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Reinsurers eye ways to boost oil rig capacity

Posted On: Sep. 19, 2010 12:00 AM CST

Reinsurers eye ways to boost  oil rig capacity

MONTE CARLO, Monaco—Proposals to increase capacity for offshore energy risks, including up to $20 billion in liability limits for oil-drilling projects, found support in principle among reinsurance executives last week during the annual Rendez-Vous de Septembre.

Munich Reinsurance Co. proposed a plan to provide up to $20 billion in limits for oil-drilling projects. Also during the Monte Carlo, Monaco, gathering, Bermuda-based Torus Insurance Holdings Ltd. said it planned to offer $1 billion in limits for drilling projects, using $100 million in capacity from energy investment company First Reserve Corp., which helped fund Torus' 2008 startup, and others (see story, page 23).

The impetus behind both ideas was the Deepwater Horizon oil rig disaster in April, the largest oil spill in U.S. history. BP P.L.C., which owns the drilling rights to the well, is self-insured and set aside more than $20 billion to pay spill-related claims.

Munich Re's program calls for annual aggregate limits of $10 billion to $20 billion for offshore oil exploration and production companies, many times more than the available limits under individual liability policies, said Torsten Jeworrek, a member of the reinsurer's management board.

This approach would require multiple insurers and reinsurers and would hinge on improved risk management, Mr. Jeworrek said.

Munich Re envisions three possible structures. One would be a consortium of insurers and reinsurers, each providing uniform prices and conditions and fixed capacity. Another would be traditional insurance or reinsurance on a subscription basis, with flexible pricing, conditions and limits. The third could be a pool, with contributions reflecting market share, he said.

Mr. Jeworrek said two developments are necessary to implement Munich Re's concept: the liability cap under the U.S. Oil Pollution Act must be raised from $75 million, and oil companies must agree to or be required to purchase liability insurance. Coverage would attach above a $1 billion to $1.5 billion retention, he said.

The coverage would be limited to cleanup and removal costs, impairment of natural resources and third-party property damage, as well as loss of earnings for businesses such as fishing and tourism, as happened in the Gulf of Mexico, Munich Re said in a statement.

Two Bermuda energy industry mutual insurers, Oil Insurance Ltd. and Oil Casualty Insurance Ltd., already provide some of the coverage above deductibles for their members. Mr. Jeworrek could not say whether Munich Re's concept might involve either OIL or OCIL.

Other reinsurance executives said they could support Munich Re's plan.

Jurgen Graber, a member of the executive board of Germany's Hannover Re Group, who oversees worldwide nonlife reinsurance, said at least 100 oil rig projects would have to purchase the coverage for the program to work. He said Hannover Re would be willing to supply capacity, “but whatever we would provide would be within our risk tolerances.”

The Hannover Re executives noted that the liability losses against BP are the highest seen so far from an offshore energy incident.

“The Deepwater Horizon physical damage loss was straightforward; the unknown is the liability loss,” said Mr. Graber. “Many parties have contributed to the platform—the rig operator, the owner, those who worked on the blowout preventer. Who has to take responsibility? As a consequence, we like the idea of Munich Re suggesting one kind of cover that would lead to a clear liability picture,” he said.

“There are other attempts to set up similar schemes,” Mr. Graber said. “We hope these ideas get merged.”

“The risk of a significant blowout or sudden event in the Gulf of Mexico is insurable,” said Brian Gray, chief underwriting officer for Zurich-based Swiss Re Group. “Swiss Re, as long as the coverages are well-structured, would be willing to put up capacity for it.”

“We can offer whatever we like,” said Stefan Lippe, CEO of Swiss Re. “We have to see what the client side is saying to that.”

Munich Re said it would provide up to $2 billion in annual aggregate limits for each drilling project, but neither of its competitors would specify the amount of capacity they might provide.

Jerry Rivers, senior vp and chief operating officer of OCIL, applauded the efforts to provide “much-needed liability capacity for the offshore energy sector,” but also said “there needs to be a convergence of the various initiatives under way for there to be a sustainable long-term solution.”

He said capital market participation seems “critical” to make limits of $10 billion or more available long term. “From personal experience, liability exposures and capital market solutions have been rare. However, given the type of risk, there may be an effective solution,” Mr. Rivers said.

“The traditional insurance industry has had the reputation of having knee-jerk reactions to events by exiting a market, curtailing coverage or severely reducing limits after an event,” Mr. Rivers said. An offshore energy program with $10 billion to $20 billion in limits requires long-term commitments by all parties “to ensure that a facility can survive over many years, even in the face of non-energy liability events” such as hurricanes, earthquakes and investment losses, he said. “OCIL is certainly doing our share in assisting the energy sector with available limits of up to $100 million.”

Other reinsurance executives gathered in Monte Carlo said more clarity is needed about what liability cap the U.S. Senate might set for oil accidents.

If the industry could win U.S. Senate support of an insurance/ reinsurance solution for buyers' needs, then SCOR S.E. would take part, said Victor Peignet, CEO of the Paris-based reinsurer's property/ casualty operations.

The U.S. House of Representatives has approved legislation to raise the Oil Pollution Act liability cap from $75 million to $10 billion, but the U.S. Senate has yet to act on the proposal.

Mr. Peignet said the first step must be to examine ways to manage the risks of deepwater drilling projects and then consider indemnification ideas.

Grahame Chilton, chairman of Aon Benfield, the reinsurance unit of Aon Corp. that worked with Torus and others to develop its planned solution, echoed the call for improved risk management of deepwater drilling projects.

“There is a need, but we don't know what it is yet,” he said, adding that it was not known how the U.S. Senate would act on raising the Oil Pollution Act's liability limit.