Plunging crude oil prices in recent months may be great news for consumers, but the trend could lead to increased losses for commercial insurers as their clients scramble to cut costs, Marsh asserted in a new report.
The insurance broker and risk management firm noted that oil prices plunged around 70 percent over the past 20 months. When this has happened in the past, oil producers have responded by shelving or canceling new projects, implementing hiring freezes, slashing infrastructure and maintenance spending, and cutting investment in health/safety measures and employee training.
Why this matters to insurers: cost cutting decisions in past oil price downturns apparently led to increased losses, based on Marsh research.
“With a prolonged period of low oil prices expected… the question now is when oil and gas companies begin spending less on maintenance and health and safety,” the Marsh report concluded. “Based on past experience, when this pullback in funding occurs, if it hasn’t already, we would expect to see an increase in losses soon after.”
If that is the case, however, there is the issue of a soft insurance market, something Marsh urges companies and their insurers to take advantage of.
Marsh said that falling insurance rates haven’t yet left companies embracing more, refinanced coverage “in uncertain times.” The firm said they would be well advised to do so.
“With the cost of insurance capital at historic lows, the opportunity clearly exists for companies to access cheap sources of capital from the insurance markets, reduce overall insurance premium costs, purchase insurance in areas that were previously omitted to cost, and renegotiate coverage terms,” Marsh said.
Oil and gas companies that are more forward-looking would use the soft insurance market as an opportunity to buy more coverage and transfer more risks off their balance sheets, Marsh added.
In turn, the commercial insurance market faces a challenge in responding to these new demands with incentives such as lower retentions, higher limits and/or increased coverage. Marsh said insurers could do this in a way that recognizes the now-ongoing cost pressures faced by the oil and gas industry.
For details on the full Marsh report, click here.