Oil price slump triggers premium cuts

02 March 2016, Lagos – The insurance industry is becoming the latest casualty of the oil price slump, with postponements and cancellations of energy projects forcing down premium rates and income in a market that is already shrinking. F

Crude-oil-declineThe Chief Executive of Hannover Reinsurance Firm, Mr. Ulrich Wallin, described current situations as, “A little bit of a crisis. We will see fierce competition on pricing.”

According to Ulrich, insurers forecast income could dive by as much as 20 percent or more, possibly forcing some players to quit the energy part of a business that has attracted new entrants hoping for better returns during the era of ultra-low interest rates.

While most energy companies renew their policies in the first half of the year, the effects of the worst oil downturn in decades are already being felt by insurers and reinsurers, who take on a share of the risk in return for part of the premium.

Crude prices have tumbled 70 percent over the past 18 months to around $35 a barrel, leading to five of the world’s top oil companies reporting sharp declines in profits in recent days. Energy firms had already laid off tens of thousands of workers and scrapped plans for mega projects that cost billions and take years to develop, as well as targeting further savings.

Global Head,Natural Resources at Willis Towers Watson, Nick Dussuyer, said some of the broker’s major clients had significantly reduced their insurance program, limits, adding, “With a corresponding dramatic reduction in premium spend. If premium income levels continue to deteriorate, and capacity does not withdraw at some stage, this portfolio is bound to become unprofitable,”

“It will be interesting to see at this stage which insurers will choose to withdraw and which will try and ride out the storm, anticipating a turning market,” he added.

In recent years, high returns in insurance and reinsurance in comparison with government bond yields have attracted new investors, ranging from hedge funds and private equity to pension funds and insurers from newer markets such as China.

This had already driven up competition and put pressure on premiums in the broader insurance industry, even before oil prices began diving in mid-2014. Insurers are also likely to have further exposure to the oil market via their investments in corporate bonds issued by energy firms, according to ratings agency, Fitch. 10 Shares541

 

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