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The Challenges of Insuring the Energy Sector

​While 2022 marked one of the largest loss years for the energy sector—with an estimated annual gross loss of more than $7 billion—2023 brought hardened rates and no end in sight for the many challenges impacting the energy insurance market.
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While 2022 marked one of the largest loss years for the energy sectorwith an estimated annual gross loss of more than $7 billion2023 brought hardened rates and no end in sight for the many challenges impacting the energy insurance market, according to Amwin's “State of the Market: A Focus on the Energy Market" report.

Geopolitical issues continue to bring exposure, with both the Russia-Ukraine war and the Israel-Hamas war causing volatility, explains Rob Battenfield, executive vice president and energy property practice leader at Amwins.

“When Ukraine was invaded, the natural gas markets were thrown into turmoil. Europe had a shortage of natural gas, sanctions caused lots of different issues and Ukraine was one of the main grain exporters, so you had an inverted volatility in the natural gas and refining sectors where petrochemicals, ethanol and natural gas spiked and caused operators to make increased profits," he says. “Then insurers charged business interruption premiums in 2022 that didn't represent the exposure they had accepted."

And with the Israel-Hamas war, Houthi attacks in the Red Sea and the Iranian seizure of an oil tanker in the Strait of Hormuz, “anytime you start talking about conflicts in the Middle East, things happen to oil prices that affect the downstream energy market in ways that are unforeseen," Battenfield continues. “For both underwriters and clients, the exposure can become greater than they thought."

Another challenge is the increased emphasis on transitioning to renewable energy. “We have the Inflation Reduction Act in the U.S., but every country has its own set of government credits, incentives or mandates that are applied to the energy transition, and it's changing the world on a daily basis," Battenfield says. “You've got trillions of dollars being invested in solar and wind energy, biodigesters, fuel cells, cobalt and lithium production."

With increased investment in renewables leading to accelerated growth, “insurers have to respond and provide coverage while keeping up with technology," he says. “While it's great for top-line premium, from a loss perspective you need to have years of data to figure out how to underwrite something for a profit. Underwriting renewables is not an easy task."

Challenges in keeping up with renewable developments are coupled with environmental, social and governance (ESG) concerns that are prompting insurers, creditors and regulators to take steps to phase out coal—creating an awkward situation where coal plants “can't get financing, can't get insurance and can't get permits, but still need to be around to provide power," Battenfield says. As a case study, he points to Germany, where nuclear and coal plans were shut down. Germany was forced to bring coal-fired plants back online after the country's natural gas supply was throttled by the Russia-Ukraine war.

Additionally, the energy sector hasn't escaped the supply-chain issues that continue to plague all industries. “If I was an insurance agent, I would continue to focus the conversation around having critical spares on hand," Battenfield says, warning that failure to obtain a back-ordered critical part could shut an operation down for a year, even two—a factor prompting huge business interruption losses in 2022 that were still ongoing at the end of 2023.

As agents look to help their energy sector clients navigate through these risks, not to mention social inflation, economic inflation, auto claims and more, Battenfield warns that underwriting scrutiny will continue to be heightened.

“As we face a tight supply of capacity, underwriters will continue to need technical data, loss control reports," he adds. “Anything they can get their hands on to understand the risk is paramount to a successful renewal or placement." 

AnneMarie McPherson Spears is IA news editor.

17596
Thursday, February 1, 2024
Commercial Lines
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