Top Brokers, Munich Re Pool Efforts to Expand Insurance for Oil Drilling

By and | December 22, 2010

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, a figure that could double if the U.S. government wins a pending lawsuit.

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 to customers.

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 whole industry on the subject.


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 U.S. Justice Department’s civil suit against BP and eight other defendants to recover damages for the Gulf oil spill is very aggressive, Westlaw Business Currents Editor in Chief Ely Razin told Reuters Insider TV on Friday.

Westlaw is a unit of Thomson Reuters.

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

Speculation about who might be interested aside, the Washington-based oil industry official said there were definitely pockets of demand for new coverage.

“People in the market lately have not been able to get this amount of coverage,” the official said. “I think there are people looking for really large policies out there.”

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

The company said at a reinsurance conference in September it was taking a new approach to insuring offshore drilling that could create risk coverage of up to $20 billion, though it was only offering a fraction of that itself.

(Editing by Jon Loades-Carter and Dave Zimmerman)

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