Extract from. Études et Dossiers No th Meeting of The Geneva Association s Amsterdam Circle of Chief Economists

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1 International Association for the Study of Insurance Economics Études et Dossiers Extract from Études et Dossiers No th Meeting of The Geneva Association s Amsterdam Circle of Chief Economists February 2011, Amsterdam & 7.5 th International Liability Regimes Conference of The Geneva Association 17 June 2011, Beijing This document is free to download from The Geneva Association website, August 2011 Working Paper Series of The Geneva Association Association Internationale pour l'etude de l'economie de l'assurance The Geneva Association - General Secretariat - 53, route de Malagnou - CH-1208 Geneva Tel.: Fax:

2 The Geneva Association Working Paper Series Études et Dossiers appear at irregular intervals about times per year. Distribution is limited. The Études et Dossiers are the working paper series of The Geneva Association. These documents present intermediary or final results of conference proceedings, special reports and research done by The Geneva Association. Where they contain work in progress or summaries of conference presentations, the material must not be cited without the express consent of the author in question. The opinions expressed in Geneva Association newsletters and publications are the responsibility of the authors. We therefore disclaim all liability and responsibility arising from such materials by any third parties. This document is free to download from The Geneva Association website, please visit:. Layout & Distribution: Valéria Kozakova The Geneva Association Association Internationale pour l'etude de l'economie de l'assurance

3 Deepwater Horizon Ina Ebert Background April 20, 2010: Fire on Deep Water Horizon Oil Rig. Location: 66 km south/east Venice, Louisiana. Water depth: 1.500m. Deepwater horizon: explosion, fire and sinking Marine CoC 01/09/

4 Blowout Preventer BOP BOP Deepwater horizon: explosion, fire and sinking Marine CoC 01/09/ On-scene Operations to fix the problem Deepwater horizon: explosion, fire and sinking Marine CoC 01/09/

5 Market Impact Market changing event Risk is spread globally Pollution physical & environmental devastation Need for adequate insurance cover Deepwater horizon: explosion, fire and sinking Marine CoC 01/09/ BP Accident Investigation Report Summary of key findings: Well integrity was not established or failed Hydrocarbons entered the well undetected and well control was lost Hydrocarbons ignited on the Deepwater Horizon Blowout preventer (BOP) did not seal the well Deepwater horizon: explosion, 01/09/

6 Report National Commission on Deepwater Horizon 2011 Report to the President of the National Commission on the BP Deepwater Horizon Oil Spill, January 2011: mistakes made by BP, Halliburton and Transocean reveal systemic failures in risk management that place in doubt the safety culture of the entire industry neither industry nor government is adequately prepred for risks connected with Deepwater energy exploration fundamental reform is necessary The scope of compensation What kind of damage has to be compensated? bodily injury property damage environmental damage clean-up costs pure economic loss (scope?) 2-4

7 The Oil Pollution Act of 1990 (OPA) OPA: strict liability for pollution removal costs and certain damage for responsible party for a vessel or a facility from which oil is discharged. Named as responsible party: BP/Transocean/MOEX/Andarko OPA-Fund: 1bn USD, especially for clean-up/removal costs and short-term help Scope of liability: Damages capped at $75,000,000, no punitive damages under OPA (however: BP already promised to pay all legitimate claims ) Unlimited liability in case of gross negligence/willful misconduct/violation of an applicable Federal safety, construction or operating regulation and for Removal/cleanup costs Deepwater horizon 01/09/ Tort Liability Different state laws and special maritime law provisions covering: Compensatory damages (including damages for personal injury) clean-up costs Punitive damages Deepwater horizon: 01/09/

8 The BP fund for compensating victims The Gulf Coast Claims Facility Who gets how much? property damage physical injury/death pure economic loss (loss of income, earning capacity, profits etc.) removal/clean-up costs legal issues Impact on Environmental Liability Insurance Oil platforms are generally not environmental site insurance, but are rather insured at Marine or Excess Casualty Shoreline is often state-owned, not many insured sites in directly exposed area Service firms working on platforms are also not target, but could be covered Treaties have offshore exclusions Increased demand for new coverage or higher limits Potential indirect/subsequent exposure Deepwater horizon: 01/09/

9 Changes for Underwriting and Insurance Policies Property Damage Cover Review of pricing for offshore drilling units Increased focus on totalt loss for new drilling units Liability Cover Higher limits for liability covers Review of pricing for liability cover Need for adequate pollution cover Development of new insurance concept Deepwater Horizon 13 Consequences for insurance industry Should insurance industry provide cover for deepwater drilling? With correct risk mitigation procedures in place plus adequate application of these procedures deepwater drilling is still an insurable risk. What are the lessons learnt in view of underwriting these risks? Cover should be provided on basis of risk adequate terms and conditions Rigorous risk assessment is key to success Deepwater Horizon

10 Outlook: Litigation Deep Water Litigation will continue for years: Thousands of lawsuits/class actions against BP Many dubious claims Most claims consolidated in New Orleans Civil securities litigation in Houston Subrogation BP/others BP vs. Transocean, Halliburton, Anadarko, Moex Settlement with Moex the importance of the degree of negligence subrogation and hold harmless agreements Outlook: Changes in regulation Deep Water is not the end of the story: 300 new drilling operations every year in the Gulf of Mexico alone. Therefore: Changes in legislation seem almost certain OPA limit (75m USD) to be significantly raised (e.g. 10bn USD)/eliminated Retroactively? 2-8

11 Outlook: New SOSCover Currently, in case of catastrophic oil spill: Injured parties do not know, whether/by whom claims are paid Oil companies cannot transfer substantial part of the risk to insurers Small S oil companies risk ikinsolvency Insolvent oil companies/(sub-)contractors cannot rely on hold harmless agreements Tax-payers to bear costs in case of insolvency Solution: New type of insurance concept consortium of insurers cover per individual drilling project, high limits scope: based on OPA liability drilling operations in the US/elsewhere 2-9

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