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MUNICH RE WELL LIABILITY PROPOSAL PROMPTS DISCUSSION
Friday 17 September 2010
Author: Russell Group
 

A new offshore well liability cover launched by Munich Re in response to fears of a hike in the liability limits for US oil pollutions cost has prompted much talk at the Houston Marine Insurance Seminar.

The world’s biggest underwriter has proposed a coalition of underwriters to create a new liability scheme which will rely on a significant take up of the policy to create an economy of scale.

In a statement to launch the scheme the reinsurer said: “Munich Re has developed a new concept for insuring offshore oil drilling, which has the potential to create cover in the order of $10–20 billion per drilling operation in the international insurance market.”

Munich Re Board member Torsten Jeworrek is convinced there will be demand for the cover.

“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,” he said.

Mr Jeworrek added that substantial capacity can be offered only if a very large number of drilling operations are insured, since it will not be possible to provide the necessary capacity at affordable prices unless sufficient wells are insured.

“This could be achieved either through a voluntary commitment on the part of the oil companies or by introducing some form of compulsory insurance in the licensing procedure,” he added.

Munich Re said operators, generally drilling joint ventures, may be held liable for death or injury, property damage, environmental impairment and financial losses in the event of an accidental occurrence.

“Currently, there is no separate cover for drilling operations, which are insured under the individual liability policies of the companies concerned,” said the statement to announce the launch of the new scheme. “As a rule, covers are available subject to a limit of U$1–1.5 billion on the international insurance market. With Munich Re’s new concept, each individual drilling operation will be covered by a policy specifically developed for that risk. As a result, it should be possible to increase liability limits to $ 10–20 billion per drilling operation. Munich Re would be prepared to offer coverage capacity in the order of US$ 2bn.”

Delegates in Houston said the scheme had its merits but that the ability for the market to create the level of liability needed or deliver the necessary level of policies.

“The industry needs to create a solution and this is a good first step,” said one US broker.