Climate Change Risk Will Have Transformative Effect on Energy Sector

Source: Willis Towers Watson | Published on April 16, 2020

Energy

Climate change and Environmental Social Governance (ESG) will transform the energy industry risk landscape, according to Willis Towers Watson, a leading global advisory, broking, and solutions company, at the launch of its annual Energy Market Review. Additionally, the recent oil price war and the reduction in demand for hydrocarbons as a result of the current Covid-19 pandemic will also have a significant impact on future energy industry risk management strategies.

Environmental Social Governance (ESG) forms the key theme of the report, highlighting that the transition to a low carbon economy requires a fundamental reappraisal of energy company climate risk; the Review shows that achieving a satisfactory ESG rating will be critical in enabling energy companies to attract and maintain the support of key stakeholders in the future.

Other key highlights of the report from an insurance market perspective were:

  • Capacity: once again the Upstream market has bucked the general market trend, as theoretical amounts are now at another record level, US$8.73 billion, from US$8.10 billion in 2019. The reverse is true, however, for Downstream, where capacity has declined for the second successive year, down to US$5.978 billion from last year’s US$6.428 billion.
  • Losses: the extraordinary run of benign loss years in Upstream continues, with only three losses in excess of US$100 million during 2019. The Downstream also show a significant number of losses over US$100 million, with one major loss significantly above US$1 billion.
  • Rating levels: rating increases are still very modest (2.5-5% on average) compared to Downstream, which features increases well in excess of 20% for virtually every type of programme, and significantly more for refinery and petrochemical business.
  • Profitability: The Upstream market remains profitable in overall terms; however, premium income levels are still low by historical standards, and certain sub-sectors of the Upstream market such as Offshore Construction, have been hit by attritional losses. For Downstream and Liability insurers, their portfolios remain firmly in the red and the long road back to profitability is uncertain.

Graham Knight, Head of Global Natural Resources, Willis Towers Watson, said: “In these unprecedented and uncertain times, there is no denying that the last 12 months have been challenging ones for the energy industry. However, it is the issue of climate risk and wider ESG factors that will have a significant impact on the future shape of the industry. In short, today’s energy businesses must commit to incorporating ESG standards and climate change into their risk mitigation strategies in order to ensure a sustainable future. Willis Towers Watson is a global leader when it comes to helping companies address growing regulatory, investor, consumer, employee and operating pressures related to climate change through combining the analytics, advice and transactional expertise from across the company.”

He added: “However, we cannot underestimate the immediate challenge faced in loss of demand as a result of Covid-19 and the impact of the recent oil price war, notwithstanding the agreement now reached by OPEC+ to cut production by 10% of global supply. While it is still too early to forecast exactly how these twin factors will play out in the months ahead, the potential effects on the energy industry are obvious; reduced capital expenditure, a reduction of exploration and production activities, lower refining margins and lower Business Interruption valuations. It will also have a knock-on effect on premium income levels for an insurance market that remains unprofitable for most lines of business.”

A full copy of the report can be found at
https://www.willistowerswatson.com/assets/image/Energy-market-report-2020.pdf