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 report from broker Willis Group Holdings.
Despite the twin rig disasters, most major insurers are no longer considering rate reductions on new business, Willis said. Instead, they are seeking 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.
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 self-insured, Willis 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 for increased cover for liability and control of well risks, 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.”
According to the Willis EMR Newsletter, most upstream insurers will have written approximately 75 percent 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 may dampen the level of market increases.
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 impact of any future U.S. legislation on liability limits will likely force U.S. companies to carry much higher levels of insurance and it is possible other governments 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.