Q&A: Offshore insurance after the spill

Michelle Dennis is the director of business development for Bowen, Miclette & Britt, a Houston-based insurance firm that specializes in insuring energy companies, from some of the largest land-based gas operators to refineries and offshore drillers. She is also this year’s chairwoman of the energy task force for the Independent Insurance Agents of Houston.

Dennis says the deadly Macondo accident has prompted a sea change in the underwriting of offshore insurance, but the immediate effect on rates won’t be clear until Jan. 1, when most companies begin renewing their insurance policies.

Firms that have had to renew since the blowout April 20 were indeed hit with staggering rate hikes. But Dennis believes insurers will be temperate going forward, largely out of concern they could drive down demand by pricing out customers.

Dennis says companies can help themselves by re-evaluating their safety and risk management programs, so their brokers can make a case for lower rates when the time comes for renewal. She spoke with the Chronicle’s Monica Hatcher about the offshore insurance industry in the aftermath of the oil spill. Edited excerpts:

Q: Was the Deepwater Horizon accident a game changer in the offshore insurance market?

A: Absolutely, a market changer, a life changer. The way insurance polices are written will be different going forward. I custom-write insurance language for various carriers, and we have barely scratched the surface of how we are going to do that for the offshore world. We need some of the lawsuits to start playing out, and we need to see how these contracts hold up. Once the industry starts to see whether the indemnity agreements hold firm the way the insurance market planned, then we’ll have a better picture of what’s going to happen with the coverage, policy verbiage and the rates. Insurance companies developed their rates based on what they intended to provide coverage for, but the courts will be the final say-so for how the coverage applies.

Q: Was there an immediate impact on offshore insurance premiums after the Macondo incident?

A: There was an initial knee-jerk reaction. The immediate reaction of insurers was to pull limits and capacity off the table until they knew where the dust was going to settle. Insurance agents had a lot to do with facilitating how that initial reaction impacted their clients, though. For example Bowen, Miclette & Britt had a client in March who was going through an acquisition. We obtained renewal rates for them including the offshore acquisition, but the deal was delayed and didn’t happen until May. Our agency was able to get the London underwriters to hold the rates they gave us before the BP event. But those who started the renewal process after BP’s blowout did see a difference. After the event, rate increases averaged 30 percent for production and support services and 100 percent for drillers. Before the event, offshore rates were declining 10 to 15 percent on the average.

Q: Has the recent moratorium in the Gulf and the slow process of getting permits to drill changed the demand landscape for offshore insurance?

A: Insurers are having to answer some tough questions — do they raise the rates now while the clients’ operations are heavily reduced due to moratorium? Or do they leave the rates where they are and see what the Macondo’s impact is on regulations, compliance-safety issues and reinsurance? Do regulators ever get back to issuing permits on a 30- to 40-a-month basis, the way they were pre-Macondo, restoring demand for insurance and risk management solutions?

The biggest factor for offshore companies, though, will be whether insurance will be commercially available based upon potential new legislation. Right now, companies have a government-mandated liability cap of $75 million. Congress is considering three options: a $10 billion limit, a $20 billion limit and no limit. The insurance industry doesn’t have a way to provide an unlimited policy. As a result, they are pushing for some other type of cap, but even at a $10 billion limit, there isn’t an insurance carrier that has agreed to post that type of capacity.

Q: Is the insurance lobby behind any proposal regarding coverage requirements?

A: The insurance industry inherently has been behind insuring according to the right risk assumption and transfer technique. It doesn’t make sense for most clients (or insurance carriers) to insure everything. Offshore clients are sophisticated companies that prefer to participate in their insurance and risk transfer processes. They have not lobbied or come out for any one limit. They have stated even the $10 billion limit is excessive.

Q: What kind of questions are you getting from your customers right now?

A: After Macondo, the first question we had was: Are we still covered? Others now are: If the Macondo blowout had happened to us, would we have been covered? Do we need to change the way we are handling risk?

Q: Has the spill caused some insurers to think twice about covering offshore oil and gas activities?

A: None have come out and said “we’re done.” There is still a need for offshore insurance. As long as there is a need, the carriers will continue to support the offshore industry and provide coverage. So the question isn’t whether they offer insurance, but how the insurance carriers and the agents improve the coverage and make it effective again in concert with new regulations and changing contracts.

That’s where writing policies will be different, which the industry will start working on soon.

We will change the policy language and work to tie changes to the rates. Instead of increasing rates carte-blanche on all offshore companies, increases should be transparent and tied to the inherent exposure of the individual client operations, including their safety records.