From the July-August 2010 issue of Treasury & Risk magazine

Insurance Premiums Hold Despite Gulf Oil Spill

The April explosion on the Deepwater Horizon drilling platform in the Gulf of Mexico left 11 workers dead, released huge quantities of oil into the Gulf and disrupted whole industries along the Gulf Coast, such as fishing and tourism. Yet the disaster is not expected to have much effect on the insurance industry or the premiums paid by companies outside the petrochemical industry.

"Having just completed the July 1 renewal cycle, we've seen little impact on client pricing and terms and conditions, except for certain energy-related companies that have offshore or water operations," says Dean Klisura, U.S. risk practices leader at insurance brokerage Marsh.

Current estimates of the total losses stemming from the spill range from $50 billion to as high as $100 billion. But BP, which owns 65% of the project, is self-insured, and estimates of the losses that are covered by insurance top out at $3.5 billion to $4 billion.

Commercial insurance rates have been weakening for years, and the oil spill isn't expected to interrupt that trend. Klisura notes that Hurricanes Katrina and Rita in 2005 didn't trigger sustained hard market pricing even though they involved considerably more insurance industry capital than the Gulf oil spill. "There's more capital in the marketplace now than there was in 2005," he adds. "It would take some significant catastrophe activity to cause a substantial market change."

David Bradford, executive vice president at Advisen, agrees the spill won't affect overall insurance pricing. "There's really nothing on the horizon that would suggest the market's going to harden," he says. "The one thing that could have a big impact is an active hurricane season, and forecasts are for a much more active than usual year for hurricanes."

The oil spill has given rise to a multitude of lawsuits, and Bradford expects still more, predicting that new types of lawsuits will emerge, lincluding those claiming damages related to the clean-up.

"The next battleground from an insurance standpoint is business interruption losses," he adds. Business interruption policies generally cover losses tied to events covered by property policies, like fires and hurricanes, Bradford says, and since offshore oil spills aren't a clear trigger under property policies, the issue is likely to be litigated.


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