Geopolitical uncertainty following events in eastern Europe is creating increased need for companies to manage their energy transition risk, according to WTW's Energy Market Review 2022.
The annual report covers the energy sector's volatility, including how commodity prices surged to record levels due to higher demand as economies emerged from the COVID-19 pandemic, as well as concerns around higher inflation rates. It also looks at how countries are shunning Russian oil and gas amid the Russia-Ukraine conflict.
In the report, WTW saw that the scales were finely balanced in all markets, with most portfolios returning to profitability. However, it found that the absence of any fresh underwriting leadership and a reluctance of insurers to “break ranks” are preventing brokers from forcing through any fundamental changes in market dynamics.
Graham Knight, head of global natural resources at WTW, advised the energy sector to come to terms with the consequences of the energy transition that may be accelerated by the recent events in eastern Europe.
“Now, we have a new factor to add to the mix – a significant future loss of energy market premium income from Russian business. It really is too early at this stage to predict with any accuracy what effect this withdrawal of premium income will have on market conditions,” Knight said. “On the one hand, insurers may use this factor to insist on recouping lost premium by re-imposing stiff rating increases; on the other, they may be inclined to compete more aggressively for the remainder of the premium income pool.”
WTW's report expects a short-term fossil fuel “binge” due to the crisis in eastern Europe that will alter the balance of the broader energy trilemma of affordability, availability, and reliability.
“It is probable that some assets may need to ramp up production, and/or other mothballed assets may be brought back online. The big question, of course, is whether maintenance and capital expenditure have been maintained for these facilities; if not, perhaps we can expect a future escalation of the current loss levels affecting the energy insurance markets, which may fuel a return to hard market conditions,” Knight said.
“How the markets react to premium income depletion as a result of sanctions and a short-term increase in fossil fuel activity remains to be seen. In the meantime, the energy transition will wait for no one; every risk manager involved in the industry will need to address the uncertainties arising out of both the new geopolitical landscape and the mounting momentum towards achieving net-zero emissions targets.”