Brokers, Reinsurer to Expand Insurance for Oil Drilling

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The world’s top three insurance brokers have joined reinsurer Munich Re to promote a major expansion in risk coverage for deepwater drilling in the wake of BP’s disastrous Gulf of Mexico spill last April.

Their goal is to expand liability limits nearly sevenfold from current levels to $10 billion — a huge difference but still a fraction of the costs of a major spill. BP has pegged its costs at $40 billion. Industry leader Aon Corp. will manage a consortium, including rival brokers Guy Carpenter and Willis Re, that aims to boost the amount of insurance cover available for oil drilling operations in U.S. waters.

Munich Re, the world’s biggest reinsurer, has said it is sure that there will be demand for insurance to cover offshore drilling but said the industry needed to work together to offer the service at an affordable price.

Premiums on policies related to offshore energy exploration rose 50 percent in the months after the BP spill, Moody’s Investor Service said in June. Industry losses would have been worse had BP not self-insured for spills, like many other large explorers do.

While the pool will be good news for those oil producers looking for coverage, some senior industry players say it is not an end-all, be-all solution for spill risk.

“Individual companies make different decisions based on their financial capabilities and their individual philosophies on how they manage risk and how much insurance they feel they need,” a Washington-based industry official said. “It’s hard to generalize about what individual companies need.” The official spoke anonymously because he could not speak for the industry.

Oil majors’ offshore operations have come under tight global scrutiny after the April 20 explosion aboard the Deepwater Horizon rig in the Gulf of Mexico killed 11 workers and unleashed the worst oil spill in U.S. history.

The new concept is based on the U.S. Oil Pollution Act, with cover related mainly to clean up and removal, natural resource and property damage, and loss of earnings in sectors such as fisheries or tourism.

While the idea is aimed at the U.S. market, Munich Re said it could be adapted for other regions. Munich Re itself is prepared to offer up to $2 billion under the new facility, called SOSCover.