While the ongoing BP Deepwater Horizon disaster in the Gulf of Mexico initially was seen as having little effect on the London market because BP is self-insured, in the long term the impact could be positive as offshore oil operations in particular face tighter regulations and potential coverage vulnerabilities are more readily apparent, according to experts across the pond.

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

At the end of the day, he observed, the oil spill aftermath is “not going to be a big loss for the market. The effects thus far are quite limited and the main reason is because BP does not buy that much insurance and they don'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, not BP–which basically uses its own balance sheet to protect itself from these sorts of catastrophes–had it been another major oil firm, [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 oil majors going back into the market to try and increase their liability covers bought under their energy packages, above, let's say, $1 billion, should they have the same misfortune themselves.”

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

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

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

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

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

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

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

“It would be naive of me to say that the reinsurance market will not sustain a significant loss from in particular the BP event,” Mr. Williams noted.

He said he suspects that when marine reinsurance underwriters begin renewing policies that come up Jan. 1, they will be looking for increased rates, “because they're taking a significant slice of this loss.”

Mr. Williams also observed that the U.S. government is looking at levels of oil pollution liability, and in particular the Oil Pollution Act, “and I think there may be some changes that they instigate following the incident with BP.”

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

Mr. Jack noted the oil spill will test the market in terms of true capacity levels for casualty risks offshore. “When you've got business interruption and pollution cleanup losses running into as many 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 priced competitively, he said, “I suspect going forward, if you could get a rate increase anywhere, the offshore energy market with any degree 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 of cover. We're seeing limits go up, deductibles come down–the continuation 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 on pricing–pricing keeps going down. Right now we're just watching hurricane 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 energy underwriters are perhaps kicking themselves that they didn't put as much rate increase on some of these risks as perhaps they could have done.”

Now, however, they will have to wait another year, or until January renewals, to capitalize on higher rate tolerance, he said.

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

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

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

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

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

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

He added that “when I think people see just how quickly $1 billion, $5 billion or $10 billion can get blown through an oil spill offshore, they will definitely be looking at [environmental coverage]. So I would think it would be a wakeup call for a number of companies,” including anyone operating in an environment offshore where they could be held responsible and anyone along the chain, “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 as professional negligence will be looked at carefully.

“There will undoubtedly be some engineers involved in this–the design of the processes, the rigs, the equipment,” he said, adding they 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 with the spill are going to be examined closely, “and lots of people are looking for more cover, because of the stunning size of the potential loss.”

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

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

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

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

Also, costs associated with trying to do something underwater were more complex than anyone imagined, and “it all played out in the media,” he said. “I think the offshore industry has got a whole set of increased profile and problems post this incident, that maybe 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 seeps explodes.” The difference, however, is that “at least when it's in the air, it disperses,” as opposed to the lingering effects of the Gulf 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 how much cover they can buy. Overall, being such a big market, it will benefit the London market. Lloyd's insurers will ultimately benefit,” Mr. Jack concluded.

Special Reports /

Heightened Awareness Of Offshore Exposures Benefits London Underwriters

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