Munich Re has announced plans to introduce insurance products designed to address the large losses that can arise from major events such as the Deepwater Horizon disaster.  The insurer hopes to introduce coverage levels of about $10 billion to $20 billion per drilling operation.  In order to make such coverage viable, a large number of drilling operations will need to be insured.

While BP is large enough to withstand the liability associated with the Deepwater Horizon spill, many smaller independent firms would face insolvency without some form of coverage.  If regulations in the United States increase liability limits further, smaller firms could be driven out of the Gulf of Mexico or forced to sell to larger interests.  The Obama Administration has made statements in recent months that indicate a preference for larger firms to operate offshore.

Munich Re has indicated that improved safety standards will play a critical role in making the new insurance plans viable. Engineering consultants or other experts independent of the insured company would be required to monitor risk management throughout the drilling process.

It is likely that other insurers with the capacity to take on large risks will enter the market particularly if rates appear to be attractive.  Given the potential magnitude of a disaster similar to the Deepwater Horizon incident, losses could be staggering and the required premiums may be quite high.

Disclosure:  None.