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

The gist of it is that although insured losses from the Deepwater Horizon Gulf Coast oil spill could reach $3.5 billion insured, according to Moody's, this disaster and the volcanic ash mess earlier this year could end up being a shot in the arm for the insurance industry. In the case of the oil spill, 80 percent of the losses will be carried by self-insured BP, and the volcanic ash thing had little impact on insured losses. The “upside” is, insurers will be able to hike rates on property coverage for oil rigs and offshore energy liability insurance to reflect the increase in risk.

The article concludes:

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

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

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

Last week, III came out with a comprehensive study on the impact of Deepwater Horizon and the possible fallout we can expect to see in the insurance industry. True, the industry may only end up shouldering 20 percent of the direct p-c losses, but a disaster of this magnitude will doubtless 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 that will take the biggest hits are:

Business interruption/loss of production income
Comprehensive general liability
Environmenta/pollution liability
Operators' extra expense (provides coverage when controlling well 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 in risk management — or lack thereof. With the U.S. Attorney General announcing that federal authorities were opening criminal and civil investigations into the spill, it's likely that a host of risk management oversights will come to light, including increasing pressure on the Minerals Management Service and its lackadaisical regulation of offshore drilling.

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

And as far as pinning hard-market hopes on Deepwater fallout, I wouldn't hold my breath — everyone expected that a hard market would be inevitable after the losses of Hurricane Katrina, but it didn't happen. Given the fact that there's still plenty of capacity in the market, it seems unlikely that a single event, even as big as this oil spill, will cause the soft market to magically disappear.

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