June 10, 2010 by Canadian Underwriter
Energy insurers and reinsurers would not be able to provide the capacity required under the proposed $10-billion legal liability limits in the United States, the U.S. Insurance Information Institute (III) testified before Congress.
Currently the legal liability under the Oil Pollution Act is $75 million.
III president Robert Hartwig testified before the U.S. Congress on June 9 about the insurance implications of the Deepwater Horizon accident.
To date, roughly 20 insurers have announced losses associated with the Deepwater Horizon accident, and more are likely to do so in the month ahead, he said.
Key arrangements include:
•BP, with a 65% interest in the Deepwater Horizon joint venture, says it is self-insured. Jupiter Insurance Ltd. (its captive) has $6 billion in capital. It does not purchase outside reinsurance. Jupiter’s per occurrence limit on physical damage and business interruption is $700 million and is not expected to cover environmental clean-up costs or third party liability.
•Halliburton: service provider to Deepwater Horizon and supplier of cement used to plug the well has liability insurance in excess of $1 billion.
•Cameron: the manufacturer of the blowout preventer that failed on the rig has a $500-million liability insurance policy.
“Insured loss estimates currently range between $1.4 billion and $3.5 billion,” Hartwig told Congress. “The wide range in loss estimates is primarily attributable to uncertainty surrounding the magnitude of business interruption losses if significant quantities of oil wash ashore.”
Hartwig described the global energy market response to the Deepwater Horizon loss as “orderly.” Capacity has not fled the market, prices have increased but “commensurate with the rapidly changing outlook in demand for liability coverages and mounting uncertainty over government action related to limits of liability combined with the outlook for a very active 2010 hurricane season,” Hartwig told Congress
“As a practical matter, energy insurers and reinsurers simply cannot provide $10 billion in capacity,” Hartwig said. The numerous obstacles for insurers and buyers alike include:
•the entire global energy insurance market currently consists of no more than $3 billion in annual premiums;
•higher limits of liability will increase the demand for coverage, perhaps greatly, exhausting available capacity;
•the increase in demand, coupled with the increase in risk assumed by insurers, implies that the cost of providing the coverage will be much higher than today; and
•if Congress retroactively raises the limits of liability on the Oilspill Prevention Act, it may well do so in the future, raising potential future payouts unexpectedly, thereby increasing the uncertainty (and cost) associated with offering such coverage.