Willis: Upstream Energy Insurers Seeking to Impose Rate Increases in
Total Deepwater Horizon Claims Estimated at Well Over US $1.2 Billion
Wake of Recent Rig Losses
London, UK, June 3, 2010 — The Deepwater Horizon and Aban Pearl drilling rig losses have left
upstream energy insurers with an unprecedented bill of US $795 million within the space of a
single month, destabilizing the market and driving up rates, according to a new report from Willis
Group Holdings (NYSE: WSH), the global insurance broker.
Despite the twin rig disasters, most major insurers have honored commitments that were in place prior to
the losses, Willis said, but are no longer considering rate reductions on new business and instead
are seeking to impose rate increases, particularly on drilling contractor fleets.
According to the latest Willis Energy Market Review Newsletter, the market has been further destabilized by a
recent announcement by Apache Corporation, a Houston-based oil and gas exploration and production company, of an
unexpected US $150 million loss from Hurricane Ike. Any insurers that have avoided a Deepwater Horizon
loss almost certainly have been involved in at least one of the other two incidents, spreading
the pain throughout the upstream sector, Willis said.
The Willis report said the Aban Pearl rig off the coast of Venezuela was insured for US
$235 million while the Deepwater Horizon rig in the Gulf of Mexico was valued at US
$560 million. Another US $140 million may have to be reserved to remove the Deepwater Horizon
wreck from the seabed. Even though a large portion of the Deepwater Horizon loss, which could
amount to US $10 billion to $15 billion, is understood to be self-insured, the broker estimates
that total claims to the market from the disaster, including control of well, re-drilling, third-party liability
and seepage and pollution costs, could still be well in excess of US $1.2 billion.
Alistair Rivers, CEO of Willis Energy, said, “The tragedy of the Deepwater Horizon loss — potentially the
largest in the history of the upstream market — has come as major shock that has
fundamentally altered the existing market environment.”
Although brokers have been inundated with requests to price and obtain increased cover for liability and control
of well risks in the wake of the April 20 disaster, Rivers said this increased demand
“may be something of an over-reaction” since the Deepwater Horizon loss is fairly unique and the
likelihood of a similar event is “somewhat remote for most operators.” Willis said buyers and their
brokers need to analyze individual risk portfolios in detail before seeking to buy or place as
much insurance as possible.
Other key findings in the Willis EMR Newsletter include:
- Most upstream insurers will have written approximately 75% of their income for the year
by early July. There is likely to be less pressure to compete for market share, but
no withdrawal of capacity yet either. It is therefore possible that that over-supply of capacity may
dampen the level of market increases.
- Since the Deepwater Horizon loss,
the recently launched Chrysalis product, which provides US $100 million of unscheduled cover for interest excess
of OIL, may now become more attractive to buyers.
- As a
result of the Gulf of Mexico oil spill, the market has clearly hardened for Offshore Property
risks. Furthermore, for Marine Liability risks such as offshore seepage, pollution and contamination insurance, it is
likely that there will be a wholesale revision of the way in which this class of
business is underwritten in the future. The Reinsurance market is also likely to harden as well
in response to the recent major losses.
- The impact of any
future US legislation on control of well and liability policy limits will likely force US companies
to carry much higher levels of insurance for deepwater activities in the future, and it is
possible other governments and legislatures may follow suit, increasing both demand and rates for these product
- Any major losses during the 2010 Gulf of Mexico hurricane
season could prompt a significant withdrawal of insurers from the market.
- Tougher underwriting stances may appear later in the year in anticipation of increased reinsurance costs and
increased retentions, as well as Solvency II capital requirements.
Click here to read the full Willis Energy Market Review update.
Willis Group Holdings plc is a leading global insurance broker, developing and delivering professional insurance, reinsurance, risk
management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around
the world. Willis has more than 400 offices in nearly 120 countries, with a global team
of approximately 17,000 employees serving clients in virtually every part of the world. Additional information on
Willis may be found at www.willis.com.