An article in today's Wall Street Journal got methinking about how to put the BP oil spill into perspective.

The gist of it is that although insured losses fromthe Deepwater Horizon Gulf Coast oil spill could reach$3.5 billion insured, according to Moody's, this disaster and thevolcanic ash mess earlier this year could end up being a shotin the arm for the insurance industry. In the case of the oilspill, 80 percent of the losses will be carriedby self-insured BP, and the volcanic ash thing had littleimpact on insured losses. The “upside” is, insurers will be ableto hike rates on property coverage for oil rigs and offshoreenergy liability insurance to reflect the increase inrisk.

The article concludes:

This would provide some welcome relief for an industry that foryears has suffered from declining prices and volumes, becausedemand for cover declined in the absence of large catastrophes.

Talk about turning lemons into lemonade. You can see thisoil spill from space and it's threatening thewhole Gulf Coast, Florida Keys and Cuba, but heck, the insuranceindustry is happy because we might be able to raise rates.

I don't know about you, but that doesn't seem like much of areason to celebrate.

Last week, III came out with a comprehensive study on the impact of Deepwater Horizon andthe possible fallout we can expect to see in the insuranceindustry. True, the industry may only end up shouldering 20 percentof the direct p-c losses, but a disaster of this magnitude willdoubtless spread just as inexorably as the oil itself to all areas— especially as the litigation sharks begin to circle (as of May,110 lawsuits and counting).

According to III, first- and third-party insurance policies thatwill take the biggest hits are:

• Business interruption/loss of production income
• Comprehensive general liability
• Environmenta/pollution liability
• Operators' extra expense (provides coverage when controllingwell after a blowout)
• Physical damage
• Workers' compensation/employers liability

One of the biggest insurance angles of this story,however, doesn't lie in potential claims or rate increases, but inrisk management — or lack thereof. With the U.S. Attorney Generalannouncing that federal authorities were opening criminal and civilinvestigations into the spill, it's likely that a host of riskmanagement oversights will come to light, including increasingpressure on the Minerals Management Service and its lackadaisicalregulation of offshore drilling.

In fact, based on the number and magnitude of oil spills overthe last 20 or so years, nuclear power plants, in spite of theirbad press, are beginning to look like paragons of safety incomparison (there's an interesting blog on the subject here).

And as far as pinning hard-market hopes on Deepwater fallout, Iwouldn't hold my breath — everyone expected that a hard marketwould be inevitable after the losses of Hurricane Katrina, but itdidn't happen. Given the fact that there's still plenty of capacityin the market, it seems unlikely that a single event, even as bigas this oil spill, will cause the soft market to magicallydisappear.