Canadian Underwriter

Gloomy outlook for offshore energy insurance sector: IUMI

September 21, 2016   by Canadian Underwriter

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The offshore energy sector is facing a series of significant challenges in the wake of a falling premium base and increased volatility, cautions the chairman of the International Union of Marine Insurance’s (IUMI) offshore energy committee.

Silhouette of drilling rig on the north sea“We have not witnessed this level of downturn for 30 years – a drastic reduction in the oil price and a slowdown in activity coupled with a very soft insurance market where capacity continues to increase,” Simon Williams warned Tuesday while speaking at IUMI’s conference in Genova.

Operators and contractors are responding by reducing activity, causing the premium base of the energy account to also go down, notes a statement Wednesday from IUMI, a professional body that represents national and international marine insurers and has 46 national associations as members.

“Most clients are still wanting to insure their key assets, but the uncertain oil price is forcing a reduction in the premium base as many clients reassess their insurance needs,” Williams told attendees.

Provisional 2015 numbers indicate a reduction in premium income of about 20% compared to 2014, he reported in an IUMI statement Wednesday. “This number might reduce further when adjusted income is calculated at the end of the underwriting year. This theme is likely to continue for the 2016 year,” he added.

As for market capacity, it is estimated to have risen to approximately US$7.5 billion, Williams noted, adding that as capacity continues to grow, competition on pricing becomes more intense.

The lower premium base, however, is not matched by lower exposures and is creating a new challenge for energy underwriters.

Underwriters must manage a much more volatile book of business than in the past, Williams pointed out. “Peak exposures are relatively common, but set against a significantly lower premium base, they have the potential to have a much greater impact on the book,” he explained.

Pointing out that more claims were recorded in 2015 than in 2014, Williams warned conference attendees that if losses this year match those last year, underwriting losses are very likely for the 2016 underwriting year.

As for cargo insurance, Nick Derrick, chairman of IUMI’s cargo committee, reported at the conference that reduced income and challenges are anticipated.

Contributing factors such as a strong US dollar and falling cargo values means global cargo premiums are expected to decrease 9% in 2015 compared to 2014, with total premium value of US$15.8 billion.

“The statistics show that marine cargo insurers are not making any money,” Derrick said in a separate IUMI press release Wednesday.

“World trade values and exports are down and the slow economic growth has created difficult market conditions. An increase in underwriting capacity is also causing concerns,” he added.

Commenting on the ongoing Hanjin situation, Derrick noted that with Hianjin Shipping Company recently filing court receivership, there is a worry that other containership companies will follow.

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“This is particularly a concern in Asia as a number of these operators are carrying substantial debt, which could cause them a major problem,” he added.