View this article online: https://www.insurancejournal.com/news/national/2010/06/04/110455.htm

Oil Rig Tragedies Shock Insurers, Destabilize Market, Says Willis

The U.S. Deepwater Horizon and Venezuelan Aban Pearl drilling rig losses have left upstream energy insurers with an unprecedented bill of $795 million within the space of a single month, destabilizing the market and driving up rates, according to a new report from insurance broker Willis Group Holdings.

Despite the twin rig disasters, most major insurers have honored commitments that were in place prior to the losses but they are no longer considering rate reductions on new business, Willis said. Instead, they are seeking to impose rate increases, particularly on drilling contractor fleets.

According to the latest Willis Energy Market Review Newsletter, the market has been further destabilized by a recent announcement by Apache Corp. a Houston-based oil and gas exploration and production company, of an unexpected $150 million loss from Hurricane Ike. Any insurers that have avoided a Deepwater Horizon loss almost certainly have been involved in at least one of the other two incidents, spreading the pain throughout the upstream sector, Willis said.

The Willis report said the Aban Pearl rig off the coast of Venezuela was insured for $235 million while the Deepwater Horizon rig in the Gulf of Mexico was valued at $560 million. Another $140 million may have to be reserved to remove the Deepwater Horizon wreck from the seabed. Even though a large portion of the Deepwater Horizon loss, which could amount to $20 billion to $30 billion, is understood to be self-insured, the broker estimates that total claims to the market from the disaster, including control of well, re-drilling, third-party liability and seepage and pollution costs, could still be well in excess of $1.2 billion.

“The tragedy of the Deepwater Horizon loss – potentially the largest in the history of the upstream market – has come as major shock that has fundamentally altered the existing market environment,” said Alistair Rivers, CEO of Willis Energy.

“Although brokers have been inundated with requests to price and obtain increased cover for liability and control of well risks in the wake of the April 20 disaster, Rivers said this increased demand “may be something of an over-reaction” since the Deepwater Horizon loss is fairly unique and the likelihood of a similar event is “somewhat remote for most operators.”

Willis said buyers and their brokers need to analyze individual risk portfolios in detail before seeking to buy or place as much insurance as possible.

Other key findings in the Willis EMR Newsletter include:

• Most upstream insurers will have written approximately 75% of their income for the year by early July. There is likely to be less pressure to compete for market share, but no withdrawal of capacity yet either. It is therefore possible that that over-supply of capacity may dampen the level of market increases.
• Since the Deepwater Horizon loss, the recently launched Chrysalis product, which provides $100 million of unscheduled cover for interest excess of OIL, may now become more attractive to buyers.
• As a result of the Gulf of Mexico oil spill, the market has clearly hardened for Offshore Property risks. Furthermore, for Marine Liability risks such as offshore seepage, pollution and contamination insurance, it is likely that there will be a wholesale revision of the way in which this class of business is underwritten in the future. The reinsurance market is also likely to harden as well in response to the recent major losses.
• The impact of any future U.S. legislation on control of well and liability policy limits will likely force U.S. companies to carry much higher levels of insurance for deepwater activities in the future, and it is possible other governments and legislatures may follow suit, increasing both demand and rates for these product lines.
• Any major losses during the 2010 Gulf of Mexico hurricane season could prompt a significant withdrawal of insurers from the market.
• Tougher underwriting stances may appear later in the year in anticipation of increased reinsurance costs and increased retentions, as well as Solvency II capital requirements.