Although reinsurers cut prices for June 1 renewals, one Bermuda-based executive speculated that price hikes in the insurance loss warranty market–fueled by the Deepwater Horizon disaster–could eventually spread to the reinsurance market.

Jeff Consolino, executive vice president and chief financial officer for Validus Holdings, made his observations about the ILW market during a session of the Oppenheimer CEO Insurance Summit last month.

During the session–titled, “Reinsurance: How Have Recent Natural Catastrophe and Weather Events Impacted the Prospects for Reinsurance Pricing” (available on an archived webcast on the reinsurer's website at http://bit.ly/daL91f)–Mr. Consolino agreed with most commentators that it is too early to tell whether liability exposures related to the sinking of the Deepwater Horizon rig are enough to make a dent in, or even turn, the casualty market.

“But what we do see is the ILW market now responding to the event with rates up there 40-, 50- and 60 percent,” he said, noting companies that provide retrocessional protection to property reinsurers in the Gulf of Mexico rely on ILWs to manage their aggregate exposures.

Like property-catastrophe reinsurance, ILWs respond when catastrophic loss events occur. But unlike traditional reinsurance contracts, ILWs are triggered when total industry losses exceed some agreed upon level. ILWs can have dual triggers, with the other trigger being an indemnity trigger based on the purchaser's loss.

(See related article–July 17, 2006, page 20, available at http://bit.ly/bCNiBm–for more background information on the development of the ILW market.)

As a result, Mr. Consolino said “retro pricing should go up, and that should work its way down on the chain–onto reinsurance pricing and down to the primary pricing as well.”

During the session, Mr. Consolino noted that Validus–which has been a fairly major player in the marine and energy market since the company's launch in 2005–announced back in April that it expects its own losses from the event to fall in the $37-to-$45 million range. The range of loss estimates is net of reinstatement premiums, reinsurance, retrocessional and other recoveries, Validus said.

Referring to analyst and broker reports stating that offshore energy insurance rates are up 15-to-20 percent for rigs operating in shallow water, and 50 percent or more on deep water, Mr. Consolino said that “we probably agree with that in the marine and energy sector.”

“Implications for the broader market remain to be seen, and I guess will play out over much longer period,” he added.

At a separate session of the Oppenheimer Summit, specialty insurance carrier executives also discussed the impact to the energy insurance market and potential implications for demand and pricing in the casualty insurance market.

One executive, John Molbeck, president and CEO of Houston-based HCC Insurance Holdings, said he's seen energy pricing go up 20-to-50 percent “on strictly operating, not windstorm [coverage], for parties not involved in the loss.”

Noting that HCC is one of a handful of players in the offshore energy insurance market, he said, “we'll get a kick up this year, [but] we may get a kick back down next year” on rates.

He went on to predict some spillover of rate hikes on high-excess liability business precipitated by the Deepwater Horizon disaster.

“Liability pricing, especially coming out of Bermuda [on] high excess, [has] gone up 10- to 20-times,” he said, referring to $100 million excess of $500 million, and excess of $900 million layers on energy accounts written by Bermuda markets.

“People now understand that you can have a $10 billion seepage and pollution loss, and I think that's going to roll into Fortune 500 pricing, too,” according to Mr. Molbeck.

Mark Watson, CEO of Bermuda-based Argo Group, who said his company participates on upper layers, reported that the company has only seen price changes on energy pricing so far, “not on excess liability business as a whole.”

Observing that the rig disaster moved quickly from being a property event to a liability event, he said “it will be interesting to see if this remains an energy-focused change or if it expands beyond that.”

Stanley Galanski, CEO of Rye, N.Y.-based Navigators Group–a participant in the offshore energy insurance market–noted that his firm is seeing customers come in midterm on energy liability insurance programs seeking to buy more limits.

“That is one of the consequences on the liability side,” he said, noting that “increased awareness” has come in reaction to congressional proposals to raise the liability caps of the Oil Pollution Act.

Mr. Molbeck explained that the often-referenced $75 million cap is the legal liability to the federal government after a company involved in a spill picks up the cost of clean-up.

“If people do buy more liability limits, that pricing is going to have to go up substantially,” he said. (For more insights from specialty insurance CEOs, see a related article in NU's E&S/Specialty Lines Extra, available at http://bit.ly/b8ewFt.)

During the reinsurer session, Michael McGuire, CFO of Endurance Specialty Holdings Ltd., also alluded to the “trickle-on effect” of rate increases for large Fortune 1000 companies that are buying liability coverage but admitted this was an optimistic view.

“I think the reality is that large industrial manufacturer and energy companies will very likely bear [the brunt of] rate increases over time,” he said.

Endurance–which made a decision to exit the offshore energy reinsurance market in 2006 after experiencing losses from Hurricanes Ivan, Katrina and Rita–is “seeing a fair bit of interest in buying more increased limits protection” in the large-risk business segment of its liability insurance portfolio in the aftermath of the Deepwater Horizon catastrophe, Mr. McGuire reported.

“It remains to be seen how this loss develops over time,” he added. For example, on the business-interruption side, “you have to wonder, if oil does make landfall, then are other parties that you would think do not have exposure [going to be] brought into the web of insurance losses?”

“Are municipalities going to be held to task for not being more proactive in protecting their shorelines or their business?” he wondered.

Special Reports /

Oil Spill-Driven ILW Price Hikes Could Spread To Re Market, Exec Warns

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