Global energy capacity at record high

The global oil and gas sector is facing a glut of capacity despite available premium for the sector being in decline, a recent report by Willis has found.

Willis says that over-capitalised re/insurance markets and an influx of capital from pension funds, hedge funds and banks has increased competitive pressures within the energy market to “unprecedented levels”.

Upstream capacity now stands at $5.7 billion, according to Willis, with a further $4.6 billion for downstream operations.

Willis predicts that it will take a run of significant losses to change the present softening market and encourage a withdrawal of capacity from the sector.

Losses in 2013 were not enough to prompt any market change, with only a handful of losses in excess of $200 million, Willis found.

There have not been any major energy losses since Deepwater Horizon in April 2010, which prompted the introduction of strict safety measures that have helped to drive down losses in the sector. The loss record of the sector continues to improve the report found.

Commenting on energy insurance market conditions, Alistair Rivers, global head of natural resources at Willis, says: “With no obvious alternative investment opportunities emerging, and with interest rates around the world still low in relative terms, capital providers are likely to maintain their funds in the (re)insurance markets where they are currently deployed - at least for the short term. Energy market capacity is therefore likely to continue to be available, even if the sector falls into unprofitability."

He continues: “The difficulty with predicting how market conditions will turn out in the next few years is that this is the first time we have seen capital deployed in the insurance markets that is unlikely to be put off by short term underwriting unprofitability.

“In previous market eras, we have always found that a major catastrophe or series of losses – for example, Piper Alpha, 9/11 and the 2005 Gulf of Mexico hurricanes – has led to a withdrawal of capacity and harder market conditions. But now we think it will take more than a headline-grabbing loss to precipitate a withdrawal. Capital providers would have to find an alternative haven for their money if they are to withdraw from the insurance arena.”