BP Oil Spill Losses Hit Reinsurers; Premiums Jump

June 3, 2010

Reinsurers have bumped up prices for offshore energy-related insurance premiums by 50 percent following insurance industry losses of up to $3.5 billion from the BP plc oil spill in the Gulf of Mexico, Moody’s Investor Service said in a report on Thursday.

Total insured losses from the worst oil spill in U.S. history are expected to be between $1.4 billion and $3.5 billion, although losses would be significantly higher if BP had purchased liability insurance instead of self-insuring its risks through its captive insurance programme, said Moody’s.

Like most larger oil companies BP is self insured for clean up costs, in its case through captive insurer Jupiter Insurance Ltd.

This substantially reduced the exposure of the commercial reinsurance industry to the event, said Moody’s, which predicted a lengthy and continuous period of class action lawsuits from other liable parties.

Millions of gallons of oil have poured into the Gulf of Mexico since an April 20 blast on the Deepwater Horizon rig triggered a huge spill, soiling 100 miles (160 km) of coastline, threatening some of the United States’ richest fisheries and endangering a fragile ecosystem.

Moody’s said the event will have a meaningful impact on the market for offshore energy-related insurance coverages, with early reports indicating a 15 to 25 percent increase in property coverages for rigs operating in shallow waters and up to 50 percent higher for deepwater rigs.

“With hurricane season approaching, any additional losses in the Gulf of Mexico this year could further bolster pricing for this subclass. Likewise, pricing for offshore energy liability insurance is sure to trend higher as insurers and reinsurers take stock of their losses and re-evaluate the complex risks associated with drilling in deep waters, said James Eck, vice president and senior credit officer at Moody’s.

Deepwater Horizon is the largest single oil drilling rig loss since the 1988 Piper Alpha platform disaster in the North Sea, which resulted in approximately $3.6 billion of insured losses, said Eck.

Insurers and reinsurers have publicly reported at least $611 million in estimated losses arising from the event, with losses reported coming primarily from the global reinsurers, who sustained the majority of net losses, and from Lloyd’s and Bermuda market players, according to the report from Moody’s.

Swiss Re has predicted the heaviest loss in the industry, estimating a $200 million loss from the disaster, according to the Moody’s report. It said Munich Re follows with $80 million, Partner Re with an estimated $65 million and Hannover Re with $53 million.

“Moody’s notes that a number of prominent Bermuda (re)insurers have not publicly released loss estimates, possibly indicating that they believe their exposure is below the relevant loss reporting threshold for their SEC filings, which is typically on the order of $25 million,” said Eck.

Last week, Lloyd’s of London estimated the net claims from the Deepwater Horizon explosion stands at between $300 million and $600 million.

(Editing by Hans Peters)

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