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California oil spill loads pressure on challenging IG reinsurance renewal

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Photo: Alamy

The spectre of a potentially vast oil pollution claim in California has heaped pressure on an already challenging renewal process for the International Group of P&I Clubs (IG) reinsurance contract, sources have told Insurance Insider.

An oil spill that has led to mass pollution near Huntington Beach, just south of Los Angeles, has the potential to exhaust the $1bn reinsurance limit for oil pollution under the IG’s reinsurance arrangement, according to sources, which would be the latest in a series of sky-high claims to hit the contract.

The potential for yet another huge claim on the contract has coincided with renewal discussions for the reinsurance tower gathering momentum, and reinforced the conviction amongst key players in the renewal process that drastic change is required to make the arrangement a viable underwriting proposition.

The cause of the oil leak is under investigation and is yet to be determined, meaning potential losses are speculative, but early indications suggest that it was caused by a ship’s anchor dragging a pipeline out of position and inflicting damage. This would likely result in a claim against the IG’s oil pollution reinsurance tower.

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Sources suggested that the location of the spill meant that clean-up costs are anticipated to be significant, and eventual costs of a claim could be amplified by the highly litigious culture in California.

The market is alive to the threat of oil pollution costs in the US, which have added substantially to the claims bill from the Golden Ray.

The development comes as renewal discussions for the IG’s reinsurance contract pick up pace, with discussions currently focussing on various private placement deals.

Following a switch to a two-year contract in February 2020 and an ensuing period of significant claims, most notably the creeping Golden Ray loss, the renewal was already anticipated to be highly difficult.

Market participants have suggested to Insurance Insider that a re-rating of the contract – even rate rises of +20% – would not be sufficient to allay concerns over the loss record, and that they are prepared to walk away from the contract unless more significant changes, such as upping retention levels, are implemented.

“There are outstanding coverage and pricing issues,” one senior marine underwriting source told this publication.

The IG reinsurance arrangements offer a unique form of indemnity to shipowners globally, providing liability cover for 90% of the world’s ocean-going tonnage.

The IG, which is made up of 13 individual P&I clubs, negotiates a reinsurance programme with a limit of $3.1bn for P&I risks and $1bn for oil pollution claims.

Over 80 markets participate in the placement, with insurers in the Lloyd’s market writing lower layers and exposure in the upper layers falling most heavily on major global reinsurers and retro markets.

The Huntington Beach incident

Last week, up to 126,000 gallons (573,000 litres) of heavy crude oil was released into the Pacific Ocean from a ruptured oil pipeline.

The pipeline connected two platforms operated by Beta Offshore, a subsidiary of Houston-based oil and gas company Amplify Energy, to the mainland.

There have been reports of significant ecological damage, including killed fish, birds caked in oil and contaminated wetlands.

California Governor Gavin Newson issued a state of emergency in Orange County following the incident.

Early indications suggest that a ship’s anchor dragged over the pipeline, pulling it out of position and causing a rupture.

The state’s attorney general Bob Bonta has announced that the California Department of Justice is investigating the incident in collaboration with other state and local authorities.

Bonta said that the event was an “environmental disaster with far-reaching consequences”.

California senator Alex Padilla added: “Already, this oil has seeped into environmentally sensitive wetlands, endangering birds and other wildlife, and forcing the closure of beaches that are the economic engines of entire communities.”

Sources said that clean-up costs and legal fees were likely to be exceptionally high in California.

A class action lawsuit has already been filed against Amplify Energy in California federal court on behalf of businesses and individuals impacted by the spill.

Disastrous losses

Since it switched to a two-year deal in 2020, the IG reinsurance contract has been hit by a string of sizable claims, leaving reinsurers on the contract significantly out of pocket.

Most costly has been the Golden Ray, a car carrier that capsized off the coast of Brunswick, Georgia in September 2019 with a cargo of 4,200 vehicles on board.

The IG initially pegged the loss at only $115mn, but costs have subsequently spiralled. The latest notification has put the loss at $842.3mn.

There is widespread dissatisfaction in the market about loss creep on IG claims, with past vessels such as Rena and Costa Concordia having been subject to similar adverse development.

Other notified claims during the period include the MSC Gayane, a ship caught up in a drug smuggling operation, which the IG has indicated is likely to cost around $130mn.

However, the market was relieved to hear that the settlement reached over the Ever Given incident after it blocked the Suez Canal was not large enough to affect the reinsurance tower.

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In addition, 2020 was the most expensive year for pool claims retained by the clubs.

There were 10 claims by the end of the policy year, with a total cost of $463mn in the band up to $100mn.

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