While the ongoing BP Deepwater Horizon disaster in the Gulf ofMexico initially was seen as having little effect on the Londonmarket because BP is self-insured, in the long term the impactcould be positive as offshore oil operations in particular facetighter regulations and potential coverage vulnerabilities are morereadily apparent, according to experts across the pond.

“I think it's a wakeup call,” said Paul Jack, executive chair ofLockton International's risk solutions division, as well as chairof Lockton Re in London.

At the end of the day, heobserved, the oil spill aftermath is “not going to be a big lossfor the market. The effects thus far are quite limited and the mainreason is because BP does not buy that much insurance and theydon't appear to buy that much reinsurance for their captive.”

However, he warned, “it's a little bit of '[there but for the]Grace of God [go I].' Had it been another major oil company, notBP–which basically uses its own balance sheet to protect itselffrom these sorts of catastrophes–had it been another major oilfirm, [the insured loss] could have been substantially worse.”

In particular, it could have been worse in the liability area,he noted, “where shortly after the loss we saw some of the oilmajors going back into the market to try and increase theirliability covers bought under their energy packages, above, let'ssay, $1 billion, should they have the same misfortunethemselves.”

Simon Williams, head of Marine and Energy, Hiscox, London,observed that Lloyd's and the insurance companies that operate inthe London market have a significant share of global energybusiness.

While the BP oil spill is a huge event, affecting a number ofinsurers and other entities, the industry has been “extremely luckythat the windstorm season of 2009 was kind to us,” he said.“Because I think if we'd had a very active windstorm season in2009, it would be a very different story in terms of losses thatcompanies might be having.”

At the same time, he cautioned, “we're still in the middle of awindstorm season.”

The area where the most significant rate changes will occur isenergy, he pointed out. “We're seeing about 15-to-20 percent [ratehikes] on average. And this isn't just for wells in deep water, oroperations in the Gulf of Mexico. This is international.”

“We have a simple position here: the overall portfolio premiumhas to increase,” according to Mr. Williams. “But those companiesthat have either had losses, or are in riskier areas or haveriskier operations, will pay more than those who haven't had lossesor who are in very benign areas.”

He pointed out, too, that “deepwater” goes beyond the Gulf ofMexico. “That same incident could have occurred anywhere else, suchas off West Africa, so I think there's been a lot of talk about theGulf of Mexico and deep water, but it just happens to be that'swhere the loss was.”

The two markets that will be affected most by the Gulf oilspill, he said, are offshore energy–encompassing physical damageand liability–and reinsurance.

“It would be naive of me to say that the reinsurance market willnot sustain a significant loss from in particular the BP event,”Mr. Williams noted.

He said he suspects that when marine reinsurance underwritersbegin renewing policies that come up Jan. 1, they will be lookingfor increased rates, “because they're taking a significant slice ofthis loss.”

Mr. Williams also observed thatthe U.S. government is looking at levels of oil pollutionliability, and in particular the Oil Pollution Act, “and I thinkthere may be some changes that they instigate following theincident with BP.”

This would mean the insurance market would have to again addressthe risk of pollution. “We might see new regulations. Also, wemight see clients wanting to purchase greater limits ofinsurance–whether they are imposed or they do it voluntarily–andthat will obviously attract a premium with it,” he said.

Mr. Jack noted the oil spill will test the market in terms oftrue capacity levels for casualty risks offshore. “When you've gotbusiness interruption and pollution cleanup losses running into asmany billions of dollars as this looks like it is going to be,there's not that much capacity available in the market.”

While historically energy coverage has been pricedcompetitively, he said, “I suspect going forward, if you could geta rate increase anywhere, the offshore energy market with anydegree of pollution cover would be a good place to start.”

Meanwhile, in the non-marine and non-energy markets, he said,along with rating discounts, “we're still seeing the broadening ofcover. We're seeing limits go up, deductibles come down–thecontinuation of a very soft market.”

The London market in general is “pretty stagnant,” he observed.“There have been a lot of natural cats this year already, toward$24 billion, but it doesn't seem to have any impact onpricing–pricing keeps going down. Right now we're just watchinghurricane season.”

