The Gulf of Mexico incident could force up prices for offshore energy liability insurance by as much as 200%, says Barclays Capital. We look at the reaction so far, and consider the pressure that the disaster is likely to place on the reinsurance industry

The destruction of the Deepwater Horizon oil rig in the Gulf of Mexico in April could cost the insurance industry as much as $3.5bn, according to some estimates, and is likely to push up marine and energy insurance and reinsurance rates.

The loss has arguably come at a bad time, with the industry still reeling from first-quarter catastrophe losses, including the Chilean earthquake and European winter storm Xynthia. Insurers and reinsurers have been spared a more severe beating, however, thanks to BP’s extensive self-insurance programme, and the loss is unlikely to tax the currently well-capitalised reinsurance market greatly.

An explosion rocked Deepwater Horizon, positioned 42 miles off Venice, Louisiana, on 20 April. The accident killed 11 crew members. When the rig sank two days later, the blow-out preventer failed to stop oil spilling into the Gulf, and the initial leak of 1,000 barrels a day increased to 5,000. According to the BBC, 15 million litres (3.9 million US gallons) of crude oil had leaked by 13 May.

Unlike many previous major oil rig losses, such as the 1988 Piper Alpha disaster in the North Sea, the Deepwater Horizon event combined a total rig loss with a substantial oil spill. Piper Alpha is the worst offshore oil disaster on record, causing total insured losses of $3.64bn, according to Swiss Re’s sigma report on 2008 natural and man-made disasters.

“From an insurance perspective, the legal liability dimensions of the losses will be the largest,” said Robert Hartwig, president of the Insurance Information Institute (III). “The rig loss is pretty much fixed at just under $600m. Whatever additional insurance is in play is going to cover primarily pollution and environmental costs, including clean-up.”

The loss situation is complex and evolving, given the number of players involved and their insurance arrangements. BP is self-insured for both property and liability, with its captive insurer, Jupiter, covering property. According to a research report from Barclays Capital, Jupiter’s per-occurrence limit on physical damage and business interruption is $700m, and is not expected to cover environmental clean-up costs or third-party liability.

Jupiter has reportedly taken out reinsurance cover worth between $1bn and $1.3bn with several Lloyd’s syndicates. As at 13 May, BP said its cost from the response to the disaster had reached $450m.

Offshore oil drilling firm Transocean, which operated Deepwater Horizon under contract to BP, had insured the rig itself for $560m, but the bulk of the claim is expected to come from the liability portion. News reports say that Transocean also has $950m in third-party liability coverage. The company is seeking to limit its liability to the value of its interest in the rig and its freight: $26.76m.

BP’s partners in the Deepwater Horizon rig include Anadarko Petroleum, with a 25% stake, and Mitsui Oil Exploration, with a 10% stake. Anadarko is reported to have insurance coverage of $177.5m and deductibles of around $15m. Contractors include Halliburton, which cemented the well equipment, and Cameron, which made the blow-out preventer. As Global Reinsurance went to press, Congressional investigations were taking place into what had happened and which firms were at fault.

Leading insurers and reinsurers have issued loss estimates, but acknowledge the picture is changing. Swiss Re, which has issued the largest individual loss estimate to date, put its own loss at $200m before tax and the total insured loss at between $1.5bn and $3.5bn, but added: “As the situation is still unfolding and involves significant uncertainties, the ultimate loss is hard to predict, and therefore estimates may be subject to change.”

Hartwig said III’s estimate for the lower-limit of insured losses was between $1.4bn and $1.5bn, but the insurance arrangements of some of the companies involved was not yet known.

“Insured losses could reach $3.5bn because other parties are likely to be drawn into this. There will be other dimensions to insurance programmes that will trigger certain kinds of legal liability coverages that we haven’t heard much about yet,” Hartwig said.

Hartwig believes the losses will cause marine energy rates to harden. He said: “The energy market is not a stranger to this type of loss. At the same time, there is a limited amount of capacity and this will put significant pressure on that market.”

The Barclays Capital research report said that offshore energy property insurance prices could rise 25-30% and offshore energy liability insurance prices could increase as much as 200%, although this increase was from depressed levels.

However, the Deepwater Horizon event, even if it hits the upper limits of current estimates, and despite following heavy Q1 catastrophe losses, is unlikely to have a big impact on the reinsurance industry overall. “The sum total of these losses is not large enough, we believe, to result in improved property-casualty insurance and reinsurance pricing, because the property-casualty insurance industry remains substantially overcapitalised,” the Barclays Capital report said. GR