Munich Re to Offer $20 Billion Drilling Cover After Gulf of Mexico Spill

Munich Re, the world’s biggest reinsurer, plans to increase the amount of insurance it sells to oil-rig operators in the Gulf of Mexico following the Deepwater Horizon oil spill, as premium rates in other industries and locations remain flat.

The Munich-based company is planning to sell operators as much as $20 billion of liability cover that will pay third-party claims should a disaster occur, it said today in a conference in Monte Carlo.

Insurance premiums for offshore rigs in the Gulf of Mexico will likely rise 30 percent following the Deepwater Horizon explosion in April that killed 11 people and caused the worst environmental disaster in U.S. history, according to Lloyd’s of London Chief Executive Officer Richard Ward. Premiums in other classes of insurance including U.S. property and casualty, have fallen to their lowest in 10 years, according to the Council of Insurance Agents and Brokers.

“There have been critical voices from the U.S. administration that there is not enough insurance capacity available,” Torsten Jeworrek, Munich Re’s head of reinsurance, said at the press conference. “Considering the size of potential losses this is a very significant answer to their demand.”

Munich Re said it would commit a maximum of $2 billion of its own capital to each of the insurance policies, which are designed to cover drilling joint ventures in the Gulf of Mexico. Other insurers would commit the remaining capital to the policies in return for a portion of the premiums paid.

Share Blame

BP Plc, the largest gas and oil producer in the Gulf of Mexico, said last week that contractors Transocean Ltd. and Halliburton Co. should share the blame for the Deepwater Horizon catastrophe. BP insured itself against some of the potential losses.

Rig operators can currently buy liability insurance paying out a maximum of $1.5 billion covering all their activities, Munich Re said.

Premium rates in January next year in areas that haven’t been affected by significant losses will likely be equal to January 2010, Jeworrek said. Brokers including Guy Carpenter said prices have declined by as much as 15 percent this year.

Reinsurers are struggling to force through rate increases because a rebound in investment markets last year helped strengthen their balance sheets. The world’s 70 biggest reinsurers are holding about $330 billion of capital beyond their regulatory requirements, almost 40 percent more than in 2008, according to data compiled by Fitch Ratings Ltd.

Buyback Program

Munich Re said in May it plans to resume its 1 billion-euro share buyback program, scheduled to end by April 2011, after posting first-half profit that beat estimates. Jeworrek declined to comment on whether the insurer would extend the program beyond that date.

“The best option for excess capital is to keep it,” Jeworrek said. “There’s no significant demand to deploy it into organic growth.”

Reinsurers plan to buy back about $5.8 billion worth of their own shares in the second half of 2010, compared with $4.9 billion in the first half of this year, according to data compiled by Moody’s Investors Service. The industry returned capital to shareholders through buybacks worth $2.3 billion in the whole of 2009.

Reinsurers such as Munich Re and Swiss Reinsurance Co., are meeting clients and brokers in Monte Carlo this week to discuss rates and conditions of next year’s reinsurance policies.

To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

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