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Liberty International: Oil Rig Accident Could Cost Insurance Industry Up to $2 Billion

Source: BestWire

Posted on 30 Apr 2010

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The explosion of an oil drilling rig in the Gulf of Mexico is estimated to have a $1 billion to $2 billion impact on insurance markets through its various coverages, according to a top energy executive with Liberty International Underwriters.

Anthony Carroll, executive vice president for LIU's global marine, energy and construction division, told BestWire that he expects the insurance market for offshore exploration and production to tighten on a short-term basis. Underwriters placing coverage in the Gulf of Mexico will face pressure on terms and conditions.

"I don't think you're going to see any rate decreases," said Carroll, who attended the Risk and Insurance Management Society's annual meeting. "You're going to see a hardening of the market, depending on what happens this year with hurricanes, which could dictate a significant change to that market."

Capacity levels in the overall energy space, which also includes the onshore segment for oil and gas and power generation, had been running at a 10-year high, Carroll said. Rate softening had continued through the middle of 2009, spurred along by a reduced demand that helped stabilize the price of oil.

He said the offshore exploration and production market within the Gulf of Mexico had been dictated by how much windstorm coverage could be bought. Now that focus will likely shift to the risk profile of the class and its large loss potential.

Carroll said he anticipates that some will start looking more closely at this segment to evaluate how the exposure base from Gulf of Mexico windstorm cover might differ from an actual per risk cover.

"And that might start to work its way into the reinsurance market, which will eventually tighten the upfront market," Carroll said.

Hannover Re said this week it expects a loss of $53 million from the sinking of the Transocean drilling rig Deep Water Horizon on April 20 (BestWire, April 28, 2010). Eleven are presumed dead and 17 were injured, including three critically, according to the U.S. Coast Guard. The drilling rig was 52 miles southeast of Venice, La. Oil spilling from a submerged well in the gulf floor has created a 600 mile oil sheen that is approximately 23 miles off the state's coastline.

Transocean has a $10 million per occurrence deductible on personal injury and collision liability claims for crew and $5 million per occurrence for third-party, non-crew claims. Transocean also carries $950 million in third-party liability coverage. Liability losses of more than $950 million are retained by Transocean.

Carroll said the long-term outlook for energy production should not be affected by the event, given the 25-year time frame that is used for energy business.

"Most of the demand is predicted to pick up in 2012 for the energy business," he said.

Carroll also doesn't anticipate that the incident will cause a game-changing momentum shift toward renewable energy.

"A lot of that business is really driven off tax subsidies and tax credits," he said. "Without those and the ability to get that financing, that is a challenge that that industry is going to face right now."

Liberty Mutual Insurance Cos. currently have a Best's Financial Strength Rating of A (Excellent).

Hannover Re currently has a Best's Financial Strength Rating of A (Excellent).