OVER THE PAST YEAR, the price of oil has remained stubbornly
low; at around a third of its 2008 peak, before recovering slightly
in recent months. The energy industry has responded rapidly
in expectation of a prolonged period of low oil prices, which
some are calling “lower for longer” or the “new normal.”
This has seen offshore oil companies and service providers
adjust their business models, drastically cutting operating
costs, shedding staff, squeezing contractors, and slashing
capital expenditure and exploration. Capital expenditure in
the US fell by 36% in 2015 and by 25% through 2016, while
day rates for drilling contractors have been 65% off their peak.
Coming off a boom time, oil and gas companies had plenty
of excess to trim, but, by any measure, cost-cutting has been
brutal, with drilling contractors and other service providers
being particularly hard hit.
These changes in the offshore energy market have implications for insurers, from the risks they are asked to underwrite, to the emergence of new credit risks and challenges
around risk accumulations.
DEMAND FOR OFFSHORE INSURANCE
With the focus on cost-cutting, as well as a reduction in
drilling activity, offshore insurance demand has slowed significantly. According to International Union of Marine Insurance (IUMI) statistics, offshore energy premiums, including
captives and mutuals, fell 20% in 2015 to $4.5 billion. And
current forecasted offshore premium numbers for last year
do not paint a better picture.
The number of construction projects in the market has
plummeted, greatly shrinking an important source of premium income for insurers. Demand for operational insurance
has also declined, as contractors have fallen on hard times.
With a reduced premium base, offshore energy insurers
are likely to face increased volatility. While a reduction in
drilling should benefit loss activity, the energy sector is characterized by high values and complex risks, which can still
give rise to large claims.
For example, upstream incidents during 2016 included
potential losses of up to $1.3 billion at an installation in the
New operating environment for offshore
SURVIVING ONE OF THE MOST CHALLENGING TIMES IN DECADES
STEFFEN HALSCHEIDT, ALLIANZ GLOBAL CORPORATE & SPECIALTY, MUNICH, GERMANY