Aon Benfield has agreed to serve as placement advisor to a new sudden oil spill consortium, formed to deliver larger liability limit coverage for deepwater drilling in U.S. waters, Aon and Munich Re announced late last month.

The consortium expands a concept announced by Munich Re at the 2010 Monte Carlo Rendez-Vous.

The plan involves the insurance and reinsurance markets working together to deliver a new product that brings significantly larger limits than have previously been available for U.S. deepwater drilling.

Munich Re said today that it, along with other insurers and rensurers, is in the process of committing significant capacity to this new insurance class. The sudden oil spill consortium will work alongside the oil industry to help ensure that the product will deliver coverage that is of value, and limits on a per-well basis that have not been available before in the marketplace.

Aon Benfield said it will be working alongside Guy Carpenter and Willis Re. All energy retail brokers will be able to access the facility, SOSCover, on behalf of their clients.

Munich Re said during a press conference at the Reinsurance Rendez-Vous in Monte Carlo in September that its new concept for insuring offshore oil drilling has the potential to create coverage of about $10-to-$20 billion per drilling operation in the international insurance market.

With the increasing scarcity of fossil fuels and growing demand for energy, exploratory drilling, now deep below the earth's surface and often far below sea level, has become more risky, Munich Re board member Torsten Jeworrek said.

He explained that drilling is becoming more complex, and remedying the damage is not something that can be done quickly.

“This is an unsatisfactory situation,” he said. “There is large loss and insufficient insurance to deal with the losses.”

Although drilling technology is already highly advanced and most oil producing countries have very strict safety regulations, he said, there is potential for catastrophes that can threaten a company's existence.

He explained that operators, which are generally drilling joint ventures, may be held liable for death or injury, property damage, environmental impairment, and financial losses in the event of an accidental occurrence. Currently, he said, there is no separate cover for drilling operations, which are insured under the individual liability policies of the companies concerned.

As a rule, coverage is available subject to a limit of $1-to-$1.5 billion on the international insurance market. With Munich Re's new concept, he said, each individual drilling operation would be covered by a policy specifically developed for that risk.

As a result, he explained, it should be possible to increase liability limits to between $10 billion and $20 billion per drilling operation.

Based on the U.S. Oil Pollution Act, coverage would largely relate to cleanup and removal costs, impairment of natural resources and property damage, as well as loss of earnings in sectors such as fishing or tourism, Mr. Jeworrek added.

He also said Munich Re considers the tightening of safety standards crucial to the concept. To ensure such standards are met, he suggested that companies independent of the operators and possessing the requisite expertise–such as specialist engineering consultants–would need to monitor and oversee risk management from the start of a drilling project to its completion.

Mr. Jeworrek said in September he was convinced there would be demand for this type of coverage.

“It was clear from the very beginning that substantial capacity can only be provided by a joint effort of the international re/insurance industry,” he said. “We are very happy that the broker community will promote the project and help to gather the necessary capacity. With Aon Benfield, Guy Carpenter and Willis Re, we found the perfect partners with the expertise, the resources as well as the contacts to realize such a huge project.”

Grahame Chilton, chairman of Aon Benfield said in a statement, “It is terrific to see the re/insurance industry working together to deliver a solution at a time of customer demand and need. Munich Re helped enormously with the initial concept for the liability product, and now other leading industry players and the oil industry will assist in the development of the terms and conditions of the sudden oil spill facility, SOSCover.”

Special Reports /

Aon Benfield To Manage New U.S. Oil Spill Consortium

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