NU Online News Service, April 7, 1:08 p.m. EDT
An insurance consortium for energy coverage introduced in light of the Deepwater Horizon event may not be a large source of coverage for major oil companies, which are likely to continue self insuring and purchasing only modest amounts of coverage, according to a Moody's analyst.
The reason, James Eck, vice president-senior credit officer with Moody's writes in Moody's Reinsurance Monitor, is that "there is not enough insurance capacity available to make a meaningful difference to [oil companies] based on their capitalization and core earnings power."
He notes, "Their preferred route appears to be investing in prevention and rapid response rather than insurance premiums."
During the September 2010 Reinsurance Rendez-Vous in Monte Carlo, Munich Re unveiled a new concept for offshore energy coverage. It envisioned the creation of an insurance consortium that could theoretically provide between $10 billion and $20 billion of insurance capacity, subject to single event limits.
Munich Re board member Torsten Jeworrek said at a September press conference in Monte Carlo, "If coverages are available, companies will buy them because inability to pay high compensation claims can lead to insolvency, and mere speculation about such an eventuality can hit their share price."
With deepwater drilling permits being issued, oil back near $100 a barrel, and tensions running high in the Middle East, he writes, "the Gulf of Mexico represents a key source of oil reserves to be tapped. With the (re)insurance industry ready to write new business, the question remains, will oil companies step up and buy?"
Eck writes that soon after the Deepwater Horizon event, insurance brokers reported brisk demand for control of well and third-party liability covers, at substantially increased premium rates. Nevertheless, the U.S. government's moratorium on deepwater drilling in the Gulf of Mexico appears to have muted demand.
While the moratorium was lifted in October 2010, the first deepwater drilling permit was not issued until late February this year. Additionally, legislation that could increase liability exposure for drillers, now capped at $75 million, remains before the U.S. Congress, creating meaningful uncertainty for energy companies, Eck writes.
He notes that the Deepwater Horizon incident is likely to mark a radical shift in how insurers approach offshore energy risks.
Eck writes that Deepwater Horizon upset the traditional view by insurers that deepwater rigs are less subject to adverse events than those operating in shallow waters. This view is based largely on the higher susceptibility of rigs placed in shallow waters to wind and waves produced by hurricanes, he notes.
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