Occurrence of a major oil spill incident in the Arctic is a matter of great concern from an insurance perspective, according to maritime insurer company Skuld.
The risk is even greater following the US Department of the Interior’s approval of Royal Dutch Shell’s plans to explore for oil in the Arctic, which, as described by Skuld, introduces a new set of challenges.
An incident similar to Deepwater Horizon spill in the Gulf of Mexico from 2010 cannot be ruled out.
“Numbers have not yet been calculated, but such an event would, without a doubt, be a more expensive exercise than a similar loss in ‘regular’ waters,” Skuld said.
As stressed by Skuld, it is not difficult to envisage that a similar-scale incident in the Arctic would cost even more that $42bn BP had to pay in liabilities.
“BP assumed most of its risk itself, so the insurance industry felt little impact. However, an insured accident of similar proportions in the Arctic would certainly test the market’s resolve,” Skuld said.
“If the claim fell to the pool, the entire International Group of P&I Clubs would suffer the costs and consequences, which could well include rate increases to affected layers of the group’s reinsurance programme.”
An incident on the scale of Deepwater Horizon would probably drive rates higher across the board for several years (as Deepwater did), Skuld said, adding that difficult discussions with re/insurers about the limits offered for Arctic risks would almost certainly follow.
As a result, Skuld stressed the need to consider fully the risks and challenges that its members and clients will encounter, including: pollution, property/wreck removal and personnel.
The cost of removing a wreck of any unit or vessel lost during Arctic operations would be considerably high as the costs of wreck removal operations are increasing significantly. What is more, the absence of infrastructure in the area would lengthen the time required to arrange, assemble and deliver the necessary equipment.
The lack of Arctic infrastructure will also impede remedies to the injury or illness of personnel, Skuld adds.
Another issue arises on pricing of the risk, as there is a lack of data that underwriters can bring to bear to draw a clear picture of the risk.
“We know the potential cost of incidents will almost certainly be significantly higher than similar events in warmer climes, but we do not know by how much more. Worse, perhaps, we have no statistics that point to the likely frequency of loss events in Arctic waters, either absolutely or relative to elsewhere,” the marine insurer added.
Other issues such as ocean mapping, lack of appropriate charts for the Arctic, surplus of capacity in energy market including political uncertainty further add to the risk of challenges.
“In many regards, the insurance market has absolutely nothing to gain from the advent of Arctic energy exploration and production, and from shipping more generally. It brings extremely large risks which are at present unquantifiable.
However, no P&I club or commercial insurer that is serious about the marine and energy sector can afford to be absent from this new risk space, and therefore from the discussions surrounding insuring them,” Skuld concluded.