A friend made the comment that BP was fully insured for the Deepwater Horizon loss. I did some looking – and was shocked to find that, not only is BP self-insured by a captive insurer and it does not look like they reinsured. I’ll get back to this momentarily – but wanted to share some questions first.
- If there were interested insurers in the picture, would mitigation of the loss be further along? I’m curious.
- At the risk of comparing apples and oranges, I have a bone to pick. It was recently mandated that the American people will be required to buy insurance on their own health. Why then are large corporations not required to have the risks of their business better covered than BP’s well was, especially in such environmentally sensitive ventures such as off-shore drilling?
- Apparently, BP made a business decision not to purchase insurance and not to purchase reinsurance. Did the company at all properly assess the amount of risk they were taking on themselves with their off-shore wells has the drilling been a blind gamble?
BP owns what is called a captive insurer, Jupiter Insurance. What this means is that it buys its insurance from its own subsidiary. This kind of arrangement is not uncommon for large companies who feel they can better price their primary insurance needs – but typically the captive company’s policy will be reinsured. And it will also be overlaid by some excess policies through some other insurers and perhaps topped off with large limit catastrophe insurance through a Bermuda company such as A.C.E. or X.L. – or possibly both. Ideally, risk is spread so that if something catastrophic happens, the financial shock can be absorbed among a group rather than being borne by a single entity.
Jupiter Insurance insures BP for $700 million per occurrence (one accident or event). The insurer has $6 billion in capital. That is not likely to be enough to cover the Deepwater Horizon disaster and all the consequential third party liabilities that continue to ensue from it. This May 16 article says the insurance industry is estimating the total damage at $3.5 billion – this May 10 article says the total may be $16 billion – and (contrary to other articles I have linked to above and just to confuse us!) that Jupiter did have about $1 billion in reinsurance in the London Insurance Market. The only certainty is that the longer the well remains uncapped, the higher the estimates will go and that they will be in multiple billions.
Some things are going to happen. Because it is now so evident how terribly, terribly expensive a well blowout can be, the insurance premiums of other petroleum companies are bound to go up. And a new market for pollution insurance coverage may be developing – who would have thought that shoreline properties would need protection from loss due to oil washing up? But apparently they do – as long as drilling continues in the water.
Neither does Joe Boren, CEO of the environmental insurance facility for Bermuda-based Ironshore Inc. As Boren watches reports of the possibility that plumes of light crude could be swept into the Gulf Stream and up the East Coast, he said, he thinks back to conversations he's had with those in the coastal hospitality industry who traditionally don't think they need pollution insurance.
"It has been my experience that it has been a hard sell," Boren said of the task of trying to sell pollution insurance to owners of dive shops, dockside restaurants, resorts and the like. "If you owned a dive shop in Florida, why would you buy environmental insurance?"
Well, now you might and you should, to hear Boren tell it.
What a mess – a complicated, complicated mess that will keep battalions of attorneys employed for years (I visualize a plume of billable hours to match the plume of oil now spreading in the Gulf). The final assignment of blame and liability is not likely to come easily or cheaply. It may be, as Raj Patel explores in his new book, “The Value of Nothing”, that the true costs of some of our activities are just not measured properly. In hindsight, it does not look like the costs and potential liability of off-shore drilling have been properly assessed by BP – or by the U.S. government when it permitted such drilling. It is my opinion that the lack of adequate insurance underscores this.