LONDON-Oil and gas producers should expect significant rate increases for property and business interruption coverages after underwater mudslides helped make Hurricane Ivan one of the most costly energy insurance losses to date.

The final tally of energy-related losses from the deadly storm could reach $2.5 billion, and up to $500 million of that will likely relate to losses caused by mudslides, energy insurers and brokers say.

As a result of the losses, premiums could increase by up to 100% at the next renewal, they say. Prior to the hurricane, energy premiums were falling by up to 50%.

Hurricane Ivan, the third of four major hurricanes that made landfall in the United States in 2004, ripped through the Caribbean, the Gulf of Mexico and the Southeastern United States in September (BI, Sept. 27). The storm caused an estimated $11 billion in total insured damages, according to the latest estimate by Swiss Reinsurance Co.

Overall, Hurricane Ivan destroyed seven platforms and caused major damage to six other platforms and five drilling rigs, according to the U.S. Minerals Management Service. Mudslides were responsible for four of the lost platforms.

In addition, of the 33,000 miles of pipeline in the Gulf of Mexico, about 10,000 miles of pipe lay in the path of Ivan. Pipes located near the Mississippi Delta were buried by up to 30 feet of mud, according to the MMS.

The mudslides are the result of years of sediment buildup flowing out into the Gulf from the Mississippi and other rivers along the Louisiana coast, explained Robert Bea, professor in the civil and environmental engineering department of the University of California, Berkeley.

"When enough material builds up and a storm comes close, the waves come into shallow water and cause major mudslides," he said.

In shallow waters, where the rivers dump large amounts of material, mudslides usually occur every five to 10 years, he said.

"In deeper waters, where the buildup occurs more slowly, events are much more rare but much larger," he said. "This occurs along the outer perimeter of the Gulf of Mexico, in deep water at depths in excess of 200 meters."

The offshore energy industry has largely ignored the problem of offshore mudslides for the past several years, Mr. Bea noted.

The mudslides that followed Hurricane Ivan caused significant losses for insurers, said Richard Watson a director at Hiscox Syndicates in London. "This has happened before, but not in an area full of pipelines and drill heads," he said.

"The market has had a much worse loss than ever anticipated," but underwriters should have been aware that they faced a significant mudslide exposure in the Gulf of Mexico, said John Lloyd, chairman and chief executive officer of Lloyd & Partners Ltd., a wholly owned subsidiary of Jardine Lloyd Thompson Group P.L.C.

Experts are divided about the magnitude of the loss, saying that companies are still investigating the extent of the damage.

"It will probably be a year before a complete assessment can be done" on what proportion of losses was caused by mudslides and what proportion was caused by wind and wave damage, said Steven Devoy, group marine director at Matthews Daniel, a Houston-based loss adjuster.

Mr. Watson of Hiscox said the mudslide-related losses would likely total $500 million, including business interruption, out of a total loss estimate for Ivan of between $2 billion and $2.5 billion.

"People are doing their best to estimate costs, but lots of them are business interruption, and that is very difficult to give, because the equipment cannot be fixed because there is so much (of it)," said Mr. Lloyd of Lloyd & Partners.

The energy losses related to Hurricane Ivan will likely be the largest since the Piper Alpha explosion in the North Sea in 1988, said a Lloyd's underwriter who did not want to be identified. The underwriter estimated that the loss would total between $2.1 billion and $2.4 billion.

Up to $500 million of the loss will fall within retentions, about $600 million will be paid by Bermuda-based oil and energy mutual Oil Insurance Ltd., and up to $1.3 billion will be paid by the open market, he said.

However, according to Doug Kline, senior vp and chief operating officer of Oil, the mutual insurer will likely pay $350 million in claims related to Hurricane Ivan.

Richard Harries, offshore energy underwriter at Atrium Underwriting P.L.C.'s syndicate 609 at Lloyd's of London, said Ivan-related energy losses will likely be more than $2 billion.

Underwriters will increase energy insurance rates as a result of the loss, particularly for Gulf of Mexico risks, insurers and brokers say.

Buyers should expect premium increases of between 10% and 100%, whereas before the hurricane, premiums were falling by up to 50%, said Mr. Lloyd. The larger increases will be imposed on policyholders that suffered catastrophic losses, he said.

"It has stopped the offshore market softening, and (underwriters) will look very closely at limits and the premiums they charge," he said.

"It will affect people with offshore Gulf of Mexico exposures, especially those with claims. Some have horrific claims," Mr. Lloyd said.

The hurricane caused losses that totaled more than the entire worldwide offshore energy market's premium income for 2004, noted the Lloyd's underwriter who did not wish to be identified.

"The simple equation is that if you need more money to put the business back into profitability, there will be demands for rate increases," he said.

The loss "will make the market wary of the Gulf of Mexico, because it was not the biggest hurricane, but it has given a very large loss," Mr. Harries said.

It is difficult to estimate by how much rates will increase, but business interruption rates in the Gulf in particular will be affected, he predicted.

Mr. Watson said the effect from Ivan will be "significant," noting that many of the Gulf of Mexico risks renew in April and May.