Insurers Avoid Large Oil, Ash Claims and May Increase Premiums

Published: Fri 04 Jun 2010

Donald Chase

Insurance companies may come out winners from the volcanic ash catastrophe and the oil spill in the Gulf of Mexico, which have benefited the industry by resulting in relatively minimal claims costs but still providing companies an excuse to increase premiums for certain types of coverage.

In April, an explosion occurred aboard the Deepwater Horizon oil rig, and the resulting leak has become the most devastating oil spill in the history of the United States. The insurance industry's losses from the oil spill are estimated at $611 million. That figure is sure to increase as the oil leak persists and causes massive damage to the environment.

Approximations of the total insured loss vary from $1.4 billion to $3.5 billion, with Swiss Re losing the most money at roughly $200 million.

As large as it sounds, the total insured loss will likely be just a fraction of the total cost of the calamity.

The insurance industry was very fortunate in that only about 20 percent of the oil-spill-related losses have been absorbed by insurers, according to Stephen Catlin, CEO of the reinsurance company Catlin Group Ltd., addressing Euroforum's yearly reinsurance summit this week in Zurich.

Insurance companies had similar luck with the volcanic ash disaster that wreaked havoc on European air travel in early 2010.

An Icelandic volcano produced ash that spread over Europe, leaving millions of airline passengers stranded and thousands of planes grounded. On the other hand, the rapid closing of airports avoided the kind of physical damage to airplanes that would result in claims for the interruption of business, industry experts say.

By contrast, billions of dollars in claims will be filed as a result of the oil spill. However, as BP PLC, the project's majority owner and operator, self-insured the majority of the risk rather than purchasing liability insurance, insurance industry losses will be limited, Moody's Investor Services wrote in a recent report.

Outcome Depends on Businesses, Hurricane Season

The oil spill claims will come from several different sources. Some of the largest claims will come from tourism companies and commercial fishermen whose businesses have been hurt by the leak near the Louisiana coast.

"In our view, potential business interruption claims represent the largest unknown for insurers," Moody's explained. But even in the worst scenario possible, losses are not predicted to exceed $3.5 billion, the higher range of the existing estimates of insurance industry losses.

What may exacerbate the situation, however, is if a hurricane drives significant amounts of oil toward the coast this summer, Moody's warned. Considering that four research organizations are predicting the most active hurricane season since 2005, the year of Katrina, this is a real possibility.

Although the total cost to the insurance industry, BP, BP contractors, and the American taxpayer are still unclear and will likely not be known for years, insurers will probably benefit from additional business and higher rates.

"Transocean will lead to an increase in demand for insurance in the oil industry," explained Catlin.