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New York : Tropical Storm Gustav, projected to reach the Gulf of Mexico tomorrow, may reveal whether insurers took adequate steps to limit risk related to coverage for offshore oil rigs in the wake of hurricanes Katrina and Rita.
Insurers including American International Group, Zurich Financial Services Group and Liberty Mutual Group raised prices fivefold and capped losses after the two hurricanes caused record offshore claims estimated at $8 billion in 2005.
With Gustav threatening to grow to hurricane strength and blow across the Texas and Alabama coasts where more than 5,000 oil platforms are located, the insurers may soon find out if their efforts will pay off. The area is home to more than one- fifth of US oil production.
"We won't know if the changes we made are valid until they're tested by another storm," Christopher Pluchino, a vice president at the Liberty Mutual unit that sells coverage for the platforms, said on Thursday. "We tend to stay glued to the weather channel this time of year."
Gustav packed maximum sustained winds of almost 113 kilometres per hour at 11 pm Miami time on Thursday and may reach hurricane strength, the National Hurricane Centre said. It was outside Kingston, Jamaica, headed west.
Owners of offshore platforms are responding to Gustav by seeking out a new type of coverage that protects them from a single storm, said Pat Gonnelli, a senior vice-president for the capital-markets division at reinsurance brokerage Carvill Group.
The coverage is known as the 'cat-in-a-box' option, a name derived from the industry term for catastrophes and a rectangular area from Galveston, Texas, to Mobile, Alabama.
The sellers of such options agree to pay the buyer if a hurricane enters the box at a size and intensity agreed upon in advance. Sellers can include hedge funds, insurance companies and so-called weather traders, who look to profit in part by swapping securities tied to disasters.
No buyers and sellers had agreed on a price and completed a transaction related to Gustav as of late yesterday, Gonnelli said.
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