Posted on 29 Jul 2010
The Deepwater Horizon explosion triggered the worst offshore environmental disaster in U.S. history and humbled BP PLC, one of the world's largest companies. But in the insurance world, the catastrophe is leaving only small waves in its wake.
Insurer Chubb Corp was prepared for questions about the disaster on its second-quarter earnings conference call last week, but no analysts asked about it. It didn't come up during an earnings call the same day held by Travelers Cos., a bigger rival that's part of the Dow Jones Industrial Average.
RenaissanceRe Holdings, a reinsurer, set up a $15 million loss provision related to the potential for excess casualty reinsurance claims from the disaster. But the company noted Tuesday that it hadn't got any claim notices from clients yet.
"This loss, while a major event in the Gulf of Mexico, is not going to be a catastrophic event" for the so-called upstream insurance market, said Jim Pierce, chairman of the Global Energy Practice at Marsh, a unit of Marsh & McLennan that's one of the largest insurance brokers.
The upstream insurance market sells coverage to companies that are involved in the search for, development and production of oil and other hydrocarbons. It operates in its own little niche of the property and casualty insurance industry, pulling in roughly $2.5 billion a year in premiums, according to Pierce.
The Deepwater disaster could leave the upstream insurance market with a total loss of roughly $1 billion, Pierce estimated.
"It's certainly a bad loss but not so catastrophic as to turn the entire marketplace," he added in an interview. The upstream insurance market lost many times more that amount from Hurricanes Katrina, Rita and Ike, Pierce noted.
One of the main differences this time is that BP didn't buy insurance, preferring instead to insurer itself, partly through a so-called captive insurance unit called Jupiter. This entity didn't buy reinsurance either.
A lot of the losses from the Deepwater disaster stem from the rig itself, which exploded and sank in late April. Transocean, its owner, filed a $560 million claim within a week of the event and it was paid soon after, according to Marsh.
That loss prompted upstream insurers to take a much harder look at deepwater drilling projects, but that may not have manifested itself in clients paying a lot higher premiums for coverage, Pierce said.
Where the disaster is having the most impact is in the excess liability area of the market, which covers the potential cost of litigation and legal settlements, according to Pierce. Read about insurers bracing for oil spill liabilities.
Offshore energy companies have historically bought large "towers" of excess liability insurance coverage to protect themselves. But the amount of this type of insurance has dropped since the Deepwater disaster, he explained.
"For a company that might have purchased $1.5 billion of coverage a year ago, renewing that today, capacity has shrunk to about $1 billion," Pierce said. "That's a significant turn of events."
There may be longer-term effects, too. The upstream insurance market may have lost money in six of the last eight years, excluding the impact of reinsurance, Pierce noted.
Despite this, few insurers have dropped out of the business. That may be because the market relies heavily on reinsurers. So when big claims and losses hit, the reinsurers end up with most of the tab.
"The management of these reinsurance companies are starting to question the necessity of continuing to write this class of business," Marsh wrote in a recent energy insurance market update.
So the ultimate impact of the Deepwater Horizon disaster on the insurance industry may be seen on Jan. 1, 2011, when a lot of big reinsurance contracts are renewed, Pierce said.