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Insurers Gain Reasons to Raise Rates

Source: WSJ

Posted on 07 Jun 2010

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For commercial insurers, the Gulf of Mexico oil spill and the volcanic-ash disaster may prove relatively light in claims costs but may give the firms justification to raise premiums for some types of coverage.

An explosion aboard the Deepwater Horizon oil rig in April, and the subsequent leak that has since become one of the worst oil spills in U.S. history, has caused estimated losses of around $611 million for insurance companies. The figure is certain to rise as the oil leak is continuing and causing heavy environmental damage.

Estimates for the total insured loss range from $1.4 billion to $3.5 billion, with Zurich-based Swiss Re so far having taken the hardest hit, estimating the catastrophe will cost it around $200 million.

High as it might be, the total insured loss will probably turn out to be only a fraction of the actual cost of the disaster.

The insurance industry "got lucky," because only around 20% of the losses incurred so far in connection with spill are being carried by the industry, said Stephen Catlin, chief executive of London-based reinsurance company Catlin Group Ltd., speaking at Euroforum's annual reinsurance summit in Zurich recently.

If claims costs reach the upper end of the $3.5 billion estimate, the insured losses would would still cost the industry only a fraction of the $41 billion it faced for Katrina, the costliest hurricane.

The industry also will avoid a high burden from the volcanic-ash cloud that disrupted air travel in Europe earlier this year.

Ash spreading across Europe from a volcano in Iceland led to the grounding of thousands of airplanes and left millions of passengers stranded earlier this year. However, the swift closure of airports prevented the sort of serious physical damage to aircraft that would trigger claims for business interruption, insurance experts say.

In contrast, billions of dollars in claims will be made in connection with the oil spill. But, as BP PLC, which is operator and majority owner of the project, self-insured much of the risk instead of buying liability insurance, losses for the insurance industry will be capped, credit rater Moody's Investors Service noted in a recent report.

Claims will come from many sources. Among them will be thousands of commercial fishermen and tourist companies whose businesses have been harmed by the oil spill off the Louisiana cost.

"In our view, potential business-interruption claims represent the largest unknown for insurers," Moody's said. But even in a worst-case scenario, they aren't expected to exceed $3.5 billion, the upper range of the estimate of industry losses.

What could make matters worse though, would be if a hurricane pushed large amounts of oil inland this summer, the ratings firm warned. With four research organizations recently forecasting the most active hurricane season since 2005, when Katrina pummeled New Orleans, this could happen.

Meanwhile, the insurance industry looks set to benefit from higher rates and more business.

Early reports indicate that property coverage for oil rigs is rising, and with the hurricane season approaching, any additional loss in the Mexican Gulf could further bolster pricing. Prices for offshore energy liability insurance are also certain to rise as insurance companies reevaluate the complex risks associated with drilling in deep waters, Moody's concluded.