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Deepwater Horizon spill prompts new excess liability facilities

Munich Re, Torus to provide billions of dollars in capacity

Deepwater Horizon spill prompts new excess liability facilities

Reinsurers would have billions of dollars in new excess liability capacity to offer if two recently proposed facilities prompted by the Deepwater Horizon spill in the Gulf of Mexico come to fruition.

Whether energy insurance buyers decide they need the extra coverage or are willing to pay for it will determine the fate of a $1 billion facility led by Torus Insurance Holdings Ltd. that is expected to begin underwriting soon, experts said.

Separately, Munich Reinsurance Co. plans to offer as much as $20 billion in excess casualty limits, a plan that will hinge on whether U.S. lawmakers raise the $75 million liability cap set by the Oil Pollution Act.

Buyers will have a lot to consider when weighing whether to buy the high-layer limits, should they become available, experts said.

“It depends on their exposures in the Gulf, pricing and regulatory issues” said Jerry Rivers, senior vp and chief operating officer of Bermuda energy insurer Oil Casualty Insurance Ltd. “It also depends on the magnitude of required limits” that could be mandated by governments, he said.

The facility backed by Torus—known as “excEED” for Excess Energy Exploration and Development—is getting attention from potential policyholders, according to the facility's backers.

“We have several applications that we are evaluating and we're hoping to have our first quotes out in the next few weeks,” David Perez, president and chief underwriting officer at the global casualty unit of Hamilton, Bermuda-based Torus, said in mid-October.

“We know there's interest,” Mr. Perez said. “In terms of market appetite, once we have our products out in the stream of commerce in the form of quotes, we'll find out whether there's a desire to bind, but we know for sure there's an interest.”

The facility was developed with Torus by brokers Aon Benfield Inc. and Guy Carpenter & Co. L.L.C. It aims to offer up to $1 billion in excess casualty and pollution capacity in tranches of $250 million through a consortium of reinsurers and insurers.

It will offer third-party liability insurance for seepage and pollution related to well blowouts, a 25% sublimit for operators extra expense, and up to $100 million of Side A directors and officers liability insurance, said Edward A. Sweeney Jr., executive vp at Guy Carpenter in New York.

“It has enormous traction right now,” Mr. Sweeney said of excEED. “We're not at the $1 billion capacity, but have every expectation that we will get there soon.”

The facility is backed by $100 million, half of which comes from Torus and half from First Reserve Corp., a London-based energy investment firm.

“It was the direct result of a number of different parties thinking about what the Deepwater Horizon means in the current insurance world,” Mr. Sweeney said. “They were pretty unanimous” that more limits were needed to cover potential of losses the size of the Deepwater Horizon spill, he said.

There are about 120 potential policyholders that would be interested in the coverage from excEED, Mr. Sweeney said.

Mr. Rivers said OCIL will consider participating in the facility if it begins underwriting. “It's certainly something we could take a look at,” he said.

If OCIL participates, it is unlikely to commit capacity at the level it provides under its own programs, Mr. Rivers said. “We can put up as much as $100 million. It is not my expectation that we would look at those type limits. We would be small-limit players.”

Separately, Munich Re has proposed offering drilling exploration and production operations liability limits of $10 billion to $20 billion above a $1 billion to $1.5 billion retention. The coverage would involve multiple reinsurers and insurers.

The Munich Re program would cover cleanup and removal costs, impairment of natural resources and third-party property damage. Loss of earnings for businesses, such as those involved in fishing and tourism, also would be covered.

Torsten Jeworrek, a member of the Munich Re board, said he is convinced there will be demand for the coverage if it is offered.

“If coverages are available, companies will buy them because inability to pay high compensation claims can lead to insolvency, and mere speculation about such an eventuality can hit their share price,” Mr. Jeworrek said in a statement.

At the annual meeting of reinsurers in Monte Carlo, Monaco, at the Rendez-Vous de Septembre last month, Mr. Jeworrek said Munich Re's concept is contingent partly on the United States raising the $75 million liability cap. The U.S. House of Representatives has approved legislation to raise the cap to $10 billion, but the U.S. Senate has not acted on the proposal.

Munich Re would not comment on its plan beyond the statement the reinsurer issued in September.

Petter Kapstad, chief risk officer at StatoilHydro A.S.A., said he is watching development of the energy facilities, but is uncertain whether the Stavanger, Norway-based oil company would purchase the high-limit excess layers.

“We are not at that stage yet,” said Mr. Kapstad. “These are interesting,” he said of the facilities, but pointed out that StatoilHydro prefers to wait until they are functioning before deciding whether to participate.

The Munich Re facility calls for strict safety standards to be in place on business written under its program, a requirement Mr. Kapstad said companies such as his would have no trouble meeting.

“We have been working with catastrophe scenarios since 2003,” Mr. Kapstad said, ensuring that the company has the proper risk management and mitigation procedures to protect against a catastrophic spill such as that experienced by the Deepwater Horizon.

Though the Munich Re facility is being proposed for risks in the U.S., Mr. Jeworrek said in the statement that it could be adapted for use elsewhere, possibly to cover renewable energy risks.

Dave Obenauer, president of Crump Insurance Services Inc. in Roseland, N.J., said that if such an expansion happened, his company might access the facility.

“To the extent that it's focused on renewable energy, I think that's certainly of interest,” Mr. Obenauer said. “We've had a few renewable energy placements that have been multiyear, high-limit. So I think that's an on-target opportunity for us, and for them.”

If both facilities begin operations, they won't be competitors, Mr. Sweeney said.

“There has been extensive dialogue between excEED and Munich Re,” Mr. Sweeney said. “These are not competing facilities at all.”

“Their concept is pure liability,” he said of Munich Re's proposed facility. “They are not providing the operators extra expense and D&O. They will just provide third-party liability.”

Willis Group Holdings P.L.C. mentioned in its “Energy Market Review” this month that primary energy rates could rise if the excEED facility starts up and charges a high price for its excess coverage.

“If it emerges that the facility rates are considerably in excess of current primary rates,” Willis said in the review, “it seems clear to us that such an anomaly will be swiftly rectified by primary insurers, who may be unwilling to continue to provide cover at current primary terms when more advantageous terms can be secured on an excess basis.”

Energy companies will have the last word in the success or failure of the facilities, said OCIL's Mr. Rivers. They are the ones who will decide whether they are underinsured in the Gulf, he said.

“It's not like a "Field of Dreams' and "if you build it, they will come,'” he said of the facilities' potential for attracting buyers. “If they feel it's not necessary or it's not in the right ballpark in terms of price, they are not going to come.”