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Reinsurers float 20-billion-dollar plan for BP-type blowout

US may file civil complaint against BP over Gulf spill
Washington (AFP) Sept 14, 2010 - The US government has said in a Louisiana court it is considering filing a civil complaint against BP under the Clean Water Act to claim 1,100 dollars for each barrel of oil spilled in the Gulf of Mexico. If the US administration can prove BP engaged in gross negligence or willful misconduct leading up to the spill, the cost of each barrel spilled is tripled to 4,300 dollars. This means BP could theoretically face fines of up to 17.6 billion dollars for the 4.1 million barrels that poured into the sea.

"At this juncture, the United States expects that it may file a civil complaint related to the Deepwater Horizon disaster under these provisions and possibly others," officials filed in court documents obtained by AFP Tuesday. The Department of Justice is reviewing the Oil Pollution Act and Clean Water Act "and other statues in which enforcement action may be appropriate," officials wrote in a filing late Monday to federal judge Carl Barbier in New Orleans, who is overseeing the gargantuan complaints process for the disaster. "As we have said from the beginning, we are committed to ensuring that those responsible clean up the mess they made, restore or replace the natural resources lost or injured in this tragedy, and repay every cent of taxpayer money," Justice Department spokeswoman Hannah August told AFP.

BP has already spent eight billion dollars trying to contain the disaster and has forecast that it will eventually cost the group more than 32.2 billion dollars. An estimated 4.9 million barrels of oil gushed out of the well off the coast of Louisiana after it was ruptured by an April 20 explosion aboard BP's Deepwater Horizon drilling rig that killed 11 workers. About 800,000 barrels were siphoned to ships at the surface. It took 87 days to stem the flow of oil into the sea and hundreds of miles of coastline from Texas to Florida were sullied, killing wildlife and devastating key local industries such as tourism and fishing.
by Staff Writers
Monaco (AFP) Sept 14, 2010
A scheme floated here at an annual meeting of giants in the insurance industry could come up with a 20-billion-dollar insurance payout if an oil rig blows up, kills people and spreads pollution.

By comparison, British oil group BP estimates that the direct civil costs of dealing with the fatal explosion of its Deepwater Horizon rig in the Gulf of Mexico and ensuing pollution could amount to about 32 billion dollars (24.8 billion euros).

BP, in common with some other oil companies, had switched to insuring itself, on the basis that the insurance premiums saved would match any eventual disaster costs.

But as the pollution spread, and the potential liability looked like being almost limitless, there was even talk that BP might need state support to avert bankruptcy.

Now the crisis has passed and BP has survived, but the costs still mount. The BP drama is making oil giants reflect on their insurance strategies and whether to revamp there own mutual insurance fund.

It has also set the reinsurance industry thinking. Reinsurers take on part of big risks underwritten by front-line insurance companies which need to spread and thereby dilute their own exposure.

These two sides of the industry meet in September each year to negotiate the terms on which they will do business with each other next year.

This annual meeting has been held in Monaco from Sunday to Tuesday against a background of oversupply of services by the reinsurers, and consequent pressure from insurers on them to keep their prices down.

In this context, the leading reinsurer in the world, Munich Re of Germany, has stepped in here with a proposal for the insurance and reinsurance industries to create policies for oil rigs which would pay up to 20 billion dollars for damage from an incident.

Munich Re used the example of the BP disaster to argue that coverage offered for civil liability in such an event is not adequate.

The company estimated that all policies taken out for a big drilling platform usually add up to coverage totalling 2.5-3.5 billion dollars, and in the case of Deepwater Horizon it put the coverage at about 3.0 billion dollars.

Under its proposal, specific coverage would be offered for a particular platform rather than for a client company, as is the practice now, on the basis that this approach would improve management of claims for an incident and payment for damage.

The German group said when it floated its idea on Sunday, that it wanted to begin talks soon with big insurance and reinsurance companies to see if the idea was of interest and, if so, to discuss how such policies would work.

It said it was prepared to offer coverage of 2.0 billion dollars per platform of the maximum of 20 billion dollars' worth of coverage the insurers and reinsurers collectively would offer for each contract.

The coverage would insure damage to the platform and also claims by third parties, and would therefore cover the cost of cleaning up pollution, damage to the environment, and lost earnings particularly for businesses in the fishing and tourism industries.

Since the proposal is intended to cover only big disasters, Munich Re suggests that the policies come into effect only for claims exceeding one billion dollars.

A senior executive at the company, Torsten Jeworrek, said it believed that the insurance resources were available to provide such coverage. It thought that the cost of such policies would be up to 10 percent of the amount insured.

Munch Re is also counting on US authorities to be open to the idea.

The scheme has already attracted the interest here of two other leading reinsurance groups, Swiss Re and Hannover Re.

The head of special insurance arrangements at Hannover Re, Jurgen Graber, said his group backed the idea of offering a greater level of protection, and the head of subscriptions at Swiss Re, Brian Gray, said that his group had an "appetite" for this kind of risk.

But both companies wondered if the scheme would work if national authorities did not oblige oil companies to take out insurance policies.

And Swiss Re's director general Stefan Lippe wondered whether customers would be prepared to pay more than they had being doing for such coverage, commenting that they had refused to take out coverage because they calculated that with the billions of dollars they saved, they did not need it.

That was the case for BP which had taken out only a small amount of insurance with its own insurance company called Jupiter.

And although several big reinsurers were showing interest in the scheme, direct insurance companies had not yet responded, he said.

In May, Swiss Re calculated that insured losses from the Deepwater Horizon incident could amount to 3.5 billion dollars, putting its own liability at 200 million dollars before tax.

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