Aug. 29 (Bloomberg) -- Tropical Storm Gustav, projected to reach the Gulf of Mexico by Sunday, 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 Inc., Zurich Financial Services Group AG and Liberty Mutual Group Inc. 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 U.S. 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 in an interview yesterday. ``We tend to stay glued to the Weather Channel this time of year.''

Katrina and Rita destroyed 113 platforms and damaged 457 pipelines, according to a 2006 report from the U.S. Minerals Management Service. They forced oil companies to redrill thousands of wells, said Frank Costa, president of AIG's rig- insurance division.

"It was estimated the premium in the Gulf of Mexico was $300 million a year'' before Katrina and Rita hit, Costa said. ``If you looked at the sum of those two losses to the industry versus the premium generated in the Gulf of Mexico, it was obvious that the formula was broken, that the exposures were a lot larger than anyone anticipated.''

Billions in Damage

Including expenses shouldered by the oil-drilling companies, the storms caused as much as $30 billion in damage before they ever made landfall on the Gulf Coast, said Paolo Bazzurro, director of engineering analysis for AIR Worldwide, the Boston- based catastrophe modeling firm that advises insurers.

With insurers paring risk in the Gulf, ``the percentage that's insured now compared to before Katrina is lower than it used to be,'' Bazzurro said.

Gustav packed maximum sustained winds of almost 70 miles (113 kilometers) per hour at 11 p.m. Miami time yesterday and may reach hurricane strength of at least 74 mph today, the National Hurricane Center 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.

Buyers and Sellers

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. Still, the interest has grown, compared with the six other storms that reached tropical-storm status this year, he said.

"It will really pick up'' staring Friday, said Al Selius, the head of the insurance-linked securities desk at Swiss Re Capital Markets. ``There are people out there who could probably use some more protection.''

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