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Dow Jones-Aon Benfield Interview: Energy Insurance Rates May Double In Gulf Of Mexico

Posted on 08 Jun 2010

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Insurers will demand substantial rate hikes for policies in the Gulf of Mexico when they come up for renewal, following the devastating oil spill there, an insurance broker said Monday.

"I expect rates for offshore energy (insurance) policies in the Gulf of Mexico to virtually double," said Jan-Oliver Thofern, chief executive officer of Aon Benfield Reinsurance Brokers in Hamburg, a unit of U.S. company Aon Corp. (AOC).

Policies underwritten by primary insurers for their industrial clients will be particularly affected, Thofern said, although he said it was too early to say what the impact would be on reinsurance rates in that region.

Thofern was speaking to Dow Jones Newswires on the sidelines of an insurance conference.

The insurance industry's costs for the Deepwater Horizon oil rig spill in the Gulf of Mexico could rise to between $1.4 billion and $3.5 billion, according to the latest estimate by international ratings agency Moody's.

Moody's senior analyst James Eck expects claims to come from a number of lines, including marine hull, marine liability, general liability, environmental/pollution liability, control of well, business interruption, directors' and officers' liability and workers compensation, according to the agency's report published June 3.

This will cause substantial rate increases in offshore energy-related insurance coverage as insurers reevaluate the complex risks associated with drilling in deep waters, Moody's said.

Thofern said the impact on reinsurance rates in the Gulf of Mexico depends on from broader developments, such as the U.S. hurricane season. Although this year's hurricane season is expected to be strong, it is too early to assess the actual impact, he said.

Meanwhile, global rates for aviation policies can be expected to "remain stable to go up slightly," Thofern said.

He said insured losses related to the volcanic ash cloud that disrupted European air travel earlier this year "was rather limited. Nonetheless, there have been a number of plane accidents" unrelated to the ash that will keep global aviation rates stable to slightly up, Thofern said.

The industry was spared huge costs from the ash as airlines aren't covered for grounding planes due to volcanic events.

Traditionally, aviation policies are renewed Oct. 1. Most industrial companies renew on Jan 1, while policies covering Japan and South Korea are renewed on April 1 and policies for parts of the U.S., Australia and Latin America are renewed July 1.

Thofern is responsible for his company's activities in Germany, Austria and Switzerland.

Asked to comment about proposals that credit insurers could assume credit and financial strength ratings in future, Thofern said a number of issues would have to be worked out for that to happen.

For instance, conflicts of interests may arise in the financial industry, Thofern said. This could be the case when credit insurers such as Euler Hermes, which is majority-owned by Allianz SE, have to rate direct competitors of the parent, such as Generali SpA. Conflicts of interest could also arise if credit insurers, which in part compete with banks' business models, have to rate banks, he said. However, he said it would be possible for credit insurers to rate industrial companies and their corporate debt.

Still, a shift of ratings toward credit insurers would "adjourn but not solve the problem," Thofern said.

He said he would question whether credit insurers would be in a better position than ratings agencies to assess the credit quality and financial strength of the financial industry.

More important than a shift toward new players would be improvements in the regulation and the control of ratings agencies, Thofern said.