Signs are increasing that fallout from the oil price crash could lead to a contraction of the energy insurance market.

Willis Towers Watson asserts in a new report that a “perfect storm” of conditions will leave insurers in the space either scaling back their participation in the market or pursuing an outright market exit. The firm’s April 2016 “Energy Market Review” follows a related write-up Marsh issued in March that warned plunging crude oil prices could lead to increased losses for commercial insurers as their clients scrambled to cut costs.

According to Willis Towers Watson, that perfect storm energy insurers now face includes the crude oil price collapse and related cost cutting in the industry. Too much capital in the global reinsurance market after 10 consecutive years of capacity increases in both the upstream and downstream markets has also contributed to the current climate, the report said.

With these conditions setting the backdrop, the energy insurance market now has fewer program limits, but also more self-insured retentions. That means the available premium income pool is dropping, as energy sector clients scale back major drilling. Willis Towers Watson said that the end result has led “to a significant overall reduction in premium since this time last year.”

“Insurers have had to choose between a strategy of retrenchment, waiting for a market upturn as others eventually withdraw, or maximizing market share, in the hope that the premium income earned will be sufficient to enable them to continue to trade,” the advisory firm and broker said in its report.

The report added that the heavy competition in the energy insurance space at present appears good for “the beleaguered energy industry” at face value, though there’s greater risk behind that reality.

“As prices continue to fall we should all remember that the market has provided a stable platform to enable to smooth transfer of risk in a predictable and manageable fashion,” Willis Towers Watson said. “It goes without saying that any scenario which severely impacts this balance will have negative consequences for all parties involved.”

Willis Towers Watson said that the market sector, in light of current conditions, is in need of product innovation. Specialist insurance products, for example, can help with environmental liabilities. But the report also notes advanced risk transfer mechanisms such as limits in excess of conventional insurance market offerings could help.

The report points to alternative risk transfer as one way to go, as an option that the energy industry is already actively pursuing.

Willis Towers Watson cites some custom policies that the London Insurance market developed with the firm, including contractors pollution liability policies for wet and dry global operations; pure financial loss policies that cover third party financial losses after a pollution incident; environmental impairment policies that work with general liability policies and fill gaps left by common exclusions (gradual defect and pre-existing conditions; and site based insurance for storage and refinery operations.

Marsh’s report pointed out that oil prices plunged 70 percent over the last 20 months, a reality that led to oil producers pursuing everything from hiring freezes to slashing spending in infrastructure and maintenance, reductions in health/safety measures and employee training, and the shelving or canceling of new products.

Marsh suggested higher commercial insurance losses could follow. The Willis Towers Watson reports acknowledges this, and explores the possible consequences to come.

Source: Willis Towers Watson