Towers Watson: Gulf Oil Spill not a Major Event for P/C Insurers

The Deepwater Horizon disaster in the Gulf of Mexico will not be a major event for the property/casualty insurance industry, but it may spur tightening of insurance terms and prices in the energy sector, according to global professional services company Towers Watson.

Based on available, published information, Towers Watson estimates that net commercially insured losses will be between $4 billion and $6 billion, a fraction of the total economic loss that is currently estimated to be $35 billion.

While litigation arising from the Gulf oil spill may take decades to resolve, under any apportionment of the liability, it is expected that the companies directly involved will be called upon to pay claims substantially in excess of their insurance limits, thus the full value of the insurance policies are likely to be drawn upon.

Towers Watson’s estimate consists of the following major components:

The total of the coverage limits above are $3.3 billion. In addition to these specific insured losses, Towers Watson expects that other companies may be drawn into the litigation, adding to this total. Finally, directors and officers liability and workers’ compensation losses may add to the tally.

By comparison (in 2009 dollars), losses from the September 11 terrorist attack were about $23 billion, and losses from Hurricane Katrina were about $71 billion, according to Swiss Re’s sigma report. In a typical year, total catastrophe losses in the United States total about $7 billion.

“The insurance industry has been operating in a soft market for the last six years, with commercial insurance prices generally falling for five years and flat for the last year,” said James Hole, Towers Watson managing director and a leader within the company’s reinsurance brokerage business. “Usually, a major event causes the market to turn, with prices rising in the wake of the red ink. We do not expect that Deepwater is a sufficiently significant event to turn the overall commercial insurance market.”

Stephen Lowe, a Towers Watson managing director, said it is possible that other corporations that were involved in some way in the design, delivery, construction or operation of the Deepwater well could be drawn into the liability litigation. “While somewhat unsportsmanlike, those who are helping with the cleanup may also be drawn in,” he added.

“This has been the case in other large liability situations, such as asbestos, particularly once it is clear that the insurance coverage of the primary players is exhausted, and the plaintiffs are looking for additional pockets to pay the claims,” Lowe said. “The companies involved will presumably have directors and officers liability insurance coverage, and it is a virtual certainty that there will be shareholder suits against the directors and officers of some of the companies.”

Lowe said that insurers are likely to be involved in paying gross claims that are a multiple of the $4 billion to $6 billion figure. He noted that policyholders with first-party property damage and business interruption losses will presumably file claims with their insurers, who will then seek subrogation recoveries from the companies involved.

Source: Towers Watson