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By DAN REYNOLDS, senior editor of Risk & Insurance®

Although it's a niche market, underwriters that price insurance for deepwater oil rigs are feeling the heat from their bosses and looking to raise prices in many cases, according to a top energy broker who met with the London markets in the aftermath of the Deepwater Horizon disaster.

Rathmell, the Houston-based president of marine and energy for Lockton Inc., spoke to Risk & Insurance® on May 7, fresh off the plane ride from London and meetings with underwriters for oil rig renewals.

It's not just the loss of Transocean Ltd.'s Deepwater Horizon in the Gulf of Mexico that has led to a firming market. (Its insured loss is estimated at between $1 billion and $2 billion.)

Frequency and severity are on the uptick, too, with a recent billion-dollar loss in the North Sea and last August's explosion of a Montara/West Atlas rig in the Timor Sea in the eastern Indian Ocean. That loss is estimated at between $700 million to $800 million.

Add to that the fact that some rig owners are trying to increase their limits by hundreds of millions of dollars, and you have a "capacity dynamic" in the market, according to Rathmell.

"And they are kind of saying the whole industry only has about $2.5 billion worth of premium nonwind, and management is going to start asking, 'Hey, what is going on here?' " Rathmell said.

What's going on here indeed? Two years ago, the industry wisdom was that the sort of accident that killed 11 workers on the Deepwater Horizon last month and fouled some of the richest fishing waters on any coast was almost unfathomable.

The failure of the blowout preventer on the Deepwater Horizon has many in the industry "just shaking their heads," Rathmell said.

"Being in the business, I don't discount anything that can happen," Rathmell added.

Neither does Joe Boren, CEO of the environmental insurance facility for Bermuda-based Ironshore Inc. As Boren watches reports of the possibility that plumes of light crude could be swept into the Gulf Stream and up the East Coast, he said, he thinks back to conversations he's had with those in the coastal hospitality industry who traditionally don't think they need pollution insurance.

"It has been my experience that it has been a hard sell," Boren said of the task of trying to sell pollution insurance to owners of dive shops, dockside restaurants, resorts and the like. "If you owned a dive shop in Florida, why would you buy environmental insurance?"

Well, now you might and you should, to hear Boren tell it.

Because let's face it, President Barack Obama, who talked a lot about alternative energy before he was elected, has now come out in support of more offshore drilling. So the practice isn't going away.

And not only the hospitality industry, but those well-meaning contractors who sally forth to clean up an oil spill, especially one as nasty as this, might want to check out the limits on their professional liability policies.

"I'm talking about the people who are in the cleanup business who are going to go in and do the work. They want to be very careful that they have enough coverage and the right kind of coverage," Boren said.

RISK MANAGEMENT STRATEGY

And what of British Petroleum, through their mineral rights the owners of that massive and deadly fan of Gulf light crude? Their risk management approach bears watching, according to Keith Hall, a New Orleans-based energy and environmental attorney with Stone Pigman.

BP borrowed a page out of the medical-malpractice risk management playbook with its "early offer" strategy, plunking down $25 million apiece for the states of Louisiana, Alabama, Mississippi and Florida for damages.

"Most parties are wanting to at least let the investigation shake out and see what happens before they start saying, 'We'll take care of you, we'll pay whatever your losses are,' " Hall said.

"We have seen a lot of fairly aggressive statements by public officials that BP needed to take care of the communities, and I think that, if BP had even hesitated, much less suggested that they might oppose or fight liability, I think you would have seen a stronger drumbeat by public officials or challenge from them," Hall said.

And that $25 million per-state offer looks like a good move and a rare move.

But right out of the gate it's in the stock market where reputational risk delivers its most immediate and forceful blow. BP's market capitalization was around $189 billion on April 20, the day before that bubble of dangerous methane blew sea water all the way to the top of the Deepwater Horizon's tower and lit up the rig.

By May 3, the company's market cap was around $157.13 billion, down 17 percent from that April 20 value.

And as Hall and others have noted, there is going to be an army of attorneys employed to battle the dozens of lawsuits that are going to emanate from this spill, currently measured at more than 3.5 million gallons. No one would be able to quantify them at this date, but BP's legal costs are going to be massive.

Hall said that as some of these federal cases get consolidated in the interests of cutting down on the administrative logjam, that could save the company a little money.

"You are talking about hiring lawyers for dozens of lawsuits in at least four states and probably five because I heard some suits have been filed in Texas. That is a small army of lawyers. Then in terms of ultimate liability I think BP is line for a substantial amount of ultimate liability," Hall said.

UNDERWRITERS AND NEW REGULATION

The class-action lawsuits represent one side of the issue, but there is also the certain dispute between BP, Halliburton and Transocean over culpability for the spill, which could rival that of the ExxonValdez.

Rathmell said that he doesn't think underwriters will call for "new conditions," an example being perhaps the remote shut-off mechanism that exists on many rigs but wasn't present on this one.

The odds are that the industry can expect more regulation coming down the pipeline.

"Everybody knows this is going to be studied and restudied and that there is going to be changes in drilling procedures and well plans that will incorporate some more redundancy to prevent this type of thing," Rathmell said.

"Everybody I have talked to feels that that is what is coming and that they, like Piper Alpha, they feel that everybody will be better off. But that will come with additional operational costs," Rathmell said.

Piper Alpha, one of the most productive oil rigs operating in the North Sea, blew apart in the wake of an explosion in July 1988.

May 19, 2010

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