Market Trends: Increased Capacity, Regulation, and Demand
Environmental and energy insurance in 2015 will be affected by a change in capacity, EPA regulation changes, and an increase in public awareness of the ability to insure damage to the environment.
As we close out the first quarter of 2015, several significant trends are emerging that will affect the environmental and energy spaces for the balance of this year and into the next.
We are seeing a backing away from the need for rate from most carriers, retreating to a flat or slightly reduced rate position. This is coupled with a broadening of the coverage forms, and increased limits capacity. All of these would appear to bode well for the client buyers, but they come with major issues that agents need to be aware of.
Capacity currently drives a great deal of the industry. Capital has poured into the insurance industry over the last ten years, and it needs to generate a return. Carriers are constantly on the lookout for profitable business to apply their capital against. This demand, more than anything else, has fueled much of the market-wide direction in the last few years. Underwriting managers are being required to find business, and are willing to sharpen their pencils to unheard of levels to get it done.
Unfortunately, there is no clear end in sight, other than the eventual point where coverage becomes free. While there are, and will continue to be, significant consolidations in the marketplace, capacity for environmental and energy products outstrips demand. This is leading to some of the broadest coverage ever offered, at some of the lowest rates.
While every underwriting entity believes they are writing a profitable book of business for their shareholders, history would argue that this is not always the case. Many factors dictate the ultimate financial success of a book, and many of those will not be fully realized until years after the account has expired. Actuaries spend a great deal of time wrestling with these issues, trying to guide their carriers down the right path.
Environmental and energy business are both generally perceived as profitable classes of business for insurance companies to write. While the CGL on both classes is well understood, the environmental exposures of both are less so. Although standalone Pollution coverages have a reasonably long history now, being first introduced in the late eighties, recent changes in coverage forms to gain market share are introducing a degree of uncertainty into the book. The same can be said for the environmental exposures generated by new technologies in the energy business. While the oil and gas business has existed for many years, the processes used in the last five years to support the oil and natural gas boom are not well understood from a loss development and exposure perspective.
Additional evidence of the inherent uncertainty of the class can be seen in carriers who are increasing their reserves on prior year’s business. While this information is typically only available to people who read press releases and quarterly returns carefully, it is evidence that claims are maturing more aggressively than the underwriters who wrote these accounts were expecting.
Even with all of the above, some carriers are looking at the short term results and declaring success. Rates, for the first time in several years, are trending downward in both market segments. Working to keep what appears to be profitable business in the face of fierce competition; carriers are easing back on rates for good clients. Whether this trend will continue in response to the continued maturation of the book will be interesting to watch.
In addition to capacity and perceived profitability, another guiding factor will be increased regulation. When the EPA published their 2016 budget, they outlined a plan that included two very important elements. The first was funding meaningful enforcement capabilities. The agency is committing to aggressively pursuing violators at all levels. The second is an initiative toward greater accessibility. This appears to be designed to make environmental compliance an easily accessed part of the public record. Neighbors will have unprecedented access to information regarding the environmental compliance of the business down the street. Whether it is an oil refinery or a grocery store, citizens will have the power to police those around them.
This will eventually lead to a significant uptick in demand for quality environmental coverage in both the environmental sector and the energy field. It will also bring about a surge in work for firms providing risk management and environmental compliance to those businesses.
The final driving trend is demand. As stated above, demand should grow significantly in both sectors due to the EPA focus shift and rising public awareness of the ability to insure damage to the environment. Balancing this in the energy space is the downturn in projected oil and gas work into 2016 and beyond. It is impossible to tell what the long term duration of the current slowdown will be, but it is already clear that the energy space will have fewer players over the next twelve to twenty four months. This is not to say it will contract, but rather that growth should stabilize somewhat.
What do all these trends tell us about the next year in the environmental and energy space? Growing demand will be driven by heightened awareness on the part of the public. More businesses will be looking for environmental coverage than ever before. Excess capacity in our industry, coupled with the belief that all business is good business, will continue to drive rates down while coverage within the forms will expand.
Will this affect all carriers equally? We think not. We believe that many will hold the line on rates, preferring to write the right business at the right rate, and not worrying too much about whether or not they have reached a certain quota. These carriers will survive the inevitable result of writing business at insufficient rates. They will most likely be the “acquirers” in the consolidation that clearly will escalate. For today, insureds should carefully select their carrier partners, because as we all know, it’s the company that is available to work with you on your claim that matters most.
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