Climate change and the resulting energy transition are the major drivers of transformation in the energy industry risk landscape, according to a report by Willis Towers Watson.
According to the company’s annual Energy Market Review, climate change is causing an overhaul of the global energy system. The flows of fossil fuels from fields around the world, through pipelines and tankers to refineries near to consuming markets, could potentially disappear or change radically as more renewable energies such as wind, wave and solar power become more developed.
WTW noted that energy insurance markets continue to harden, but rate increases are expected to be more moderate for some risks.
The report discussed the following aspects of the energy insurance market:
- Capacity: Total theoretical capacity for both upstream and downstream property has increased, at US$9.2 billion and US$6.2 billion respectively, depending on region and risk profile. However, management pressures continue to prevent much of this capacity from being deployed in practice, and realistic levels now stand at US$7.0 billion and US$4 billion respectively. Theoretically, liability capacity remains static at around US$3.0 billion, but is realistically valued at US$1.0 billion for most energy business, depending on region and risk profile.
- Profitability: Both the upstream and downstream property markets are likely to prove profitable for 2020, whereas the liability portfolio continues to run at an overall loss, the report said.
- Rating levels: A two-tier market has developed for property business, with sought after business featuring a good spread of risk and premium income attracting more moderate rate rises than the remainder of the portfolio. Liability rating increases continue to depend heavily on the amount of program limit required.
“It is the issue of climate risk that continues to dominate the sector and we are increasingly seeing an acceleration of the energy transition that will have a significant impact on the future shape of the industry,” said George Nassaouati, head of natural resources Asia, Willis Towers Watson. “In short, today’s energy businesses are needing to consider how they establish robust transition plans to ensure a sustainable future.”