Gulf Disaster Could Bring Long-Term Rise In Rig Insurance Cost
May 20 2010 - 5:03PM
Dow Jones News
In the wake of last month's Deepwater Horizon disaster in the
Gulf of Mexico, insurers that had focused in recent years on the
possibility of a hurricane sinking an offshore platform are
reconsidering the risk of drilling even when the skies are
clear.
The price to insure offshore rigs will almost certainly rise as
the accident's cost to the insurance industry becomes clearer.
Premiums may remain permanently higher if the investigation of the
disaster reveals previously unknown dangers, or if the inevitable
legal wrangling breaks new ground in assigning blame more broadly
than insurers expected.
The cost of insuring a rig against a so-called physical
loss--damage to the rig itself--can easily surpass $3 million a
year, and could reach $9 million depending on the deductible and
whether the owner opted to waive the right to file a claim if it
were damaged by a windstorm, said Richard Kerr, chief executive of
MarketScout, the Dallas-based electronic insurance exchange. Other
variables make it impossible to estimate the premium on the rest of
the coverage, which would include liability, pollution cleanup, and
the mounting price tag to stop the leak, which insurers call
control-of-well costs.
The loss of the Deepwater Horizon rig itself has cost insurers
$560 million, but that expense is just the start. The still-growing
spill will likely require insurers to shoulder part of the cost of
cleaning up the beaches, compensating coastal business owners and
fighting the inevitable wave of litigation.
Two weeks ago, Swiss Re estimated insurers would incur $1.5
billion to $3.5 billion in claims. And the spill has only grown
since then.
"Two billion? Three billion? Nine billion? Nobody knows," said
Kerr. "They can't get the damn thing stopped."
The insurers who sold protection on the Deepwater Horizon are
many--possibly dozens will share the cost of the disaster. They
include American International Group Inc. (AIG), Swiss Reinsurance
Co. (RUKN.VX) and Munich Re (MUV2). The loss is unlikely to cripple
any one company, but carriers have pledged to re-evaluate the new
equipment and novel techniques used to drill for crude a mile or
more beneath the sea.
"The science and engineering involved were believed to be quite
advanced, and you have to rethink those assumptions," said George
Stratts, the head of marine and energy coverage at Chartis, the
property-casualty arm of AIG.
Lawsuits are seeking to pin blame on BP PLC (BP), the primary
leaseholder of the well; Anadarko Petroleum (APC) and Matsui Oil
Exploration, the minority partners; rig operator Transocean Ltd.
(RIG); Halliburton Co. (HAL), the company responsible for cementing
the well; and Cameron International Corp. (CAM), the maker of the
so-called blowout preventer, which appears to have failed to
operate properly.
Lawsuits could spread the blame--and increase the costs--"to a
degree much larger than anticipated" when insurers set the price
for the coverage, warned John Lloyd, the chairman and chief
executive of insurance broker Lloyd & Partners Ltd., in a
letter to U.S. senators last week. Insurers will bear much of the
cost of fighting the lawsuits; liability policies typically include
no cap on the cost of mounting a legal defense.
Coastal hotels, beachfront resorts, fishermen and many others
will have grounds to seek reimbursement from their insurers,
predicted Marshall Gilinsky, an attorney at Anderson Kill &
Olick. "People who are harmed can go directly to their insurance
companies and let the insurance companies work out how to get money
from BP or Transocean or whomever."
Other insurers acknowledging they face losses from the sunken
rig and resulting spill, include Hannover Re (HNR1.XE), Ace Ltd.
(ACE), Transatlantic Holdings Inc. (TRH), Flagstone Reinsurance
Holdings (FSR), Arch Capital Group Ltd. (ACGL) and Lloyd's of
London carriers including Amlin PLC (AML) and Chaucer Holdings PLC
(CHU). Insurers typically prefer to share large risks.
"Even if this particular case doesn't become a large liability
event for the insurance market, it surely shows the potential of
such claims arising," said Axil Brohm, the head of Swiss Re's
energy and power unit. The potential alone may push offshore
insurance rates higher.
A handful of insurance companies, including Warren Buffett's
Berkshire Hathaway Inc. (BRKA, BRKB), attempted to capitalize on an
earlier increase in prices following hurricanes in 2004, 2005 and
2008, but the higher rates instead caused operators to forego some
of the coverage they'd purchased in earlier years. BP, for example,
was self-insured.
Now, insurers may become less willing to back policies just as
the companies working in the Gulf rediscover their appetite for
insurance, said Richard Kern, the head of energy and environmental
coverage at James River Insurance Co. in Richmond, Va.
Some of the new entrants who did manage to sell coverage "are
going to step back and look at what's taking place, look at what
their results are and realize we're not doing restaurants," said
Kern. "These aren't slip-and-fall cases. These are big claims."
-By Erik Holm, Dow Jones Newswires; 212-416-2892;
erik.holm@dowjones.com
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