Oil industry set for surge in insurance premiums after Deepwater disaster

Oil companies face a sharp rise in the cost of insuring deepwater oil rigs at the start of next year in the wake of the Deepwater Horizon explosion in the Gulf of Mexico, which triggered the biggest oil spill in American history. Following the disaster – one of the largest losses ever to hit the energy market – which eventually cost BP boss Tony Hayward his job, global energy premium rates have gone up by between 10% and 30%, according to one of the largest insurer of energy risks, Lancashire.

However, the full impact will not be be felt until 1 January onwards when the bulk of reinsurance is bought, insurers warn. The disaster has also fuelled demand for insurance, as regulators are moving to a tougher stance on how much cover is needed by oil and gas companies. BP was self-insured.

"The question that board members of oil and gas companies are asking management is 'if this were to happen, have they got enough insurance?'" said Alex Maloney, chief underwriting officer at Lancashire. "We see some clients come to us to purchase double the amount of insurance as previously. A smaller oil and gas company [than BP] probably would have gone under."

About 80% of the energy book was already written by 20 April when the explosion happened, explained Richard Hooks, an energy underwriter at Kiln, one of the biggest Lloyd's of London insurers. Most of the insurance business is done before the US wind storm season starts in June.

"The full impact of the rate hikes will probably not be felt until 2011 because most energy insurance is placed in the first six months of the year," said Hooks. "You write business in the knowledge that this can happen, but suggested amendments in US legislation look set to change the insurance environment, and increase demand for coverage markedly."

The key proposals are for mandatory insurance and the amendment of the limiting of liability of operators for offshore pollution under the US Oil Pollution Act (OPA) of 1990. The changes are expected to come into force next year.

Under the OPA, those responsible for a spill have to pay cleanup costs, but it has limited payouts for private economic and environmental claims to $75m (£48m). Exceptions include gross negligence, willful misconduct and the violation of safety rules. BP voluntarily waived this limit.

Energy underwriting rates were down 10-15% before the disaster but, in recognition of the increased risks, the oil spill drove up premiums for insuring deepwater operations by 25-30% and deepwater drilling by 100% or more, said Hooks.

Michal Huttner, insurance analyst at JP Morgan, noted that the message from insurers gathered at the Monte Carlo reinsurance conference last week was that overall premiums were declining, with the notable exception of offshore energy rates.

The oil spill has also had a knock-on effect on marine liability rates because of potential pollution.

Offshore drilling company Transocean insured its oil platform at Lloyd's of London. Lloyd's has estimated net losses from the explosion at up to $600m. It has asked a judge to limit its exposure as an insurance carrier for Transocean, on the basis that BP was grossly negligent.

"It makes perfect sense for Lloyd's to minimise its liability by trying to assign blame onto BP so it can limit or avoid paying off Transocean's insurance claims," said Stephen French, managing partner at Legalbill, a legal consulting firm based in the US.

"If Lloyd's fails to limit its exposure, it will take a hit in the short-term. But in the long run, Lloyd's and its underwriters will raise insurance rates, and future insured energy companies will bear the cost of past misfortune."