Oil spill losses of $4.9b likely to lift premiums

The insurance industry is forecasting a loss of up to US$3.5 billion ($4.9 billion) from the growing oil spill in the Gulf of Mexico.

This will be the biggest energy insurance loss in more than 20 years, and could drive up premiums.

According to Lloyd's of London insurer Catlin, the April 20 explosion, which triggered an undersea well leak, will be the biggest loss in the energy market since the explosion of the Piper Alpha platform in 1988. A spiral of reinsurance losses from that disaster cost Lloyd's £8 billion ($16.4 billion) between 1988 and 1992.

Swiss Re has estimated insured losses from the oil rig at between US$1.5 billion and US$3.5 billion, and its own loss at US$200 million. JPMorgan Chase analyst Michael Huttner, who initially put the insurance industry's liability at US$1.6 billion, says Swiss Re's US$3.5 billion figure reflects additional costs if the oil comes ashore: "As soon as the oil hits the shore, it triggers additional policies linked to business disruption."

The losses estimated by individual insurers are about US$700 million.

Experts say much of that will end up being paid by reinsurers, which cover the losses made by direct insurance companies - resulting in reinsurance price hikes that will be passed back to the insurers, who may then pass them on to customers.

Amlin, the largest group in the Lloyd's market, warned it faces claims of up to US$180 million after a catastrophe-hit first quarter, including US$15 million from the oil spill. It expects the oil rig disaster to "trigger upward pressure on rates".

The remark was echoed by Chris White, the head of the energy division at Lloyd's underwriter Chaucer, who said the loss "demands a strong market response, with significant rate rises to compensate for the underwriting exposures confronted in these areas".

Chaucer estimates its net loss at US$25 million from the oil leak.

Munich Re, the world's biggest reinsurer, has warned that payouts for the oil spill and such natural disasters as the Chilean earthquake threaten its 2010 earnings target.

The Deepwater Horizon rig, owned by Transocean, had an insured value of US$560 million.

A Lloyd's spokeswoman said: "Transocean insured their oil platform at Lloyd's; this has now been claimed and paid."

The insurance market will publish a total loss estimate later this month.

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