electrical & Production specializations and a Master s Degree in Fire Protection Engineering. UIB Downstream Energy newsletter We are pleased to provide our existing and potential clients with our first newsletter of 2015. We hope that readers will find this newsletter interesting and informative and would welcome your feedback and comments, please email us at: downstream@uib.co.uk This newsletter is published for the benefit of clients and prospective clients of United Insurance Brokers Ltd. It is intended only to highlight general issues that may be of interest in relation to the subject matter and does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. If you intend to take any action or make any decision on the basis of the content of this newsletter, you should first seek specific professional advice and verify its content. 7 UIBL Market update February 2015
About United Insurance Brokers UIB Group is an independent, international insurance and reinsurance broker headquartered in London. The accredited Lloyd s insurance broker and UIB Group s centre of excellence for specialty business is United Insurance Brokers Limited (UIBL). UIBL provides access to the unique and unrivalled concentration of underwriting expertise for both the Lloyds and Company market in London. Excellent relationships exist with all the major reinsurers from the day to day underwriters to the respective heads of underwriting and claims. It is UIBL s belief that the specialist classes of business need to be handled on the basis of a transparent relationship between all the parties and therefore encourage meetings between our clients and underwriters. UIBL s broking capabilities are complimented by our London based in-house Risk Management and Consulting team. UIB Group s team of 400 people boasts over 20 nationalities. Supported by a network of local offices, and strategic business partners, UIB provide clients with the platform to access insurance and reinsurance markets globally. UIB Group clients benefit from a dedicated and exceptionally culture sensitive team of specialists who can provide global solutions supported by a personal drive and focus for which UIBL has established an unrivalled reputation. Over time the UIB Group has established and sustained strong relationships with its client base and built a strong network through its international arm, UIB International, and UIBL s own strategic offices. The result is local expertise with global capability to deliver specialist know-how, strategic risk management advice and outstanding claims management. The founding directors, many of whom are still active in UIB, have worked together since the 1970 s providing a depth of knowledge and continuity seldom seen in the insurance business today. The ethos of UIB, from the very beginning, has been client focused: listening carefully to clients concerns and their requirements, striving to meet those needs and delivering the appropriate products and professional service. Disclaimer United Insurance Brokers Ltd accepts no responsibility for any loss which anyone suffers through acting, or refraining from acting, as a result of material contained in this newsletter. No part of this newsletter may be used, reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise, without the prior permission of United Insurance Brokers Ltd. United Insurance Brokers Ltd 2015 United Insurance Brokers Ltd 69 Mansell Street, London, E1 8AN T: +44 (0)20 7488 0551 W: www.uibgroup.com United Insurance Brokers Limited is an accredited Lloyd s insurance broker, authorised and regulated by the Financial Conduct Authority (FCA registration number 307812). Company registration number 02480634. VAT registration number GB 245 6180 62. Broker at LLOYD S.