PRIME-Tass_26/05/10

PRIME- Tass:

How will the Gulf of Mexico accident affect Russian insurance market?

25.05.2010

Vadim Klementyev, Director General of Profile Re OJSC:

I believe it’s too early to speak of any influence of the Gulf of Mexico accident on the price of insurance for Russian companies, since we do not have sufficient information. This may be attributed to the following:

Over 15 per cent of oil in the world is produced by offshore rigs, while in Russia offshore rigs produce less than 5 per cent.

The accident was connected with a number of factors that are almost of no relevance in Russia .

In this case we have deep drilling at a depth of more than 1.5 km.

Behavior of oil in case of an accident at high water pressure has not been properly studied yet.

The offshore rig was equipped with the so-called “last resort valve”, an automatic cut-off valve with remote actuation.

The offshore rig was subject to a higher risk from the very beginning, since it was a floating one, and not fixed one, and after the explosion it drowned.

That accident will probably mostly affect the price of reinsurance coverage for Russian companies, because after a major insured accident causing huge losses western reinsurers automatically increase their prices for the whole market.

However, I understand the policy followed by western reinsurers, but I don’t think it will cause a significant increase in insurance rates, since, I should repeat it again, Russia is mostly involved in on-land drilling, and we are just starting to master shelf drilling technology. It is most likely that reinsurers will apply differentiated rates depending on the systems and tools used and that such rate will reduce the probability of occurrence of insured accidents and limits per one accident.

Aleksandr Korolev, First Deputy Director General of Capital Reinsurance:

Indeed, large-scale accidents like the one that happened in the Gulf of Mexico affect the global reinsurance market. In this case it is obvious that the environmental damage and expenses needed to eliminate the aftermath far exceed the financial damage. We should not ignore the fact that this event may influence cost of reinsurance protection offered by leading global insurers.

Elena Klimova, Director of Reinsurance Department at AlfaStrakhovanie OJSC:

We suppose that the price of reinsurance will rise. The reason is that drilling rig insurance is a quite specific business, and reinsurance is purchased from western companies specializing in such risks. We have limited options for allocation; therefore reinsurers will definitely increase their prices for reinsurance to be able to compensate such great damages.

Andrey Posevkin, Deputy Head of Division of Inwards Reinsurance at ROSNO:

Certainly, the Gulf of Mexico accidents cannot pass without influence on the “energy” market.

According to various estimations we can assume that rates for energy sector insurance, including insurance at the Russian insurance market after this event will rise by 15-20 per cent on average.

The main companies involved in such rate growth will be major western reinsurance companies who suffered big losses from the event and will certainly try to compensate them in this way. As a rule, major “energy” risks are reinsured with the major western reinsurance companies, since Russian reinsurance market does not have sufficient capacity, and since Russian oil and gas companies request western reinsurance of all others. Policy of oil and gas companies for limits used for insurance and expenses for insurance may also change not just because insurance rate will be higher than before, but also due to increase of insurance limits.

As our current experience shows, the problem mainly lies in the fact that there is no readily available and effective solution to minimize the aftermath of such accidents: more than 3 weeks have passed from after the explosion on the drilling rig, but oil blowout is still not localized.

Experts of Moscow Re:

Possibly it will affect the global market in general, at least offshore business and liability. This accident may lead not only to an increase in rates, but more likely to an increase of claims for limits for various liabilities. However, the consequences for Russian market will be insignificant.

At the conference Profile Re was represented by its Director General Vadim Klementyev and Chairman of the Board Alexei Onishchenko.

The event was held on May 20-23 at Veles Club Hotel, Vladimir Region, and was attended by more than 200 participants: representatives of federal executive authorities, heads of world’s major insurance and reinsurance companies, insurance unions and members of the Federation Council. The conference was organized by the All-Russian Insurance Association.

For Profile Re OJSC participation in the event has been an enduring tradition observed throughout 9 years of our vigorous activity.

The company would like to thank the participants for interesting discussions and productive negotiations, as well as the conference organizing committee for the high level of organization, deep program, coverage of presentations and the topicality of issues discussed.