Insurance Market Trend: U.S. Downstream Property Market | Stephens

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Market Trends

U.S. Downstream Property Market Update: Preparing for Success

Jan 2, 2024

The downstream energy insurance market has had its ups and downs with many concerns being raised by insurers in recent years. Environmental Social Government (ESG) compliance, communicable disease clauses, cyber resulting damage exclusions, supply chain / logistic concerns, and asset valuation integrity have all been top discussion points underwriters have been anxious about. That being said, new markets entered the downstream energy space and are eager to compete for business which has made the current marketplace more dynamic as we enter 2024. The energy property insurance market has forced clients to make program changes and have also forced insurance buyers to further scrutinize their current property programs, “trim any fat,” that may be in their current programs (inappropriate limits for certain coverages, moving certain assets to be covered under a separate policy for lower rates, etc.). Clients that have proven to be flexible on their risk tolerance have benefited the most in recent years.

Clients that have proven to be flexible on their risk tolerance have benefited the most battling the hard market.

Many insurers in the sector hit target goals early on in 2023, which affected the amount of capacity and aggressiveness in the downstream market place. The lack of losses in the downstream space in 2023 compared to other years and inflation points added to clients’ reported values over 3 years have put markets in a situation to charge premium at an increased rate. Underwriters have the ability to be strategic with the new business submissions coming in the door, which makes the need for individual client / broker attention during renewals ever more important.

Creativity, including the use of self-insured retentions and captives, has helped numerous insurance buyers battle the hard market on pricing, terms, and conditions. Many loss free large / complex downstream accounts were able to renew their placements in 2023 with only single digit rate increases. Loss-sensitive accounts were forced to increase their physical damage deductibles, and in some cases, also had to raise waiting periods in order to manage premium spend to battle the large rate increases from the market.

Other clients had to accept Business Interruption (BI) volatility caps much lower than those in their expiring policies as result of BI claims that surpassed underwriter’s expectations due to logistic and supply-chain issues this past year. Even with these challenges, there are workable solutions to combat these concerns from underwriters without completely altering your insurance program. One way to manage this is to have Business Interruption values reviewed by forensic accountants to ensure the reported Business Interruption values on your policy are correct. Underwriters in the market will apply pressure on clients that do not have the ability to confirm correct values, and having a third party firm conduct a forensic study on your reported monthly and annual values is the best course of action for clients looking to reduce the likelihood of markets imposing strict BI caps (annual and monthly) to your business.

Losses in 2023

Over the past 5 years, the downstream industry has seen increased claim activity (operational and NAT CAT losses) across the United States. This has positioned markets to push for higher premium rates as the claims that have been paid out outweigh the premium received during that time period. In 2023, global losses in the sector have slowed, which has created a delta not seen in years between the premium underwriters receive and losses paid out by them. Many would signal this as a sign of a turning or softening market. However there are still a lot of factors at play that determine the markets’ pricing. Over the last two decades, there have only been two consecutive years (2009 & 2010) that the downstream market received more premium than they paid out in claims. Each subsequent year after receiving more premium than losses paid out, claims have historically risen. So what does this mean for clients? That losses can happen at any time, and relying on market pricing relief for your property program can backfire quickly the next year. Being able to be positioned in a flexible risk – tolerance manner will provide further premium relief than renewing your current structure, relying on the market pricing alone. Having a program structure that can be nimble and flexible during a hard market or soft market will help clients battle market pricing regardless of the current state of the market. This also helps clients deal with potential market-altering losses that can affect underwriters’ rating of your business.

Over the last two decades, there have only been two consecutive years that downstream markets received more premium than paid out in claims.

Indemnity Periods

Indemnity periods have also been scrutinized in this past year, and this trend will affect insureds as they look ahead to their 2024 renewals. Due to supply chain issues and product shortages, many insurers have decided to limit their risk to this rising exposure and have pushed to lower the indemnity period on programs. Providing insureds with data on expected timelines for replacement of equipment / spare equipment parts on site will lower underwriter concerns. In addition, some insurance buyers have decided to partner with other comparable firms in their sector to buy specific pieces of equipment to have spare parts readily available and distribute the costs. This ensures that the equipment is readily available for the 3-4 mutual firms if one firm suffers a loss. The firm that needs the piece of equipment would then have the obligation to re-stock the piece of equipment between their peers in case there was another loss. This can cut costs in half and help get insureds back up and running quickly, without having to wait months for certain equipment. Not only does this help to achieve better terms from the markets, but it also helps insureds with assuming costs from the waiting period retentions if one of the firms suffered a loss.

