A Tale of Two Insurance Markets: Oil, Gas Outlook on Rates Differ for P&C, D&O

Stephens Insurance's David Zarr is executive vice president focused on the energy industry, and Joseph Presley is a senior vice president focused on executive risk. Both are based in the firm’s Houston office.

Directors and officers liability (D&O) rates are softening, allowing buyers to experience some relief in 2023. In contrast, property and casualty (P&C) rates are hardening. Why is this happening? What can executives do to take full advantage of opportunities in D&O while mitigating some higher P&C prices, as well as restrictive terms and conditions?

Property and casualty

Given the current challenges of the hardening energy insurance market, where insurers are limiting D&O capacity and premiums are increasing, it is more important than ever for E&P and midstream firms to get an early start and obtain as many viable options as possible, including third-party liability insurance programs.

Decreased investment

In recent years, key insurance providers have withdrawn significant amounts of capital from the market. For example, the largest reinsurance carrier in the world stopped writing E&P business via its Lloyd’s of London syndicate, the industry leader. This decrease in available capital, primarily due to ESG concerns, coupled with large increases in reinsurance rates, is causing an uptick in energy package rates (e.g., control of well and property) as well as a tightening of terms and conditions. This same Lloyd’s syndicate currently leads almost all E&P firms’ windstorm insurance programs, with significant participant lines.
Accordingly, Gulf of Mexico E&P firms may experience large premium increases at their next named windstorm renewal.

Déjà vu all over again

Other energy segments have experienced hardening insurance rates over the past years. But E&P firms were mostly isolated from the large excess liability premium increases, primarily due to availability of capital from several domestic insurance programs. However, as these E&P excess liability insurers have started pulling back the amount of excess liability limit provided for any one E&P client, E&P firms are now experiencing increases similar to those of midstream firms. Some E&P firms are seeing premium increases of more than 40% at their excess liability renewals.

D&O insurance

D&O insurance will continue to have competition this year on consequential D&O policies, such as primary and low excess layers. This is driven by an influx of new and rejuvenated capacity that has entered the market since the end of 2020. Further, reduced capital market activity last year sidelined some capital.

Underwriters of D&O are aggressively pursuing opportunities to deploy dry powder capital. This should be especially true for energy firms that consistently have a low number of D&O claims brought against them. Potential headwinds remain, but dry powder and low claims are expected to lead to positive D&O pricing.

Several changes are expected this year:

• Pricing: Rates decreased materially in 2022 – particularly in the second half (10.8% in the third quarter, according to global credit agency AM Best) – with the entrance of some 20 insurers and a slowdown in the capital markets. Excess layers drove the competition in 2022. Look for competition to heat up on primary D&O and low excess layers for the rest of 2023.
• Coverage: Competition on the primary increases will make coverage as much as a part of the renewals as clients and brokers are willing to push. To win business, underwriters may include material coverage grants such as entity investigations coverage. Of actions filed in the last decade against energy firms, 20% include regulatory action.
• Capacity: Underwriters displayed a willingness to consider higher limits than their expiring layers. This will pick up steam in 2023. Look for agreeable underwriters to increase their capacity from $5 million to $10 million or from $10 million to $15 million. Consideration will also be given to $25 million layers.
• Retentions: In 2022, D&O attempted to hold the line on self-insured retentions. As primary layers come under more pressure in 2023, underwriters may have increased flexibility with retention levels, particularly for clients with favorable claims history.

In sum

The insurance market for energy firms has good news and bad news. D&O insurance should be well priced and relatively easy to acquire. P&C insurance will be a very hard market, and energy firms need to start early and search for as many options as possible.