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Hartwig Speaks to Congressional Panel, Says Insurers Unable to Provide $10B in Capacity for Oil Spill

Posted on 10 Jun 2010

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As reported earlier in the "Daily NewsFlash", economist and president of the Insurance Information Institute (I.I.I.) Dr. Robert Hartwig testified today at a hearing before the Committee on Transportation and Infrastructure, U.S. House of Representatives. During his testimony, Hartwig told the committee that if legislation passes to raise the limit of liability (retroactively) under the Oil Pollution Act (OPA) to $10 billion from the current limit of $75 million, energy insurers and reinsurers would not be able to provide the capacity.

In his testimony, Hartwig stated the typical maximum available limit of third-party liability coverage in the offshore energy market today is approximately $1 billion and with perhaps as much as $1.2 billion to $1.5 billion available under some circumstances. "As a practical matter, energy insurers and reinsurers simply cannot provide $10 billion in capacity." According to Hartwig, there are several reasons for this:

• The entire global energy insurance market currently consists of no more than $3 billion in annual premiums;

• Higher limits of liability will increase the demand for coverage, perhaps greatly, exhausting available capacity;

• Underwriting for very low probability, extreme severity events is very challenging for insurers and reinsurers;

• The increase in demand coupled with increase in risk assumed by insurers implies that the cost of providing the coverage will be much higher than today;

• The higher cost of coverage could disadvantage offshore operators that cannot self insure;

• The current tort liability environment increases uncertainty as to the frequency and severity of future events, and if Congress retroactively raises the limits of liability on OPA, it may well do so in the future, raising potential future payouts unexpectedly, thereby increasing the uncertainty (and cost) associated with offering such coverage.