While this may be the norm in some areas of the London market,it most likely won't be the case in the energy and marine sectors.In the wake of the half-year renewals, he said, “a number of energyunderwriters are perhaps kicking themselves that they didn't put asmuch rate increase on some of these risks as perhaps they couldhave done.”

Now, however, they will have to wait another year, or untilJanuary renewals, to capitalize on higher rate tolerance, hesaid.

While there hasn't been much change in the environmental marketso far, Mr. Jack said he believes there could be.

“The environmental market does tend to be fairly specific andhave very limited capacity,” he said, “but the ongoing, long-termeffects, interestingly enough, appear to not be nearly as bad aspeople thought–evidenced recently by [President] Obama and hisfamily going swimming [in the Gulf of Mexico].”

Beaches have been cleaned up relatively quickly and some of themethods and technologies used to disperse the oil seem to haveworked, “certainly from a physical presence,” he noted, although“what effect it's had on the environment or underwater may not beas evident.”

In the environmental market, he predicted the Gulf Coast oilspill is “just going to sharpen people's pens and make them thinktwice about what cover they are gong to give and what is really therisk management that is going on.”

Finger-pointing between BP and Transocean and “anyone elseinvolved immediately after the accident” made BP look like a softtarget, he said, because of its track record, or assumed trackrecord, and deep pockets.

More and more corporations will be purchasing environmentalcoverage, he predicted, noting: “If you were a corporation and youdidn't have the deep pockets of BP and you couldn't pay, or youwere going to unnecessarily impact shareholder funds, as a riskmanager, CFO or CEO you wouldn't be in a job for very long.”

He added that “when I think people see just how quickly $1billion, $5 billion or $10 billion can get blown through an oilspill offshore, they will definitely be looking at [environmentalcoverage]. So I would think it would be a wakeup call for a numberof companies,” including anyone operating in an environmentoffshore where they could be held responsible and anyone along thechain, “and it will be a long, long chain.”

This, he said, will have a positive impact on London,anticipating that coverage for directors and officers, as well asprofessional negligence will be looked at carefully.

“There will undoubtedly be some engineers involved in this–thedesign of the processes, the rigs, the equipment,” he said, addingthey will be looking at “any form of professional negligence cover,where any engineer firms are involved.”

In other words, Mr. Jack said, all liabilities associated withthe spill are going to be examined closely, “and lots of people arelooking for more cover, because of the stunning size of thepotential loss.”

What's more, he said, cleanup and liability associated with theBP spill have put the cost of the material damage intoperspective.

Are there more people visiting London now looking at thesecoverages? “Yes,” Mr. Jack affirmed. “We have a lot of U.S.engineer business, a lot of the service industry associated withthe major energy companies. Also, operators and governmentaloperators are looking at it very, very carefully in advance oftheir renewals.”

While others in the energy sector besides offshore are impacted,he observed, the difficulty associated with “trying to do somethingoffshore just makes this a different ballgame.”

A fire, an explosion in a mine, or some form of vapor cloudexplosion at an onshore facility, for example, “to a certain extentis quantifiable–the impact can be assessed. But nobody, as soon asthat accident happened in April, had a clue that it could take thatlong to stop the oil flowing,” he recalled.

Also, costs associated with trying to do something underwaterwere more complex than anyone imagined, and “it all played out inthe media,” he said. “I think the offshore industry has got a wholeset of increased profile and problems post this incident, thatmaybe nobody realized could be as severe.”

By comparison, onshore, he said, gasses are more of a threat,citing “natural gas, anything that when it leaks or seepsexplodes.” The difference, however, is that “at least when it's inthe air, it disperses,” as opposed to the lingering effects of theGulf oil spill.

While there is more concern in this area as well, he said,awareness of offshore exposure is very heightened.

“What's frightening CFOs most at the moment is figuring out howmuch cover they can buy. Overall, being such a big market, it willbenefit the London market. Lloyd's insurers will ultimatelybenefit,” Mr. Jack concluded.