Subject: FW: Munich Re in call for $20bn industry energy drive
From: "Neil Callahan" <[email-masked]>
To: "'Michael Andrews'" <[email-masked]>, <[email-masked]>, <[email-masked]>, "'Eric Schwerin'" <[email-masked]>, <[email-masked]>, "'Curt Hastings'" <[email-masked]>, "'robert mitchell'" <[email-masked]>, <[email-masked]>, "'Chris Heinz'" <[email-masked]>
Date: Mon, 13 Sep 2010 00:10:01 -0400

Shows the case by case potential in the re-insurance space – all requiring case by case due diligence.

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Neil Callahan

Rosemont Seneca

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From: The Insurance Insider [mailto:[email-masked]] 
Sent: Sunday, September 12, 2010 1:02 PM
To: [email-masked]
Subject: Munich Re in call for $20bn industry energy drive

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The Insurance Insider Monte Carlo Rendez-Vous News Alerts 2010
In association with Canopius and Ruxley

Munich Re in call for $20bn industry energy drive

Munich Re has committed a $2bn line to a proposed industry offering that it says has the potential to create $10bn-$20bn in new liability cover from the international (re)insurance industry for offshore drilling operations around the US coast.

The reinsurer called upon its industry peers to support the initiative with capacity and for the US government to consider it as part of its reforms in the aftermath of the Deepwater Horizon blow-out.

Unveiling the project today (12 September), the German giant said it would change the way rig operators are insured for liability exposures of drilling.

Currently operators, which are often joint ventures, typically can only buy limits of $1bn-$1.5bn in the insurance market to cover liability for death or injury, property damage, pollution and financial losses in the event of an accident with no separate cover for drilling operations.

Munich Re’s proposition would instead cover each individual drilling operation with a policy developed on a risk-by-risk basis.

As a result, it should be possible to raise liability limits to $10bn-$20bn per drilling operation, the reinsurer claimed.

At the Monte Carlo Rendez-Vous briefing, Munich said it would put up capacity in the order of $2bn to kick-start the project, as it called on other (re)insurers to participate in the initiative.

The proposal is the second market-style solution to offshore energy needs in recent days, after The Insurance Insider revealed that brokers Aon and MMC had teamed up with Torus to put together a facility of 30+ reinsurers to offer an additional $1bn+ limits covering operators for liability.

Munich Re board member Torsten Jeworrek commented: “If coverages are available, companies will buy them because inability to pay high compensation claims can lead to insolvency, and mere speculation about such an eventuality can hit their share price.” 

The projected cost of such policies would average around 10 percent of the production cost to joint ventures of initially drilling a well – a figure which currently stands at about $120mn. And with over 300 plans for new wells being submitted each year, the concept represents potentially up to $3bn in annual premium income. 

“Following the catastrophic oil spill in the Gulf of Mexico, it is clear that better provision has to be made for dealing with losses and damage arising in this context,” Jeworrek explained. 

Substantial capacity can only be offered if a very large number of drilling operations take up the insurance, the reinsurer suggested. 

Jeworrek revealed that Munich Re is currently lobbying the US government to include such a policy in its review of the licensing procedure for new offshore drilling platforms.

“It will not be possible to provide the necessary capacity at affordable prices unless sufficient wells are insured, therefore we are hoping that the US government will take this seriously and make such policies a mandatory part of the insurance process. But, a high take-up could also be achieved through a voluntary commitment on the part of the oil companies,” he said.  

Based on the US Oil Pollution Act, cover would largely relate to clean-up and removal costs, impairment of natural resources and property damage, as well as loss of earnings in sectors such as fishing or tourism. 

The policy would also demand that independent consultants would be drafted in to monitor and oversee the risk management of new drilling projects until completion. 

“More stringent risk management standards of this type ought to be an integral part of the procedure for granting drilling licenses,” Jeworrek said. 

Suitably adapted, the coverage could also be offered in other territories, according to Munich Re.

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