On June 9 Robert Hartwig, president of the Insurance Information Institute, spoke at a Congressional hearing before the House Committee on Transportation and Infrastructure about the insurance implications of the Deepwater Horizon oil rig accident. He specifically addressed three issues: insurance arrangements in place at the time of the Deepwater Horizon accident; the immediate and current insurance market reaction to the accident; and the potential market reaction to proposed changes by Congress to various acts governing the limits of liability associated with offshore drilling activity and the spillage of oil. Hartwig noted that the global energy insurance market is accustomed to infrequent but large scale losses. In energy insurance markets, as in all insurance markets, the supply of insurance (also referred to as capacity) is a function of the amount of available capital, which in turn is dependent on the rate of return that can be earned on that capital for any given level of demand. The riskier the venture, the greater the required rate of return, and insuring deep sea drilling platforms is a risky business. As the magnitude of the Deepwater Horizon incident became apparent, it became clear to insurance underwriters that Deepwater Horizon would likely become one of the most expensive events in history for the offshore energy insurance market. Current insured loss estimates range from $1.4 billion to $3.5 billion dollars. The wide range in loss estimates is primarily attributable to uncertainty surrounding the magnitude of business interruption losses if significant quantities of oil wash ashore. Hartwig concluded that the global energy market response to the Deepwater Horizon loss has been orderly. Markets remain stable and capacity has not fled the market. At the same time, prices have risen, reflecting not only the Deepwater Horizon event itself but increased demand for liability coverage and mounting uncertainty over government action related to limits of liability. While available capacity for liability coverage in offshore energy insurance markets remains at pre-Deepwater Horizon levels of approximately $1 billion to $1.5 billion, it is highly unlikely that insurers could provide coverage limits sufficient to meet the proposed $10 billion limit of liability being discussed in the context of the Oil Pollution Act (OPA).
Robert P. Hartwig, Ph.D., CPCU, President, testifies before the House Committee on Transportation and Infrastructure.
The hearing focused on "Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related Statutes". You can download the testimony below.
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