The Wall Street Journal: Oil-Rig Insurers Expect Price Jumps: "Shell Oil Co., the U.S. unit of Royal Dutch Shell PLC, which saw damage to two oil- and gas-producing platforms in the Gulf of Mexico, declined to comment on what price increases it would accept for insurance policies.": Thursday 8 Sept 2005
Premiums Could Rise 50%
Following Damages in Gulf
To at Least 58 Installations
By ULRIKE DAUER
Insurers of offshore oil rigs and platforms are expected to push for steep increases in premium prices in contract talks after Gulf Coast oil and natural-gas-production sites were battered by Hurricane Katrina last week.
Katrina damaged or displaced at least 58 oil platforms and drilling rigs -- including about 30 irretrievably lost -- in the Gulf of Mexico, the American Petroleum Institute said. While the industry assumes much of its own risk, rising premiums to insurers could still add costs to their projects.
Insurers plan to seek price increases of more than 50% for oil rigs in the Gulf of Mexico when contract-renewal talks start next month, said Charles Franks, an energy-insurance underwriter with Kiln PLC, one of the syndicates in the United Kingdom Lloyd's market.
Overall claims for damaged or lost offshore oil rigs and platforms in the Gulf could rise to $5 billion, Mr. Franks said. Those claims are on top of the $3 billion in claims insurers received after Hurricane Ivan last year, he added.
"Large disasters -- and notably natural disasters -- are on the rise, and the need to insure such risks will be higher than in the past," said Jürgen Thiede, a managing director of German insurer Gerling Allgemeine Versicherungs AG. "Prices for such insurance cover have to be in line with the large individual risks involved."
One industry participant said oil companies spend about 0.4% of revenue on insurance products. To cover the additional premiums, companies will likely pass the costs on to customers.
Companies could also increase their reliance on the industry's own insurance plan, the Bermuda-based Oil Insurance Ltd., which was established in 1972 and had $443 million in net premiums in 2004. That represents about 16% of the $2.7 billion in overall premiums for energy-related insurance, according to Willis Group Holdings Ltd., a London-based insurance broker. Oil Insurance Ltd. paid 30% of insured damages related to Hurricane Ivan, while about 55% was handled by the insurance industry, a person familiar with the matter said. The rest was covered by the oil companies themselves, this person said.
About 4,000 offshore oil and natural-gas rigs are scattered along the Gulf of Mexico, with a total value of more than $100 billion, according to Risk Management Solutions Inc., a Newark, Calif., risk-assessment firm. Annual insurance coverage for an oil-production platform typically costs about 0.75% of the value of the platform, which can range from $10 million to more than $1 billion, Mr. Franks said.
Policies generally cover the property, including the steel construction, drills and other machinery, the wells on the ground of the ocean, the pipeline and the oil or gas in the pipeline if lost. Many policies also insure the potential business interruption. Such policies usually cost at least 1% of the value of the platform, Mr. Thiede said.
He said prices for insurance policies covering offshore oil rigs last year fell by 20% on average from the previous year, mainly because of strong competition among insurers and a history of low damage claims. But that scenario could be changing, experts said. "We expect prices to go up, due to large offshore losses," said Mr. Franks, who said he wants future premiums to better reflect the increased frequency of hurricanes.
Shell Oil Co., the U.S. unit of Royal Dutch Shell PLC, which saw damage to two oil- and gas-producing platforms in the Gulf of Mexico, declined to comment on what price increases it would accept for insurance policies. The company, which is one of 86 shareholders of the industry's own plan, said when asked about its platforms that it doesn't maintain business-interruption insurance.
Hurricane Katrina hit the U.S. just ahead of the annual contract-renewal talks. Insurers and reinsurers generally negotiate with clients starting in October as rates are set for the next calendar year.
In next month's negotiations, insurers are expected to point out that Katrina, which could turn out to be the costliest natural disaster in history, could be just the start. The U.S. National Oceanic and Atmospheric Administration said it expects 11 to 14 tropical storms from August through November, with three to five major hurricanes.
"This will make any discussions over lower prices for [these types of policies] a nonissue," said Elke Koenig, chief financial officer of Hannover Re AG, the world's third-largest reinsurer by premiums.
The Lloyd's market, the oldest and largest commercial-insurance marketplace in the world, tends to dominate insurance for big-ticket items such as oil rigs, since the risk on any one policy is shared among a number of companies, so no one company is overexposed. Lloyd's said last week that it expects to "receive significant insurance claims as a result of Hurricane Katrina, predominantly in relation to offshore energy installations in the Gulf, property damage and business interruption."
Reinsurance companies, which insurers use to spread out the risk for large claims, will be hit hard by the storm. Last week, Hannover Re issued a profit warning; Munich Re AG said its exposure to Katrina may top €400 million ($499 million) gross, meaning some of that will be shared with other reinsurers; and Swiss Reinsurance Co. said its exposure to the hurricane will be about $500 million. Some analysts said that, in the future, it might become more difficult to obtain insurance for offshore oil rigs, forcing more companies to accept higher deductibles or even to self-insure their rigs.
"The question is whether insurance companies, which are obliged to make money with every policy, will insure such risks in the future," said M.M. Warburg analyst Ralf Dibbern. "Many insurers might ask themselves whether they can afford such risks in the future."
Write to Ulrike Dauer at email@example.com
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