Energy

In this chapter of our Annual Insurance Review 2019, we look at the main developments in 2018 and expected issues in 2019 in the energy sector.

Key developments in 2018

Following nearly four years of depressed oil prices, 2018 has seen a gradual recovery – culminating in a high of US$85 a barrel for Brent crude in October.

The rise in oil prices is understood to have resulted from increased geopolitical uncertainty, and in particular President Donald Trump’s decision to reinstate sanctions on Iran and withdraw the US from the Iran nuclear deal. The resultant effect on supply, coupled with political turmoil in alternative producers (including Russia, Saudi Arabia and Venezuela), has driven oil prices back towards the $100 mark.

Despite the upwards trend in oil prices, there remain a number of factors that continue to exert downward pressure on prices and pose a risk to their recovery. These include reduced demand from major consumer nations, and the transition towards renewable energy sources. For now, these pressures have been mitigated by unpredictable geopolitical events.

In parallel with rising oil prices, the appetite to invest in new projects has also increased. The economic viability of new projects is further improved as a result of the low cost of offshore development and logistical support that has resulted from a lull in field development over the last two to four years.

A June 2018 report by oil and gas consultants Rystad Energy reported that $110bn of investment has been approved for new oil and gas projects over the 18 months preceding the report. This contrasts with $50bn approved during 2016.

These new construction projects and facilities will result in increased activity for underwriters (and potentially claims teams) in the upstream energy market over the coming year.

What to look out for in 2019

The past year saw a trend of insurers divesting or limiting their involvement in the coal industry. In 2018 a number of major European insurance companies (including Allianz, AXA, Generali, Hanover Re, Munich Re, Swiss Re and Zurich) announced an intention to limit the amount of business they underwrite in respect of coal power/energy.

We expect the shift away from coal as a power generation/energy source to remain a pertinent issue within the insurance market during 2019.

A number of insurers have identified concerns over climate change as the basis for their decision to move away from coal-based risks. Burning coal is the most significant contributor to global carbon dioxide emissions, and there is a reasonable consensus within the scientific community that this carbon dioxide production contributes to climate change.

Climate change has been associated with a number of natural catastrophes and extreme weather events during 2018, including the North American cold wave in January, the European heat wave in July, and hurricane Michael in October. Accordingly, there is increased public awareness of the effects of climate change and increased reputational pressure on financial services (including the insurance market) to distance themselves from certain fossil fuels.

The coal industry accounts for a small (and reducing) percentage of the energy/power market. Therefore, the decision by a number of insurers to limit their involvement in the coal industry is unlikely to have a material impact on their businesses, but nonetheless it will likely serve to enhance their reputation with consumers.

It remains to be seen whether these underwriting restrictions on the coal industry will have any impact. However, even if the supply of underwriting services available to the coal industry does constrict, it will invariably create opportunities for insurers that are willing to continue to write coal business.

Authored by William Jones.

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