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Bill Kenealy

Insurers face host of evolving risks as oil production booms

Risks evolve around extraction developments

March 16, 2014 - 6:00am

The volume of rail cars carrying crude oil increased threefold in 2013. Energy underwriters are growing more concerned about the exposure.

The volume of rail cars carrying crude oil increased threefold in 2013. Energy underwriters are growing more concerned about the exposure.


HOUSTON — Few markets present the insurance industry with such a rapidly changing risk profile as the energy sector.

While the upswing in domestic energy production in recent years has generated an accompanying demand for insurance, the nature of the risk is evolving as energy companies employ extraction technologies in new ways and economic conditions impel them to access new geographies for drilling.

John Keely, Houston-based managing director and global upstream sector leader for Aon Risk Solutions, noted that the amount of crude oil transported by rail has jumped markedly in the past few years as energy producers switch to oil extraction in the face of falling natural gas prices.

“Just to give you a sense of the growth of crude movement by rail, from the fourth quarter of 2012 to the fourth quarter of 2013, we've gone from 40,000 rails cars of crude a day to 120,000 per day,” he said. “That's a staggering number and likely to continue to grow.”

While underwriters have a long history dealing with energy industry issues, there are mounting concerns about loss frequency and severity as the industry grows, said Annemarie Tobin, Hamilton, Bermuda-based vice president with Canopius Underwriting Bermuda Ltd.

“Energy does things that go boom,” she said. “You have to worry about leakage and spillage and contractors and subcontractors that may be doing things that are out of your control. We understand those things, and we have dealt with them for a long time. What we don't have a handle on yet is the increase in large losses we have seen recently.”

These observations on whether the rapid growth and evolution of the energy industry was advisable from a risk management perspective were made during a panel discussion held at the International Risk Management Institute Inc.'s Energy Risk and Insurance Conference March 4-6 in Houston.

The uptick in claims is likely due to the rapid growth in the industry outstripping existing resources, Ms. Tobin said. “People are doing things much more rapidly than in the past,” she said. “We also have an aging infrastructure that we are working with. With so much more crude moving, we have to worry about derailments. We also have the extension of pipelines, and a lot of the older pipeline will need to be replaced eventually.”

Likewise, many of the risks involving the energy industry are linked less to controversial practices such as hydraulic fracturing and horizontal drilling and more transporting oil and gas off-site, said Scott Cruce, Houston-based vice president of risk management for offshore drilling contractor Noble Corp. A company can use the most advanced drilling technology but still run into problems due to aged infrastructure or if the conductor of a train transporting crude oil away from the extraction region is under the influence of drugs, he said.

“Often the risk is more of a transportation industry problem than an energy industry problem,” he said. “The rail infrastructure in parts of the country is very old.”

Another risk for the energy industry is a lack of qualified workers to fill positions ranging from rig operators, welders and drivers, said Jesse Thompson, a Houston-based business econo-mist at the U.S. Federal Reserve Bank of Dallas. “The biggest question is where the labor is going to come from,” he said.

Given this complex set of risks, risk managers in the energy field can anticipate increasingly thorough analysis from underwriters.

“When we underwrite energy, we analyze you to death,” Ms. Tobin said. “As we evaluate emerging risks going forward, we will rely on questionnaires that will help us understand the risk better.”

The energy sector is one that requires underwriters to form tight partnerships with an insurer's risk engineering staff in order help clients lower their total cost of risk, said Matt Waters, Boston-based vice president and chief underwriting officer for Liberty Mutual Insurance Co.'s commercial insurance energy practice.

“We make use of analytics and historical data, but in energy you really have to surround yourself with experts,” Mr. Waters said.

 



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