Reinsurer to put up $2bn under suggested facility

German reinsurer Munich Re has proposed an insurance solution for oil rigs that could boost the third-party liability coverage available to US oil drilling operations to up to $20bn.

The proposal is a response to the destruction of the Deepwater Horizon oil rig and resulting spill.

Oil drilling projects are typically joint ventures between several firms. Currently, argues Munich Re, there is no separate liability coverage for the drilling operations themselves – they are covered under the individual liability policies of the joint venture partners. Liability coverage limits under these policies typically range from $1bn to $1.5bn, meaning that a venture with three partners could only find coverage of up to $4.5bn

However, Munich Re’s proposal would insure the projects themselves rather than the individual members. The cover would specifically be tailored to that project. Munich Re believes that it should be possible to increase coverage limits to between $10bn and $20bn, and would be prepared to put up $2bn of capacity itself under the facility.

The cover would be based on the US Oil Pollution act and would largely relate to clean-up and removal costs following an oil spill, impairment of natural resources and property damage, as well as loss of earnings in industries such as fishing and tourism.

Torsten Jeworrek, head of Munich Re’s reinsurance operations, estimated that the price companies would pay for the coverage would increase by less than 10%.

Following the Monte Carlo Rendez-vous, where the new initiative was announced, Munich Re plans to consult with the oil industry as well as other insurers and reinsurers.

Jeworrek said at the press conference that the coverage limits would have to be raised substantially from current levels to make the solution useful to the market. He pointed out that oil rig disasters can losses of between $20bn and $25bn. “In that context, how much better is it to increase capacity by only $2-3bn compared with today? Anther $2-3bn would not help in my opinion.”

He added that if Munich Re could not get support from other players to raise the coverage limits, Munich Re would most likely not put up the proposed $2bn of capacity. “The whole concept would be questionable,” Jeworrek said.

For sufficient capacity to be made available, Munich Re believes a large number of oil rigs would need to be insured, both to provide the diversity and premium required. The company suggested this could either be achieved through a voluntary commitment from oil companies or by introducing a compulsory insurance element to the oil rig licensing procedure.

Munich Re has proposed three potential structures to the solution. A consortium of a fixed group of reinsurers where each participant agrees fixed capacities, traditional co-insurance, or a pool insurance arrangement, where oil companies would pay into a pool to cover liabilities, which would in turn be reinsured.