Executives of W.R. Berkley said they would not hesitate to write coverage again for the operator of the oil rig that exploded in the Gulf last month, adding that increased prices and insurance requirements for operators could provide opportunities.
Meanwhile, a new report from Moody's said that premiums are already 15-to-25 percent higher for rigs operating in shallow waters and up to 50 percent higher for deepwater rigs, following the disaster.
William R. Berkley, chair and chief executive officer of Greenwich, Conn.-based W.R. Berkley Corp., and his son, Robert Berkley, chief operating officer, shared their views on lessons learned from the Transocean explosion at a press luncheon, and said there is no lack of risk management in the offshore drilling industry.
The two were asked whether they would stop writing oil rigs after the CEO explained his company paid its loss--$25 million on a gross-of-reinsurance basis--just four days after the rig went down. "Instead, we raised our rates 40 percent. It's a better response," Robert Berkley said.
William Berkley, who was discussing the Transocean loss as a way to demonstrate how companies like his can distinguish themselves from competitors--by paying claims quickly--later said the prices in the offshore energy segment are up between 40 and 50 percent across the industry.
When asked whether rig operators would pay those kinds of prices for insurance, the elder Mr. Berkley said "this may end up being a good opportunity" for insurers because the amount of coverage required for rig operators is likely to increase.
In fact, it might increase so drastically "limits may prove to be so big that few can offer" such large amounts of coverage, he said, singling out Warren Buffett's Berkshire Hathaway as a potential beneficiary since that organization can put out massive limits.
As for W.R. Berkley's response to the Transocean catastrophe, he said: "We were the first company to pay the loss. It didn't cost much to do the right thing."
He said the loss was within the company's expected loss range, and that the claim was paid without any proof of loss. "CNN gave us the proof," Robert Berkley said.
"We continue to believe that if you do the right thing, customers will recognize that," his father said, adding that when insurers seize the opportunity to respond to the trust that policyholders place in them by paying claims quickly and responsibly, "it is something that gains you value."
On a prior occasion, at the annual UBS Global Financial Services conference earlier this month, he said the company paid its $25 million limit without being paid by its reinsurers. At the luncheon, he said that after reinsurance recoveries, the net loss for his company will be $5 million.
The younger Mr. Berkley spoke about some of the lessons to be learned from the Transocean experience for the offshore energy industry and insurers. One lesson is based on how the situation was handled "when it became a situation."
Firemen tend to dump water on a fire, and therefore, when the explosion and fire occurred, "the fireboats went out [and] filled the legs of the rig with water," instead of letting it burn in a controlled way. That is what caused the rig to sink, he said.
"The moment the fire started, they could have solved the problem by pumping mud down," his father said later.
Although there are questions to ask and lessons to extract when insurers look at the equipment involved, the operators and how the event was handled for insurance underwriting purposes, Robert Berkley said, "Yes, we would write it again at the rates we charged. But we would write it more happily at 40 percent more," referring to the prevailing rate environment.
Asked directly whether there is a lack of risk management in the offshore drilling industry, William Berkley said there is not.
"Whenever something goes wrong, that's the immediate response. But no one expected these things to happen...No one expected the rig to sink," he said.
Recent events don't give evidence of a lack of risk management. Instead, "there was a lack of understanding of the alternate things that could go wrong," he said.
In related news, a report by Moody's Investors Service released last week concluded that "insurers and reinsurers are likely take a hard look at the assumptions used to price property and liability coverages for drilling platforms in the wake of the Deepwater Horizon loss."
"Property pricing has already responded to the event with premiums that are 15-to-25 percent higher for rigs operating in shallow waters and up to 50 percent higher for deepwater rigs," Moody's said. "With the 2010 hurricane season now underway, any additional offshore energy losses in the Gulf of Mexico this year could further bolster pricing for these risks," the agency added.
"We believe that this event will have a meaningful impact on the market for offshore energy-related insurance coverages," said James Eck, vice president and senior credit officer at Moody's. "Pricing for offshore energy liability insurance will likely also trend higher as insurers and reinsurers take stock of their losses and reevaluate the complex risks associated with drilling in deep waters."
Total insured losses from the explosion of the Deepwater Horizon drilling rig are currently estimated to be between $1.4 billion and $3.5 billion, the report said. Claims are likely to come from a number of lines, including: marine hull, marine liability, general liability, environmental/pollution liability, control of well, business interruption, D&O liability and workers' compensation.
"Potential business interruption claims represent the largest unknown for insurers," noted Mr. Eck in a Moody's statement, "and pollution damage along the coastline could push industry insured losses toward the upper end of the current estimated range."
The full report, "Deepwater Horizon Losses Sting Insurers and Reinsurers as Hurricane Season Looms," is available at www.moodys.com.
In addition, Insurance Information Institute President Robert Hartwig has put together a PowerPoint presentation on the insurance implications of the Deepwater rig disaster, available at www.iii.org/presentations/Deepwater-060210/.