When it comes to the use of evolving technologies in oil and gas production—such as hydraulic fracturing, or fracking—insurance companies are faced with one big question: to insure or not to insure?
Executive SummaryInsurers faced with the fracking question—to insure or not to insure?—should consider the potential insured’s corporate safety program, practices and location before making a decision.
That is a key question for underwriters, according to Robert Weireter, vice president and senior underwriter at Swiss Re.
However, “this is exactly the same question that we as underwriters ask ourselves in any industry,” Weireter said during a webinar on hydraulic fracturing presented by Advisen and Swiss Re. “A lot of it depends on risk selection—specifically, which companies are really serious about health and safety.”
Hydraulic fracturing is a drilling technique that involves injecting water, sand and chemicals under high pressure into the well to create fractures in the bedrock, according to the U.S. Geological Survey. The pressurized liquid pumped underground helps release trapped oil or gas. It typically is used in conjunction with horizontal drilling to access formations that previously were inaccessible with traditional vertical drilling methods.
While fracking has been used for decades, with the rapid pace of technological advancements in the drilling process, insurance companies want insureds involved in fracking to be more forthcoming about their policies and practices, Weireter said.
“We’re seeing more underwriters meeting with these companies and looking for an overall management and corporate commitment to safety. Accidents of course can happen, and that’s why companies buy insurance. But companies with strong safety programs need to make an extra effort to demonstrate why they’re a good risk,” Weireter said.
“Another key issue for us insurers is risk engineering expertise and expense,” he said. Insurers need to dedicate the resources to keep up with those changes.
“This simply isn’t a class of business that you want to dabble in,” Weireter said. “On the other hand, though, if you make a determined effort and bring together the right resources, you can understand the exposures and make good risk selection decisions.”
Location is also a factor. In many regions of the country, fracking is suspected of triggering not only earthquakes but also groundwater contamination and air pollution.
Underwriters “need to look closely at where the drilling is occurring. There are different issues in the densely populated Northeast relative to other parts of the country,” Weireter said. “That’s not to say that any one region is better or worse, or that we should or shouldn’t provide coverage in any one area, just that there are important regional differences that need to enter the overall underwriting discussion.”
Aside from the technical aspects of drilling and operating the well, there are political, legal and regulatory issues to consider, he said.
New York state, for example, has had a moratorium on fracking in place since 2008, and the process is under environmental review. Other states have regulatory systems that allow hydraulic fracturing while monitoring its use and effect on air and water quality. And the court of public opinion on the process can vary widely from state to state.
In Texas, a state well accustomed to oil and gas exploration and production, the practice is not so controversial, according to Thomas Blanquez, an oil and gas specialist at insurance wholesaler Quirk & Co. in San Antonio.
“We understand there’s risk involved, but we also understand it’s a necessary evil,” he said.
While the drilling process, including fracking, is definitely hazardous, the oil and gas industry has taken widespread “corrective measures to help mitigate these environmental disasters and the earthquakes supposedly that are tied to hydraulic fracturing,” Blanquez told Insurance Journal.
“They have money to lose as well,” Blanquez added. “Bad publicity and delays in production due to fracking and other issues are going to be giving them a black eye.”
Even so, Randy Bila, an energy division underwriter/broker with Austin-based Specialty Insurance Managers Inc., said he’s seeing a somewhat limited market for fracking contractors.
“Many carriers are not quite sure what the future holds in terms of fracking even though it’s been done for decades and decades,” Bila said.
Also a little more difficult to place are acidizing contractors, which are closely related to the fracking process, Bila said.
And risks that have an ongoing loss frequency problem can be problematic. But even those are able to be written, Bila said, especially when loss control measures have been taken to minimize future losses or possible subrogation.
Because of the complicated issues involved in claims stemming from the hydraulic fracturing process, costs to defend can be quite high, according to Michael Diggin, vice president and claims expert at Swiss Re.
“In the event of a fracking lawsuit, insurance will be sought to pay for the insured’s defense costs and indemnification,” Diggin said as a participant in the Swiss Re/Advisen webinar. “Defending a fracking claim may involve a substantial amount of analysis and input from experts including petroleum engineers, geologists, hydrologists, chemists, biologists, et al.”
In addition, oil and gas companies have made large investments in the hydraulic fracturing process, Diggin said.
Given that, “they may be expected to fiercely defend against any lawsuit questioning the environmental safety of their drilling practice. Regardless of actual liability or indemnity, insurers may incur significant defense costs should energy companies aggressively litigate potentially complex fracking claims,” he said.