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By CYRIL TUOHY, managing editor of Risk & Insurance®

(Editor's note: Updated portions can be found at the bottom of the story.)

A hurricane, or two, or three, would simply add to the laundry list of disasters that have already made 2010 a record year for insured losses.

The Chilean earthquake, temblors in China, European windstorm Xynthia, record snowfalls and flooding in the United States, severe weather in Australia and now the Deepwater Horizon disaster in the Gulf of Mexico have made for an expensive first five months in 2010.

Even so, absent a few first-quarter earnings hits, reinsurance companies have been able to absorb the losses thanks to plenty of property capacity.

The surplus of capacity has meant that reinsurers have not had to resort to raising new capital to replenish their capital bases. Should a couple of expensive hurricanes make U.S. landfall, however, the industry would be facing a very different equation, according to a May 21 research note issued by Standard & Poor's.

The National Oceanic and Atmospheric Administration expects an "active to extremely active" hurricane season, with as many as three to seven hurricanes measuring Category 3 or higher.

If aggregate 2010 losses are in the "tens of billions of dollars," according to S&P, "the cumulative effects of these losses could erode the capital of a few reinsurers, which could cause us to take rating actions."

A CLOUDED HORIZON

Meanwhile, the losses from the current disaster--the Deepwater Horizon rig explosion and oil gusher--are far from clear. Already, the insured losses associated with the Gulf oil spill have been estimated at $3.5 billion. The disaster has led to an about-face in the pricing of energy coverage--from decreases of 15 percent to 20 percent, to increases of 10 percent to 15 percent.

A dozen Bermuda-based reinsurers are facing an estimated property loss of $315.1 million related to the loss of the rig and the subsequent oil spill, according to S&P.

Five Europe-based reinsurers are looking at an estimated property loss of $355 million, and the five U.S.-based carriers with exposure to the disaster are facing estimated property losses of $60 million, S&P said.

Lloyd's said on May 26 that it expects net claims arising out of the spill to come in at between $300 million and $600 million.

While the losses have affected energy lines, they are still not enough to make much of an overall dent on the capital structures of the re/insurance industry's key players.

"There will be a negligible impact on Lloyd's capital and no Central Fund exposure from the events, either individually or collectively," said Lloyd's, in a statement, referring as well to its estimated $1.4 billion in losses from the Chilean earthquake.

If property losses in connection with the Deepwater Horizon disaster have edged the industry a little closer to a so-called "capital event," the liability losses arising out of the disaster are another story.

On May 14, BP P.L.C. notified a dozen insurers and reinsurers possibly liable for pollution claims under the "additional insured" clause of the contract between BP and Transocean Ltd., the rig owner and operator.

With BP named as an additional insured, Transocean had agreed to hold BP harmless from pollution-related liabilities originating above the ocean surface.

Excess liability insurers representing Transocean, however, argue that they are not responsible for pollution claims because the oil is coming from below the surface.

The oil spill has resulted in more than 130 lawsuits by property owners, shareholders, workers and the commercial fishing industry, according to an insurance and reinsurance law blog.

The liability to BP and its contractors under federal statutes alone is expected to run in the hundreds of millions of dollars, though insurance carriers will seek reimbursement for those claims through subrogation, said Christopher Kende, a maritime and insurance law expert with the law firm of Cozen O'Connor.

At least four federal laws, and perhaps even a fifth, apply to BP and its contractors in this case, said Kende: the Oil Pollution Act of 1990 (OPA), the Death on the High Seas Act (DOHSA), the Jones Act and the Limitation of Liability Act, Kende said. The oil companies may also be liable under general maritime law.

While BP's pollution liability under OPA is limited to $75 million for economic losses to third parties--a hotel or charter boat service, for example--the limit is voided in the case of gross negligence or safety violations, which in this case is almost certain, Kende also said.

Claims for economic losses in the case of death and injury will fall under DOSHA and the Jones Act.

Kende said that state laws would apply as well, which means that Louisiana, Mississippi, Alabama and Florida could also file claims against the oil companies.

"OPA doesn't pre-empt state law, so there are other requirements under Louisiana laws," he said.

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May 27, 2010

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