Physical Damage Asset Valuations

Another topic at the center of attention for underwriters is asset valuation integrity. Many markets have requested raising values on clients’ assets 3-7% per year since the onset of COVID-19 in 2020. During that time, there were supply chain issues which caused values of steel and other commodities to rise, but this trend has declined over the past 12 months from its height during 2021. Partnering with the correct firm for asset valuations has proven to be one of the best ways to seek correct values for your firm’s reporting, and this will also help underwriters feel more comfortable with values they are insuring. This will help limit additional risks from the underwriter’s point of view, which in return will help clients with program pricing and limiting any coverage restrictions. This also helps to establish the correct limit of insurance for clients as many insurance buyers have seen property damage (PD) and BI values increase without raising their property insurance program limits.

Engineering has also further engrained itself into the renewal process. Having the ability to access many options / engineering partners has proven to be extremely beneficial. In-house brokerage firm engineering market reports can be viewed as biased from your carrier partners reviewing your risk and can put your business in a challenging position for renewal. Reviewing third-party / carrier partner engineering options with your current program-lead markets is the best practice to ensure everyone is in agreement and content with the quality of the reports. Quality engineering reports also attract additional new markets and help further build trust with your incumbent markets.

Going into 2024

With additional capacity coming in the downstream space, it is important to be represented in a positive manner and to make a good first impression with the markets as underwriters have been reviewing new account submissions more than ever. Each market has limited capacity to deploy, and those clients that have superior submissions with the necessary data needed for underwriters to quote will have an advantage compared to clients that are missing data or have biased engineering reports.

As mentioned, the 2023 loss record in the downstream marketplace shows signs of a potentially softening market for 2024. However, losses can happen at any time, and having a broker who can provide a plan to counteract any market trend is important. Going into 2024, we anticipate rates to be anywhere from flat to 5% for large and complex downstream accounts if the current loss trend continues. In addition, clients that have flexibility and partner with a broker that provides multiple program structures may see even greater pricing relief in the marketplace.

Being prepared and having a sensible strategy to counteract underwriters’ concerns in the downstream property marketplace have become extraordinarily important in order to have a successful property renewal. Understanding the concerns and how to formulate responses for each underwriters’ interests will be a deciding factor on how markets rate downstream accounts in 2024. Partnering with the correct broker holding the view that client risks should be underwritten on an individual basis, and not placed as part of a large book, will be a determining factor for success in the upcoming renewal cycle. Not only do insurance buyers need to plan for 2024, but we also recommend that clients take a long term approach with the structure of their property programs to ensure long-lasting relationships with key markets. Understanding the importance of longevity and program resilience for our clients’ future is how we create value at Stephens.

At Stephens, we tailor each client experience to meet their unique needs. Understanding our clients’ businesses and the needs of our clients is what we do best. Across the industry, many firms are shifting to a “transactional” placement and service strategy with declining levels of client servicing. At Stephens, we believe in the lost art of client servicing and acting as an extension of our clients’ risk management teams. This allows Stephens to fully understand our clients’ businesses and how our clients operate internally and build relationships with many members of our clients’ teams to create a smooth and transparent line of communication for any insurance need.

About the Expert

Matthew Crewe

Commercial P&C Account Executive, Insurance

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  1. This material has been prepared solely for informative purposes as of its date of preparation. It does not purport to be a complete description of the markets or developments referred to in the material. Information included in the material was obtained from sources that we consider reliable, but we have not independently verified such information and do not guarantee that it is accurate or complete. No subsequent publication or distribution of this material shall mean or imply that any such information remains current at any time after the date of preparation of the material. We do not undertake to advise you of any changes in any such information. The views and opinions expressed in this material are those of the author and do not necessarily reflect the opinions of Stephens or any other person or entity. Any expressions of opinion or forward-looking statements included in this document are based on information available on the date of preparation, speak only as of such date and are subject to change without notice. No assurance can be given that any of such opinions or statements will prove correct.