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Lloyd's of London CEO Ward Says Insurance Rates Should Rise after BP Spill

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Posted on 23 Jun 2010

Lloyd's of London Chief Executive Officer Richard Ward said the BP oil spill in the Gulf of Mexico will push up the price of insurance on offshore drilling.

"Rates have to go up quite significantly" Ward said in an interview on Bloomberg Television's "In Business With Margaret Brennan" today. "Rates had fallen to quite a low level in the Gulf of Mexico for offshore energy. We’d been questioning the profitability of insurance in that region for quite some time."

Insurers are charging 50 percent more for policies covering oil rigs after an explosion on the Deepwater in the Gulf of Mexico triggered the worst spill in U.S. history, Moody’s Investors Service said on June 3. London-based BP has spent $2 billion to respond to the disaster.

Lloyd’s estimates its insurers will pay $300 million to $600 million in claims related to the Deepwater Horizon rig. Lloyd’s underwriters insured the rig, owned by Transocean Ltd., and has caps on the coverage it provided for environmental damage caused by the spill. BP, which didn’t buy insurance, will cover the majority of the costs, forecast to be at least $20 billion by the U.S. government.

‘More Capital’

“We should see more capital come in,” Ward said of the capacity of insurers to cover greater risks in the Gulf. “With these major catastrophes, you always get a rate adjustment after the catastrophe,” Ward said in a separate interview at Bloomberg headquarters in New York before his TV appearance.

Lloyd’s, the three-century-old insurance market, is composed of more than 80 syndicates that underwrite risks on commercial property, marine risks and celebrity assets. The syndicates that insured Transocean have already contributed about half of a $570 million payment tied to the rig’s destruction, Ward said.

Lloyd’s underwriters have sued BP in U.S. district court, asking the judge to declare that they have no obligation to cover pollution-related liability claims resulting from the spill because contracts between BP and Transocean stipulated that the rig owner wouldn’t be responsible for contamination that originates below the surface. BP made an attempt to provide the insurers with a notice of claims in May, Lloyd’s underwriters said in their complaint.

‘Not as Clear Cut’

“Policies are not as clear cut as you might expect, there’s always a bit of ambiguity,” Ward said of the dispute with BP. “No one, I don’t believe, has a good understanding at this point in time as to what the cause was. And until you do have a good understanding of the cause, it’s difficult to know where are the liabilities.”

Judge Melinda Harmon called a pretrial conference for Sept. 9 in Houston.

Lloyd’s insurers reported record profits last year on a benign North Atlantic hurricane season and higher investment returns. The market keeps about a third of its assets in corporate bonds, a third in cash and a third in government obligations, mostly from the U.S. and U.K., Ward said.

“We have significant exposure to the U.S. and significant exposure to the U.K., and we’re comfortable with that,” Ward said. “We are not going to shift that portfolio significantly in the next few years.”

Insured losses tied to natural disasters have increased this year as carriers pay claims tied to rainstorms in the U.S. Northeast, the earthquake in Chile and windstorms in Europe. Yesterday, AccuWeather Inc. boosted its forecast for the 2010 Atlantic hurricane season to 18 to 21 named storms, up from 16 to 18. Climate change, Ward said, is pushing up catastrophe risk, while increases in global trade are raising the cost of disasters.

‘Reassess the Risk’

“Everyone is having to reassess the risk arising from climate change and recognize that severity and frequency is increasing,” Ward said. “We now suddenly discover we are exposed to risks around the world. Supply chains are getting more complex. Supply chain risk is a big issue. With greater wealth comes greater risk.”


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