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Even if industry 'behaves,' midstream's low insurance rates could rise

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Even if industry 'behaves,' midstream's low insurance rates could rise

Insurancepremiums for midstream operators may start to rise in the near future if excessinsurance capacity dries up and underwriters are pushed to grow income from theenergy industry.

For years,pipeline companies have been paying lower and lower premiums as insurers fightto maintain existing business and attract prospective customers, according toDavid Mittelholzer, managing director and energy leader at insurance advisoryfirm Aon Risk Solutions.

"We'vebeen hearing from underwriters for the last couple of years … that they don'tsee how premiums can continue to drop, going forward," he said. "There'stoo much capacity chasing too few businesses, and insurance companies don'tnecessarily agree with the environment of falling prices."

Thoughthere are outliers, pipeline operators on average are presently getting a 20%premium reduction on property insurance, and a roughly 10% reduction onliabilities, he said. The reduction is partly because of capacity but alsobecause there have not been any catastrophic losses that rocked portfolios inrecent years, Mittelholzer noted.

RobertDillard, vice president of risk management and insurance at , is preparing forinsurance premium rates to rise in the near future.          

"Insurance premiums are on a downward curve. Butwe could see that end, as in, we won't continue to see year-to-year decreasesin premiums," he said in an interview. "Underwriters will start tonarrow coverage and raise rates."

How much rates go up partially depends on whether "the midstream market behavesitself," Dillard noted, referring to the potential for pipe ruptures orother mechanical failures.

"One thing is you can't predict what is going to happenfrom a loss standpoint," he said. "If there are a larger number oflosses, such as pipeline failures that could be due to a reason such as lack ofmaintenance that insurers would view as being under the control of the pipelineoperators in question, then carriers could drop out of the market orsignificantly increase the rates they charge. That's a real possibility. It'shappened in the past. For example, pipeline blasts in California, Michigan,etc., over the last five years. It's become more difficult for underwriters towrite that class of business."

Assumingpremiums do rise, Dillard hoped for a gradual curve, rather than a spike.Kinder Morgan is hoping to renew its casualty insurance contract effective Aug.1 and the pipeline giant has already secured its property insurance for 2016. "Weare thinking that we will have minor reductions in cost this year versus lastyear," Dillard said.

Theupstream industry has seen a similar trend in falling insurance premiums,according to risk management and insurance brokerage company Willis TowersWatson's April 2016 Energy Market Review. Estimated premium income levels forupstream oil and gas had depreciated by more than 20% to approximately $2.3billion in 2015 from just under $3 billion in 2014, according to the report.

Whilemidstream specific data was not included in the report, London-based WillisTowers Watson does have a sizable base of U.S. midstream clientele. RobinSomerville, executive director in the firm's natural resources division, agreedwith Mittelholzer's view on competition for pipelines businesses amongcarriers.

"Atthe moment, [insurers] are not able to prevent the discounts … because ofcompetition [for large, investment-grade operators] among upstream and downstreamenergy insurance companies across the value chain," he said. "Mostinsurers are in this market for the long-term and are hoping they can surviveto take advantage of higher premium prices once the market has turned.

"But,if there is to be a market turn in the future, this will be because there isless capacity. So, some of them are bound to exit the business before thisturnaround materializes," he added. "The trick is finding a way tosurvive these low [premium] prices while other competitors decide that enoughis enough and withdraw."