German insurance and reinsurance groups are not renowned for being fast-moving, forward looking and innovative types that seek to constantly extend the boundaries of risk transfer and embrace new risks.
Rather, the traditional view of the German insurance market is that it is big and well capitalised but at the same time notoriously cautious, ponderous and if anything risk averse and the first to tighten conditions when the going gets tough.
Traditionally markets such as Lloyd’s of London and Bermuda have been the ones to break the mould, seek new ways of transferring risk and provide customers with solutions as the risk changes rather than 10 years later.
This was the case for good economic reasons of course. The subscription market, as demonstrated by Lloyds par excellence and Bermuda to a lesser extent, is designed for this very purpose. It enables significant capacity to be amassed but the risk to be spread among a large number of players.
This is why insurance and reinsurance buyers should have been delighted to hear Torsten Jeworrek, member of the board of management at Munich Re, that most German and supposedly bland of reinsurers, announce during last year’s Monte Carlo Rendez-Vous an idea to cover oil spill losses in a per-well basis with as much as $20bn of backing.
Jeworrek used this platform to call for a more cooperative approach from the market to tackle the kind of risks posed by the Deepwater Horizon disaster in the Gulf of Mexico.
The reinsurer said at the time that it hoped to gather broad industry support for a facility that would cover individual oil drilling operations, based on local liability law, on an annual per risk basis after risk management audits had been carried out for each operation.
The group said that such a system could overcome the complex, expensive and time-consuming coverage system that currently exists by which each individual party involved in a project arranges their own coverage and then argue about whom is responsible for what after an event occurs.
Jeworrek said that Munich Re believes that a better route for all concerned in such a sensitive and high value market would be to create an industry pool or preferably an insurance consortium, so long as antitrust problems could be clarified.
Munich Re said it had $2bn of liability cover available to kick start the concept and would hope to gather between $10bn and $20bn from the wider industry.
Clearly Munich Re decided to use its annual press conference to talk about anything other than the persistently soft market that everyone else was talking about and try to take a more positive stance. What better than the still highly topical matter of sudden and accidental oil spill?
The more sceptical of the press-corps, let alone brokers and rival insurers and reinsurers at the event, could be forgiven for assuming that this was a savvy PR move to deflect attention away from the unattractive underlying market conditions.
Rivals, Swiss Re in particular, suggested that this was perhaps not a very practical proposal as it would probably be more expensive than standard coverage and oil industry buyers had already opted not to buy the existing cover at the low rates on offer.
Also, it was pointed out, such a concept would have to deal with a fast-changing US political and legal landscape that would make the modelling all that more difficult to tie down.
Swiss Re and others such as Hannover Re told Reactions politely at the time that they would look at the proposal in more detail and respond accordingly.
Many assumed that it would blow over and prove to another case of a big reinsurer pretending to be innovative but not really being able to follow through once the hard calculations had been done.
But, surprise, surprise, Aon Benfield announced just before the year-end that the project is truly underway and appears to have legs.
Guy Carpenter and Willis Re have confirmed that they are working alongside Aon Benfield as placement advisors for the new sudden oil spill consortium, to deliver larger liability limit coverage for deepwater drilling in US waters.
The brokers said that all energy retail brokers will be able to access the facility, called SOSCover, on behalf of their clients.
Aon Benfield said that SOScover “involves the re/insurance markets working together to deliver a new product that brings significantly larger limits than have previously been available for U.S. deepwater drilling”.
It seems unlikely that the market will be able to amass the $20bn of capacity mooted by Jeworrek. Aon Benfield said that Munich Re, along with other re/insurers, is “in the process of committing significant capacity” to this new insurance class.
It added that the sudden oil spill consortium will work alongside the oil industry to deliver limits on a per well basis that have not been available before in the marketplace.
Grahame Chilton, chairman of Aon Benfield, said: "It is terrific to see the re/insurance industry working together to deliver a solution at a time of customer demand and need. Munich Re helped enormously with the initial concept for the liability product, and now other leading industry players and the oil industry will assist in the development of the terms and conditions of the sudden oil spill facility.”
Jeworrek added: “It was clear from the very beginning that substantial capacity can only be provided by a joint effort of the international re/insurance industry. We are very happy that the broker community will promote the project and help to gather the necessary capacity. With Aon Benfield, Guy Carpenter and Willis Re, we found the perfect partners with the expertise, the resources as well as the contacts to realise such a huge project. The broker community can be assured that we will give support wherever necessary.”
The slip is still not full and there are no indications yet about the level of demand that this effort will generate. It could of course simply not happen.
But given the constant and growing demand among insurance and reinsurance buyers over the past two or three years for true innovation and a greater spirit of partnership among insurers and reinsurers to meet their ever more challenging risk transfer needs this effort surely deserves as much support as can be gathered.
We, and the international oil and gas insurance and reinsurance buying community, will await with interest the final result of this latest innovation from the forward looking German insurance sector.
Further evidence of innovation emerged in the first week of this year when Willis and Berkshire Hathaway announced they had formed a facility to add capacity to the oil and gas market. It is designed to underwrite a 10% follow line, with a limit set at $150m for any single insured, subject to client agreement.