- Houston, TX
The Overall Industry: What a Ride
As we started the 4th quarter and the holiday travel season, we saw demand steadily increase as it does every year. This year is a bit different, however, as our national supply has taken a major hit for various reasons: legislative restrictions on drilling, labor shortage, and OPEC's stance on increasing production, to name a few.
These factors all contributed to decreased supply, which simple economics always tells us means we are going to see an increase in pricing—and boy did we. In October alone there was an approximate 12% increase in WTI. This increase not only affected the prices at the pump, but trickled over to just about every industry that you can think of. Construction saw significant material price increases due to rising transportation costs, manufacturing saw increases due to operating cost prices, and the travel industry saw major increases due to the cost of fuel.
By the middle of the 4th quarter we saw staggering inflation rates, and the industry tried to remedy this by tapping into the Strategic Petroleum Reserve. The release of reserves did provide some short-term relief and we saw the WTI price in November drop approximately 30%. This drop was also assisted by future demand scares due to the Omicron variant and the possibility of additional travel restrictions.
Then December rolled around and we saw another increase in demand due to the holiday travel month, with a 16% increase in WTI pricing, bringing us back to where we started in the month of October. What a ride.
Insurance Industry Impact
The insurance industry has unsurprisingly been impacted by these swings in the market. Massive changes in commodity pricing make it very difficult to provide accurate annual revenue projections. As we know, the majority of markets in the E&S space rate off of revenue, making it hard for retail producers to confidently indicate an exposure basis.
From a wholesaler standpoint, there are things we can do to assist with these issues, like working with carrier partners to provide a percentage of free growth, negotiating lower minimums and deposits, and communicating with retail agents mid-term to discuss any possible acquisitions or large revenue swings. The RPS energy division makes a conscious effort in deploy all of these strategies to provide the most transparent insurance program possible. Setting expectations early and often ensures a smooth transaction, whether it be during audit or renewal.
Q1 of 2022 looks to keep the wild ride going. With the Omicron variant surging in much of the United States and threats of additional shutdowns, demand predictions are going to be very difficult. That said, in the insurance industry we have the luxury of being roughly six months behind the energy industry market.
As we start to review and analyze our Q1/Q2 renewals, let's remember that our insureds have experienced an overall positive Q4. Oil demand predictions and revenue figure for insureds will be difficult to get right, so let's be sure to prepare them for the unexpected going forward. Aggressive revenue figures only help if they actually achieve them; as insurance professionals, it's up to us to help our insureds navigate an uncertain world by providing a realistic view of the following term.
- Dallas, TX