Fitch Ratings are reported as saying (by Bloomberg here) that the final total for insured losses from the Deepwater Horizon oil rig disaster in the Gulf of Mexico may amount to $6B. Actual economic losses are estimated to be much, much higher at around $35B.
BP plc are liable for the majority of the economic loss and will pay it through their self-insurance scheme and cash it is assumed but the insurance (and therefore the reinsurance) industry are going to be liable for between $4B and $6B.
The figures make Deepwater Horizon the biggest man-made insurance loss since the September 11th terrorist attacks on New York.
Oil rig insurance costs have risen by approximately 50% since the disaster. It seems that only now are people realising that many of the Gulf of Mexico oil rigs are not in the best condition, or are old and therefore the risks associated with them are high. We hear that this has lead to many rig operators not taking out their usual levels of hurricane insurance this year (as they couldn’t afford it), they have been extremely lucky that no major storms have moved through that part of the Gulf.
There is still a place for the risk transfer and capital markets to help the oil industry hedge its risks. Catastrophe bonds have yet to be really tested with man-made disasters but their application to these types of problems is certainly feasible (as we wrote about previously here). Some say the market is missing an opportunity to create capital market risk transfer products for these niche risks. Do you think we’ll ever see a day when a cat bond structure could be applied to protect oil rig operators in this way?